I've been transfixed listening to these to programs on the economy. I feel that they made the current situation much more understandable for me. Maybe you'll find them interesting....

http://www.thislife.org/Radio_Episode.aspx?episode=355

http://www.thisamericanlife.org/Radio_Episode.aspx?episode=365

Click on "full episode" to get it to play...

Well, nuts! I can't get the links to work. Maybe paste them in to go there, if you're interested.

I know something about some things, but not much about ecconomic matters, and these helped me a lot.

(Message edited by barbara_gibson on October 9, 2008)

(Message edited by barbara_gibson on October 9, 2008)

(Message edited by barbara_gibson on October 9, 2008)

Clicky links.

one

two

Cecil, you're smart...

Thanks for the links CB & Cecil.... I'm really trying to take in every stitch as finances have not been my strong suit (course I'm not a candidate so I can admit that!!!).
So far everything I've seen has come from one side or the other.

Thanks for glancing at it, Tara. Eric and I were doing separate things the day the first one aired, and we both ended up sitting in our cars, listening, til the program ended.

I haven't had a chance to dissect it yet... me thinks that will be what I'll be doing tonight. I've got quite a collection of articles to read, then fact check, etc.
It's a shame there's such partisanship and so little journalism... not much trust from my camp on either end of the spectrum.

btw- some of G&my best times have been spent listening to the end of a radio program in the car. I knew he was my mate the first time that happened Patient, calm and engaged

The real key to understanding how we got into this mess besides the sub-prime market are Credit Default Swaps. The sub-prime notes were bad but these swaps are way worse and need to be regulated. They are like insurance with no capitol behind them. A disaster just waiting to happen, that is now occurring.

Tara, Guy is amazing. When we've been together, I've found myself looking at him and thinking "How does this quiet, calm guy turn into SwatMan on the job?".

Cecil, these programs made me understand credit default swaps...I was an English major, remember, so give me time....they're clever little thingies, aren't they, but amazingly irresponsible....

At least the market is not dropping another 500 points........................Sorry, it is now!

I can live just fine on SS, there is dog food, SPAM, pasta, all under $2.00

There are a lot of reasons for this debacle, but as for the proximate cause; I go back to 1999 with the appeal of Glass Stegall Act which came into being in the early 1930's. This had to be one of the WORSE pieces of legislation ever produced in this country! Authored by Texas republican Phil Graham & signed by democratic president Bill Clinton (so there's plenty of blame to go around folks).

Essentially Glass Stegall erected a barrier between Commercial banks & Investment banks. This served us extremely well for many many decades.

If it wasn't for the repeal of this, the investment banks never could have gotten their hands on the home mortages, slicing & dicing them up into their invented financial instruments which made some investment bankers wealthy beyond their wildest dreams.

In my professional opinion as an analyst and portfolio manager, the biggest problem has been the lack of accountability all the way up the residential mortgage chain from people who had no right applying for a mortgage (whatever happened to the old rule of thumb that your house payment should not exceed 28% of your monthly take home pay? - ANSWER: no doc mortgages!!), to mortgage brokers that just got a fee to close the deal, to mortgage banks that got paid to service & package it, to the rating agencies that were also paid by volume, etc.

Americans have been binging on debt that was given too freely and spending/consuming too much for the past 7 years and we are paying dearly for it. (there's likely a correlation with the increase in obesity in America...)


Also, I am in the middle of this mess as an analyst and I was never comfortable with the CDS market. My portfolio managers would push me for CDS recommendations and I would decline. IMO the biggest problems with the CDS market is that is not a market (it's a contract between 2 parties), not regulated and not subject to SEC regulation. I'm sure it will come out that there was significant market moving behavior in the CDS market by banks (to unload exposure - problem with that is that banks have inside information) and hedge funds (starting rumors and then trading).

Hey, Vince....I KNEW that!

And Sue.....I UNDERSTAND you!






I feel so proud....

Vince & Sue
Thanks for making the reason for the situation clear. It seems like it can all be boiled down to one word. Greed.
Mick

In a word; I'll say the fault was "unregulation".

Credit default swaps.. What are they? In actuality they are nothing more then an insurance policy.
They should be called credit default insurance policies.

However the insurance biz is highly regulated.
Calling them an insurance policy would have subjected them to regulation. No one wanted that.

Every beginner claims person is taught the importance of establishing accurate reserves.
And reserving is repeatedly drummed into them.
Guess what, the 50 Trillion of this stuff was never reserved!! It was never regulated.

That's why one of my old employers, AIG has just about has gone down the tubes and the insurance carrier stocks who were involved with this were pretty well decimated last week.

Thank you all for your input... it truly is appreciated.

So the lingering question for me is....

is the sky really falling? or is this just a re-alignment/correction of the credit market?

Everyone seems in agreement that we've been living a credit driven life --- is this a situation that will level out as people rely less on credit?

Investment professionals should have seen the warnings signs of the CDS market over the past few years, so shame on them for now waking up and wondering what happened.

Delphi and Cendant are the 2 best examples.

When Delphi filed bankruptcy, there was 50-100+ times more CDS exposure out there than securities that could be delivered on the contract. Delphi bonds shot up to above 100 cents on the dollar, as they were like musical chairs where everyone was scrambling to close our their contracts.

Cendant was the other extreme; they were considered a risky name (borderline junk/investment grade) and in early 2006 they announced they were going to redeem all debt. Suddenly market realized the CDS contacts were worthless, as there would be no bonds to 'reference' in the CDS contact.

If the CDS market is to continue, it needs to be recognized and called the derivative security is it and trade like an option, as that's what it is: an option on the creditworthiness of the subject company.

sorry to ramble, but I have felt like the lone voice in the wilderness on this topic for 3-4 years... (sorta how I felt when I told someone that worked for me that I didn't understand internet stock valuations in 1998/1999 and she told me I just didn't understand the 'New Economy'. Oh well, I'm planning to retire from Wall Street rat race in a few years and she will still be working!)

Ramble on Sue... your insight and others are appreciated at least by me.

I don't think the sky is falling on a macro-basis, however it will for people who are credit stretched and/or not well positioned from an employment perspective.

My view is that we need to be prepared for life like the early 70s: stagflation, with more emphasis on stagnated wages, versus the massive inflation

The US government should follow the lead of Sweden in the 1990s and take ownership stakes in banks. Smaller ones should be allowed to fail (just a loss to the equity holders, not depositors) to 'punich' the bad lending/investment behavior that led to their downfall. We have too many banks in this country that did stupid things and the 'dumb' managers need to be shown the door so they fall out of the system.

I think the only way out of this mess is for the government to ramp up spending on infrastructure projects to get things moving not unlike the CCC of the 1930's. (yes, this will lead to higher taxes for people making $150-200K). I am not a fan of social handouts, it doesn't incent people to improve themselves.

Valuations of all securities were at historical highs (stock and bonds) and global economic growth has been overheated. China's massive growth engine will slow, as wages and costs are increasing there. I do agree that the rural to urban shift will continue, however the standards of living may decline. We will see everyone come back down to earth for a few years.

hope this makes sense to everyone and it's too technical!

it's like you're in my head
I'm admittedly naive on issues of finance - save for the very basic of "money in-money out=money on hand"
Having 'pulled myself up from nothing' I am outraged at the abuse of financial responsibility shown by ceo's and AIG and other corporations.
If my company isn't bringing in the necessary income I don't give myself a bonus and then cry poor!! That just boggles my mind!

there has been abuse of the system more on the hedge fund side of the business versus AIGs and the investment banks. The latter just fed 'the pig' of these unregulated investment vehicles (hedge funds).

I know many of my peers in the investment group at AIG - they are good analysts (frankly some of the best around), but like many investment professionals, they got swept up in the heat of the market and did not question the fundamental soundness of it. Now they all realize the emperor was naked.

One major problem with Wall Street/investment professionals is they live in the NYC metro area and don't get out to see how middle America really lives. While most of them can spout the statistic that the average American makes $35k/year, I don't think most of them comprehend what that means. I have plenty of family members and friends without college degrees that would be the 'typical' American and I find my conversations with them very helpful to shape my market views. When I saw several of them stretching to buy bigger houses and better cars that I drive over the past years, I thought it would be only a matter of when, not if, we would see a major meltdown. (not to the magnitude that we have, which feels like we have swung too far, which is why I haven't sold my mutual funds).

Tara, you just have to listen to those programs. They're built just for people like us who aren't dumb, but who don't have an expertise in high finance.

I've been interested in this about the bail out package thing: I'd been listening to something on NPR about two bailout proposals: the one that passed and another one that involved the government buying preferred stock in the banks, like Sue describes in Sweden, as far as I an tell. The banks hated the latter and lobbied hard against it, and it was removed from the bill.

Then, in a little tiny news report right after the thing was passed, I heard that the language for the latter proposal was reinserted right before the vote. I only heard it one time on one news story.

Then a week or so later, Paulson starts talking about a "tool" in the bill that would allow him to, guess what, buy preferred stock in the banks, and that he's thinking about doing it. Now it seems to be the major plan. The banks must be cranky.

Sorry, Sue...I'm a civilian on your world, so I hope this isn't to elemental a post....

my laptop won't let me listen so I have to wait till I'm at work.

Or not, Tara...I don't want to twist your arm!

no twisting needed here CB

When the officials wanted "all americans" to be able to own their own homes and fancy cars, etc. and created the "no downpayment/interest only" mortgates/loans it was said back then that anyone who intended to live in these McMansions beyond a period of five years or so should NOT partake in this type of mortgage/loan. The warnings were out there from the beginning but not broadcast or shouted loud enough for the regular folks to hear it. They were correct. Here we are exactly within the timeframe they expected would show bad results.

Joe and I chose not to partake in the "no downpayment/interest only" mortgage fiasco as we realized it would explode later on down the line. It did. We have money for the downpayment but the real estate market in our area (Northern New Jersey) just kept going up, up, up in value and price....way beyond our realistic reach. Median home price in our immediate area is well over $500,000 now....even AFTER the "crash" that hit most of the USA, but not around us in Morris County, NJ.

We are now paying $1650 per month in rent which is "reasonable" for our area of multi-million dollar condos and homes. Thank goodness we are able to afford the rent each month. We are grateful to have our jobs to enable us to live where we do and to travel and enjoy life, too.

I guess most folks who jumped on the so called "free ride" (no downpayment/interest only) moneys being offered did not research and study what they were about to do and we know for a FACT that the lending institutions certainly did not alert or "educate" the buyers to what would occur down the road.

It's a crime. Simple as that. This was allowed to happen. No excuses from the government and the lending institutions. Greed was dictating the drive for everyone to own their own homes. (IMHO).

Greed will bury us. IMHO.

The check/bill/tab has just been placed on the table and it's time to pay for what we have eaten/consumed.

I truly feel for those who were led down this ugly path of self-destruction by not being educated by the "experts" and misled by those who were out to make a profit and/or quick buck at their expense.

Sorry to rant on here, but it's so frustrating to know what was going to occur years ago before it happened and not be able to do much about it now, after the damage has been done. The bill will be paid by all USA folks now. Even those who did not benefit from or partake in the "party".

I guess there should be a "clean sweep" at the voting booths for the next few years but I'm not certain that will make much difference with things, either.

The more things change, the more they remain the same. IMHO. cb

(Message edited by Carole on October 12, 2008)

(Message edited by Carole on October 12, 2008)

As I understand it, the "preferred stock" bailout option should be a less painful plan for us to bear, so I was glad to see it resurrected.

I struggle with the "How much should we have figured out for ourselves? How much should they have told us?" thing....we're pretty conservative financially, too Carol(probably the only way I am conservative!), so it grates on me to pay part of a tab I didn't run up.

On the other hand, I remember the first time I had contact with my bank after we'd paid our little house off, having made double mortgage payments instead of taking trips and buying new cars to do so....the bank was so gung ho to sell us a home equity loan! After we finally owned the place, they wanted to get us back in debt! Ack!

I think Sue's point about Wall Street being out of touch with the middle of the country is a good one...out here on the Left Fringe, I know we suffer the same malady.

Sue, Carole,
I agree with you all the way. I'm no financial expert, but I know greed when I see it. Not only $ greed, but the "I'm entitled to" fill in the blank (food, the newest, the biggest) greed.
My friends and coworker are always amazed with what I don't need, and most of all that the mortgage to our humble little home was paid off early last year due to the extra we paid each payment. I'll drive a vehicle for a minimum of 10 years, etc.

Sure I want stuff, but I usually wait a few months to think about that new watch that I don't really need. The "want" passes after a while and I do just fine with out.

Rant off.

Well, I think it's really sad, but in my opinion, having observed the political scene, I truly believe that the United States has the best government that money can buy!
And that ends my rant.

Ha!