My advice to them would be to acutally learn your history as boring as it usually is. And keep that knowledge in your shirt pocket in the future.

In it we see that all of these things we are facing now, we have seen before. And all of the stupid things we did that caused this to start with, we have done before.

There really is no good rememdy for what is going on. We have never found one in the past, and I don’t think this one will be any different. It’s a stop gap to give the illusion that we are doing something productive about it.

If future generations can manage to remember what gets us in trouble in the first place, maybe they will not be reduced to short-term bandaid solutions that are a waste of time, energy, and money.

But given the years of documented history, failed attempts, and what should have been learned lessons, we continue to screw it up time and time again.

So tell them that. Be honest about our failures, and maybe someday, some generation will get it right BEFORE it happens.

Thanks for the comment. I don’t particularly agree, but I like to have different viewpoints.

Can you elaborate on what you think should be done differently.

It’s one thing to say something sucks. It’s another entirely to say something sucks, and here’s what I would do instead.

Would love to see your sugguestions.

Regardless if I agree with them or not, I’m sure we have a lot of readers who disagree with me on lots of thing and would like a different perspective:)

Nice comment. Don’t ever worry about taking up too much space

And in answer to your question:

Here is my understanding about the morgtgage process. I am by no means and expert and may be completely wrong. I’m gonna try to give a call to one of my old bank buddies and see if he can enlighten me further.

But anyway,

When a bank loans you money, it acutally IS the deposits of other folks. The fed mandates what percentage they can loan out (90-95% I think) But, keep in mind, it is the Fed NOT the bank that guarantees your deposits.

It gets a lot more complicated when we talk about them then bundling and selling your loans on the secondary market, but I won’t got into that…mostly becuase I’m not sure how it works.

So say you default on you loan after 2 years and paying around $20k. The vast majoriy of those payments to the bank is all interest that early in the life of the loan.

When a bank writes it off, they will write off $100k asset (big deduction), and a revenue stream (not so big deduction) of $72k ($92k-20) They are not treated the same in terms of taxes. They are still on the hook for that $100k they loaned out originally. Yes they now own the house that was the collatoral, but in this market, that is neither a liquid asset or one that is anywhere near the original value.

So, the $100k (or at least a big portion of it) wasn’t invented out of thin air. Somehow that money needs to be put back into the pool.

Where you do have the money “invented” is in “secondary assets” Following the same rules, lets say that the 100k loan now becomes a bank asset on their books. This is where I am not sure how it works… it is theoretically possible for them to now loan a 90-95 percentage of that new “asset” (which is based on 90-95% of the original deposit) If that is the case, what we really have is double dipping. I am sure at a minimum they can also claim the $20k you have paid in interest as an asset, but can’t claim the other $72k until you acutally have paid it. (Again unless they have sold it on the secondary market in which case they CAN claim both)

It would not surprise me if that is how it works, and would explain a LOT of the banking crisis.

No wonder the system is so f’d up This stuff is CONFUSING!

I’ll see what I can do to get a real expert in here to discuss.

Again thanks for the comment.

JJ

There are two things from your article that caught my attention. One is a way we can support the economy, and the other is a question.

These are the first four bullet points from the article:
1. Right now lots of people are out of work or don’t have enough work to pay their bills.
2. Because of that, they (consumers) can’t spend money buying stuff, investing, saving, or paying taxes.
3. Because consumers can’t buy stuff, businesses are not selling as much as they need to make a profit.
4. Because businesses aren’t making their profit, they are firing even more people. See point 1.

The thing that occurs to me is that we – all of us – support low paying, part-time jobs by shopping, specifically, at Wal-Mart.

My personal opinion of Wal-Mart is that they are doing precisely what a corporation in today’s market is supposed to do. They are maximizing profits, limiting liability and cutting expenses as much as possible.

This is what stockholders want because they want to put those maximized profits into their pockets.

So how does this lead to us supporting the economy?

Because it’s up to us, as consumers, to make a deliberate point of going to the smaller, more expensive, retailers in our neighbourhoods and paying those higher prices. You’re right, we can’t really afford it for all our purchases.

So, use Wal-Mart in just as calculated a fashion as Wal-Mart is using its resources. Make selected purchases at Wal-Mart with the objective of saving money that you can then spend with local small businesses.

The only power a corporation has is the money we give it.

I think Wal-Mart is a good corporation. They just aren’t a very good corporate citizen. But when you affix blame for how this particular child turned out, be sure to stand in front of a mirror and consider you spending and investing habits.

The other thing – the one that gave me a question – is the part about banks, loans and assets. Here it is:

“For a while banks were lending 95 to 100% loans. That means if you stop making payments, they take your asset (the thing you bought with the loan). If your asset loses any value (think housing market crash) then the banks are stuck owning something that is not worth as much money as you paid for it. Because they are stuck with this crap asset, they don’t have cash on hand to loan more money to other people. If the bank can’t make loans, they can’t make profits themselves (the interest they charge you for loan). End result – bank fail.”

Here’s how I understand the loan process:
I go to a bank to buy a house and want a loan. My credit rating is okay, and the bank agrees to loan me the money. Let’s say $100,000.

The bank isn’t loaning me the money depositors put into the bank. In fact, banks are specifically not allowed to loan the money I put into my chequing or savings account.

So, what they do is “invent” the $100,000 they are loaning me. They can do this because I have promised to make the $100,000 a reality by paying it to the bank. Plus interest, of course.

The interesting part is that the bank gets to add this loan to their list of assets. Because I promise to pay $100,000 – plus interest – the bank gets to claim an asset of the prinicipal plus the interest.

Just to use as an example, let’s say the interest on the loan – over the 20 year life of mortgage – is going to add up to $92,000.

(Just take the amount of your mortage principle – the amount you borrowed – and subtract it from your monthly payment for 20 years. Say $800 a month for 20 years. That’s $192,000 – so the interest is $92,000.)

So the bank is now claiming an asset of $192,000.

Only none of this money really exists yet. There is only my promise to make it exist by paying it to the bank. Everyone knows the bank manager does not walk into the vault to get me a pile of money.

Amazingly, currency – physical money you can hold in your hand – accounts for less than 10% of the money circulating in the economy. All the rest of the money is based on promises to pay.

Now back to me. Two years after getting the mortgage, I default on the loan. What, exactly, has the bank lost?

In two years, I’ve paid $19,200 ($800 per month).

So the bank is really ahead of the game by almost $20,000. After all, they started with nothing and now I’ve given them a lot of moeny.

But that isn’t how it works. Instead, the bank gets to claim a loss of $172,800 because I failed in my promise to pay. They get to claim is as a loss, and use it as a tax write-off, even though all they really lost is anticipated income.

Plus, they get to keep the asset. They keep the house and the property.

So my question is, first, do I have a correct understanding of the process? And then, if I do, why are we in such a turmoil over losing something that never existed in the first place?

I do apologise for taking up so much space. I’m just wondering how much of this crisis has been manufactured. I keep thinking back to Y2K and the volume of sales generated by scare-mongering.

How can money that never existed cause so much trouble?

Conrad

It’s all going to paid for by a small increase in taxes on the wealthiest Americans. Sure. Only people who make more than 200k will pay higher taxes. Sure.

The direction of the market is a bet about the future and a gauge of uncertainty, and most investors recognize that Obama’s plan to raise taxes in a recession, attempt to nationalize health care,and spend money we don’t have isn’t the right solution for the American economy. Investors may also be a little skeptical of a president who nominates a Treasury Secretary who asks for billions and then admits he really doesn’t have a plan.

I like Obama because he represents something different. (if he acutally is or not remains to be seen) He is a communicator and diplomat more than he is a fighter. And I value that.

It’s kind of how I roll. I’ll talk to you first and try to find a common ground. THEN if you are still a dick, I will kick you in the balls with such overwhelming force that fighting back is no longer an option.

I personally believe the stimulus package will work becuase of Obama, not the package itself. Here is why: Obama will go out of his way to communicate with people. At least more so than anybody has in the last 8 years. Whenever you are rolling the dice, if you communicate with people what you are doing, why you think it will work, and what might not work… people feel a lot more comfortable with what you are doing.

People feeling in the loop on what is going on will really help with consumer confidence, wether the stimulus really works or not.

And ultimately consumer confidence, not the banks, not taxes, not the deficit, is what pulls out of a recession.

If you agree of not, I sincerely thank you for your well though out post.

JJ

This is easily the largest bill ever put before congress to nationalize our businesses and entire industries. And while greed was certainly a part of the loan situation, this package smacks of greedy power by Pelosi and Reed. It is astonishing that anyone with any business or economic knowledge would think that this is even a marginally good bill/idea. Thus, it isn’t better than what we’ve had over the years.

And, in fact, things were worse in 1980 at the end of President Carter’s tenure than they are now with the prime lending rate at 21% and unemployment as high as 8 1/2%. It’s simply bad judgment.

However, I think you explained it fairly well in simple and very general terms without any detailed explanation of how any of this will really impact our culture and society in the immediate future or in perpetuity.

Thanks for the effort and research.