Tuesday, October 7, 2008

Long, and almost certainly wrong, the only question is how wrong, explanation of the CRISIS ON WALL STREET, Part 3

So, G. (no, wait, it's g.) posted an hour long YouTube video that took me about 8 hours to get through, because I stopped, looked stuff up on wikipedia, rewound and listended to again, etc. I wrote as I went along, too, and here's what I wrote (the wikipedia articles are referenced in Part 3).

My understanding of “Crisis on Wall Street” : Princeton economists review recent events on Wall Street and assess the implications for the economy and public policy – September 23rd, 2008
posted on Impolite Company: http://morisey.typepad.com/my_weblog/ and available on YouTube at http://www.youtube.com/watch?v=Wj_JNwNbETA




GUY 3
"Yes, there's panic, but underneath the panic, don't forget that housing prices are going down - we have to deal with that mess in addition to the panic."

Housing prices stopped going up, on average, for the first time ever (at least as far as Wall Street knew). One housing prices start going down, mortgages start being defaulted (before, if you couldn't pay your mortgage, you sold your house and then you could pay it off. Or the bank took it and sold it, and got its money back).When housing prices go down, money disappears. [Again, why is that different than when anything else is devalued? ] So, the banks are out of money - why can't we just make new banks if the current ones are screwed? If a restaurant goes out of business because of bad food, someone else will open a new restaurant with better food, right? So if a bank goes out of business because of bad debt, then a new bank can open up with better debt? Well, yes, but Wall Street banks are not made overnight. Long term, that WILL happen - but "long term we'll all be dead." So, all of the sturm and drang that Guy 1 was talking about is on top of the underlying factors of housing stuff -
1 - housing prices have shot up in the last decade after being basically stable for a really long time - though everyone has been saying that it's not a bubble, clearly it is.

2. And it's not done bursting yet. He shows the Case-Shiller 10 City (Case-Shiller is a way of looking at housing prices) deflated by the Consumer Price Index - which I think means "accounting for inflation." If you look at the graph that he showed, it's a straight line and a bell curve upward, but the downward point of the curve is only about half way to the baseline. It's an "r", not an "n".

3. All of this has nothing to do with what Guy 1 was talking about with the panic and all that.

4. The banks are reporting losses that are pretty much in line with what they would actually be if housing prices stopped dropping, but they won't, "by any reasonable index;" they're going to keep falling for a while. So there are more losses to come.

I think his point here is that no amount of regulation or government interference is going to effect the housing market (as opposed to the financial market, which it can effect). Short of the federal government "buying up 10 million houses and knocking them down."

So, what are we going to do? We've gone from "no more bailouts" to "bail out the entire system." He takes umbrage to the phrasing of "take the troubled assets off the balance sheet." You can easily take them off - just declare them worthless, and they're 0. Voila, done. But the problem is that these are "assets" which no longer exist - which means the total liabilities are bigger than the total assets. So to make these institutions solvent again, the goverment has to buy the assets for a large enough price that it puts the balance sheet at least back at 0 – really, a little above, so they can start making loans again - which, at this point, is greatly overvaluing the assets.

So, what's the plan? Apparently, Paulson's original plan was "give me $700 billion dollars and I have absolute power." Almost literally - the "plan" was only 3 pages?!
Even IF Paulson was beyond reproach, hello, election year? He's not going to be the treasury secretary much longer. Next, he mentions that Paulson said this morning (Sept 23rd) that he totally wants oversight, but it had to be a short document so it would be presumptuous to add oversight language to it. Except, EXCEPT, the document actually specifically PRECLUDES oversight, which is very different than not mentioning it.
Ergo, liar liar pants on fire. Ergo, this is not being done in good faith. So, what are they going to do? Seemed like at first, they didn't really know - Paulson just wanted the money. Now, it's seeming like they're talking about the government buying the "troubled assets" (the mortgages, ultimately) at a very inflated price. Makes sense - that's what's necessary, after all (see above). But, he points out, the way these things are normally handled is, somebody swoops in and saves your bacon (I will give you a cash infusion so your business doesn't fail), they typically get an ownership stake in your business. So, it seems like the right thing to do is to give the government an ownership stake in Wall Street. So, what are they trying to do? Up until recently, it's seemed to be all about staving off the panic, which doesn't really make sense, because of falling house prices, etc. So now, maybe they're working on the bulking up the financial capital of the market – which is what needs to happen in addition to calming the panic - nationalizing the market along the way to some extent. We did it in the SnL crisis, Sweden did it, and Japan eventually did it. That's what happens.

Panel discussion:
How big a deal is this for the "real world?" So far, it hasn't been a huge issue. Everybody downstream is still pretty much functioning, and the housing industry has already been nationalized.

Question: Come on, the CEOs knew what was happening. You’re not trying to tell me this was all an honest mistake, are you?

Answer: No, you’re right. The CEOs got greedy and stupid.

So, that’s what they all said. I think.

Case-Shiller 10 Cities: http://en.wikipedia.org/wiki/Case-Shiller_home_price_index

Consumer Price Index: http://en.wikipedia.org/wiki/Consumer_price_index

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