Limper
09-24-2008, 08:00 AM
How did we get into this mess Stanley?
After the crazy interest rates of the Carter Era things started to calm down, stagflation was defeated and things were getting better… interest rates on savings started to sink and continued to sink until they were to small to beat inflation and taxes. Current interest on savings accounts and CD’s actually cost much more than you make as your capital is depreciating faster than it pays you by about a 50 to 1 ratio.
At the height of the 80’s came a time of deregulation which continued right up until everything was too messed up to easily backtrack.
The largest demographic group in the country realized that they were going to have to retire in the not too distant future, they had nest eggs but those nest eggs couldn’t cover 20 years of not working. This was the Boomers.
The Boomers flooded the stock market with assets as they funneled ever increasing amounts of their built up capital into their 401k’s and general investments. This started the upward push of the market and the creation of gobs of products to receive that money… mutual funds proliferated and still are.
This set the stage for the next disaster.
Tech became big money. The infiltration of computers and the internet into all of our lives fueled a boom time in the markets for innovative tech companies. The millionaire receptionists for companies like Apple and Microsoft came into existence.
With all this money to be made and hype more and more products and companies came into the market to capitalize on the boom. Shell companies that did little more than get other tech ideas turned into public companies; companies with $20,000 a year in revenue trading as if they were worth $2,000,000 and other such insanity. This created HUGE amounts of wealth for people and the country actually entered a period of surplus tax revenue rather than deficit. People look back on this as a great and wondrous time. Those little nest eggs of the boomers had grown to a point that retirement looked to be pretty easy.
Since things were going so well deregulation seemed like a great idea and the key regulation that would have avoided what was to come was repealed by such a congressional majority that the president couldn’t have vetoed it if he tried. Citicorp had worked long and hard to get rid of the Glass-Steagle Act which would have stopped them from merging with Travellers Insurance. Glass-Steagle was put in place in 1933 to separate the different types of financial institutions so that no conflicts of interest could be created that would adversely impact customers and the broader economy.
Since tech companies were getting all the money from investors other sorts of companies had to try and keep up with the crazy growth in order to keep people investing in them. Enron was a utility company that was able to make itself look like it had tech type growth through a variety of accounting and merger activity. They were far from the only one however they are the best known story for an example.
Sadly for everyone the tech bubble was all fluff. The underlying fundamentals of the boom had as much substance as the air we breathe and couldn’t last. The bubble popped and in extremely short order it all went away sending the economy into a tailspin.
All the wealth created vanished and those who fluffed their books got burned and died and some regulation was put back into place as it should have been all along.
The Dotcom boom was over. The nest eggs were reset back to where they had started and 8 years of time (the most valuable asset in growing wealth) were gone. It was gone because everyone had deluded themselves that it could continue forever… it was a new economy and the old rules didn’t apply.
Desperate to get back what was lost people looked around and noticed that their houses and other real-estate had been growing very well during all this so they started buying houses and shifting their nest eggs into rehabs and house flips and given the housing market was warming up it worked very well.
A side effect of the repeal of Glass-Steagle was that it paved the way for a new innovative investment vehicle in which one could package groups of debt obligations and sell them on the open market. At first this was actually a good idea and it made money. However as things heated up in real-estate it turned out to be the key to the next collapse.
With everything going to hell in a hand basket in the stock market the investment firms were hard pressed to convince shareholders that they could make money so they created ever more complex and on paper profitable investment vehicles to grow their earnings and restore confidence in their abilities. They succeeded.
Part of the problem with this is that there were really too damn many investment banks and firms all fighting over a limited amount of capital. This forced them toward too much innovation in what they did. ETF’s (exchange traded funds mostly tracking a sector or index… such as agriculture or banking) were created as well at this time.
Once again more companies and products had been created to help fuel the boom in real estate. Interest rates were still extremely low and credit became very easy to get for everyone. Thanks to SIV’s actual risk could be sold to others to the investment firms could pass it along to others quickly and as long as things went well (which they all seemed to think had become matter of course) everyone was making money.
Greed reared its head. Deals were made in which every party thought they were putting one over on every other party… the guy borrowing for a house he couldn’t afford with the plans over borrowing more than it was worth to make the payments until it was worth enough he could sell and make a huge profit thought he had put one over on the lender, the lender loaning him the money who knew they’d just package it with some good mortgages and sell it to an investment firm for a huge profit thought they had put one over on the investment firms, the investment firms bought the SIV’s thinking that one of two no pays wasn’t a big deal cause it was insured and they had gotten it at a good price and would make big bucks even if 20% of the assets in the SIV didn’t pay out, the bond insurer who backed it wasn’t worried cause it looked as if they’d collect the premiums and never have to pay… you get the picture.
Given that interest was so low one could borrow against their assets and buy more assets which were paying them more than they were paying. Companies extended themselves greatly by doing this as the more they bought the more they could borrow and the more they could buy… most firms became overleveraged compared to conventional wisdom and once again they said conventional wisdom was out of date.
The home equity line of credit (HELOC) came into common use with your house going up in value so quick you could borrow against the equity without having to sell the place and use that money to pay off other debts or renovate (thus increasing the value even more) or just to buy a big TV and go on vacation… debt was cheap to have and with housing going up it didn’t hurt you in the slightest.
Companies of all sort were getting into the lending business since there was a LOT of money to be made. There was so much wealth floating around the world fueled and backed by real estate that anyone could get money for just about any purpose and it was cheap. Companies bought SIV’s for the big revenues they generated and it made their balance sheets and profit margins soar. They didn’t truly understand what they were buying but it was insured, rated, and in theory hedged against failure. It’s not surprising they didn’t understand what they were buying since the folks selling them barely understood themselves.
Loaning money about creates wealth and prosperity. The money borrowed builds buildings, employs people, creates revenue that couldn’t have existed without the borrowed money. You can do it without credit but it’s MUCH slower and less robust.
One last bit and we’ll knock over this house of cards as well. When you borrow against assets be they property, stocks, or anything else if the underlying assets go down in value you are required to make up the difference… it’s called a margin call.
Ben Bernanke takes over from Alan Greenspan as head of the fed. Ben is an inflation hawk and an academic. He sees what is going on in the markets and sees that all this easy credit is creating inflationary pressure and he acts to slow it down and stop the great devil of inflation. He starts a rapid program of raising the interest rates but does so to quickly as it takes about 6 months for a rate increase or decrease’s effect to be realized in the overall markets. He raised the rates until credit dried up. No longer could you borrow low and collect higher (called spreads) and as a result the housing market slowed.
Demand drives prices the more demand the higher the prices get. No one was loaning money so the prices of housing slowed in growth (bad for HELOC’s) and eventually stabilized and then proceeded to decline (bad for margin).
Ben had raised rates too far but hadn’t done it slow enough to be able to back off in time. Odds are he didn’t understand what he had done because virtually no one knew how convoluted this housing boom had become or how far its reach had gotten.
As house prices declines margins were called and companies no longer had the revenue coming in to meet the obligations… they went under in a wave of bankruptcy. Thus began the Subprime Slime.
Next up came the Alt A mortgage companies, Alt A wasn’t quite as bad as subprime but it wasn’t good, they had jobs but not enough of a job to afford what they had bought. Alt A companies go under.
HELOC customers are now in trouble as are those who made them their loans. They had borrowed 20% more than the house is now worth and are trapped. They can’t sell cause they owe more than it’s worth the lenders are panicking cause if they homeowner goes bankrupt they’ll be eating a huge loss.
No one will buy SIV’s any longer because they are scared of them. The ones that are out there begin losing value since there is no demand. More Margin calls and write off start.
We now begin to see how much of this crap is out there… possibly trillions of dollars of it.
The Fed acts to slow to avert the crisis. They lower the interest rates but it’s too late to stem the collapse no one will loan anyone money for fear it won’t be repaid and they have more than enough risky loans on their books.
The economy both at home and abroad grinds to a halt and bellies up and dies the Housing Boom is over and we stand on the brink of a crisis as bad as the Great Depression.
The reason this is so much worse than the Dotcom boom is that the money created in the tech bubble wasn’t real it wasn’t backed by homes, land and other hard assets so when it went away it didn’t leave destruction.
Once again the Boomers have seen their nest eggs reset to where they were when they started and in this case they are much deeper in debt and after 16 years it’s really too late to grow what’s left of their resources into something meaningful in time… as I said earlier time is the most important asset in growing wealth.
The bailout packages are needed, it’s a crappy deal for those who didn’t get in over their heads but if there isn’t a bailout they are going to suffer worse than if there is.
If confidence in the functionality of our markets is not restored so that the wheels of capitalism begin rolling again we will get a second depression… I’m glad I listened to my grandparents and great grand parents about those times because I think that might give me and my family a better chance of surviving the coming mess.
There is MUCH more I could say on this but I think I've hit the main time line of events that got us where we are.
After the crazy interest rates of the Carter Era things started to calm down, stagflation was defeated and things were getting better… interest rates on savings started to sink and continued to sink until they were to small to beat inflation and taxes. Current interest on savings accounts and CD’s actually cost much more than you make as your capital is depreciating faster than it pays you by about a 50 to 1 ratio.
At the height of the 80’s came a time of deregulation which continued right up until everything was too messed up to easily backtrack.
The largest demographic group in the country realized that they were going to have to retire in the not too distant future, they had nest eggs but those nest eggs couldn’t cover 20 years of not working. This was the Boomers.
The Boomers flooded the stock market with assets as they funneled ever increasing amounts of their built up capital into their 401k’s and general investments. This started the upward push of the market and the creation of gobs of products to receive that money… mutual funds proliferated and still are.
This set the stage for the next disaster.
Tech became big money. The infiltration of computers and the internet into all of our lives fueled a boom time in the markets for innovative tech companies. The millionaire receptionists for companies like Apple and Microsoft came into existence.
With all this money to be made and hype more and more products and companies came into the market to capitalize on the boom. Shell companies that did little more than get other tech ideas turned into public companies; companies with $20,000 a year in revenue trading as if they were worth $2,000,000 and other such insanity. This created HUGE amounts of wealth for people and the country actually entered a period of surplus tax revenue rather than deficit. People look back on this as a great and wondrous time. Those little nest eggs of the boomers had grown to a point that retirement looked to be pretty easy.
Since things were going so well deregulation seemed like a great idea and the key regulation that would have avoided what was to come was repealed by such a congressional majority that the president couldn’t have vetoed it if he tried. Citicorp had worked long and hard to get rid of the Glass-Steagle Act which would have stopped them from merging with Travellers Insurance. Glass-Steagle was put in place in 1933 to separate the different types of financial institutions so that no conflicts of interest could be created that would adversely impact customers and the broader economy.
Since tech companies were getting all the money from investors other sorts of companies had to try and keep up with the crazy growth in order to keep people investing in them. Enron was a utility company that was able to make itself look like it had tech type growth through a variety of accounting and merger activity. They were far from the only one however they are the best known story for an example.
Sadly for everyone the tech bubble was all fluff. The underlying fundamentals of the boom had as much substance as the air we breathe and couldn’t last. The bubble popped and in extremely short order it all went away sending the economy into a tailspin.
All the wealth created vanished and those who fluffed their books got burned and died and some regulation was put back into place as it should have been all along.
The Dotcom boom was over. The nest eggs were reset back to where they had started and 8 years of time (the most valuable asset in growing wealth) were gone. It was gone because everyone had deluded themselves that it could continue forever… it was a new economy and the old rules didn’t apply.
Desperate to get back what was lost people looked around and noticed that their houses and other real-estate had been growing very well during all this so they started buying houses and shifting their nest eggs into rehabs and house flips and given the housing market was warming up it worked very well.
A side effect of the repeal of Glass-Steagle was that it paved the way for a new innovative investment vehicle in which one could package groups of debt obligations and sell them on the open market. At first this was actually a good idea and it made money. However as things heated up in real-estate it turned out to be the key to the next collapse.
With everything going to hell in a hand basket in the stock market the investment firms were hard pressed to convince shareholders that they could make money so they created ever more complex and on paper profitable investment vehicles to grow their earnings and restore confidence in their abilities. They succeeded.
Part of the problem with this is that there were really too damn many investment banks and firms all fighting over a limited amount of capital. This forced them toward too much innovation in what they did. ETF’s (exchange traded funds mostly tracking a sector or index… such as agriculture or banking) were created as well at this time.
Once again more companies and products had been created to help fuel the boom in real estate. Interest rates were still extremely low and credit became very easy to get for everyone. Thanks to SIV’s actual risk could be sold to others to the investment firms could pass it along to others quickly and as long as things went well (which they all seemed to think had become matter of course) everyone was making money.
Greed reared its head. Deals were made in which every party thought they were putting one over on every other party… the guy borrowing for a house he couldn’t afford with the plans over borrowing more than it was worth to make the payments until it was worth enough he could sell and make a huge profit thought he had put one over on the lender, the lender loaning him the money who knew they’d just package it with some good mortgages and sell it to an investment firm for a huge profit thought they had put one over on the investment firms, the investment firms bought the SIV’s thinking that one of two no pays wasn’t a big deal cause it was insured and they had gotten it at a good price and would make big bucks even if 20% of the assets in the SIV didn’t pay out, the bond insurer who backed it wasn’t worried cause it looked as if they’d collect the premiums and never have to pay… you get the picture.
Given that interest was so low one could borrow against their assets and buy more assets which were paying them more than they were paying. Companies extended themselves greatly by doing this as the more they bought the more they could borrow and the more they could buy… most firms became overleveraged compared to conventional wisdom and once again they said conventional wisdom was out of date.
The home equity line of credit (HELOC) came into common use with your house going up in value so quick you could borrow against the equity without having to sell the place and use that money to pay off other debts or renovate (thus increasing the value even more) or just to buy a big TV and go on vacation… debt was cheap to have and with housing going up it didn’t hurt you in the slightest.
Companies of all sort were getting into the lending business since there was a LOT of money to be made. There was so much wealth floating around the world fueled and backed by real estate that anyone could get money for just about any purpose and it was cheap. Companies bought SIV’s for the big revenues they generated and it made their balance sheets and profit margins soar. They didn’t truly understand what they were buying but it was insured, rated, and in theory hedged against failure. It’s not surprising they didn’t understand what they were buying since the folks selling them barely understood themselves.
Loaning money about creates wealth and prosperity. The money borrowed builds buildings, employs people, creates revenue that couldn’t have existed without the borrowed money. You can do it without credit but it’s MUCH slower and less robust.
One last bit and we’ll knock over this house of cards as well. When you borrow against assets be they property, stocks, or anything else if the underlying assets go down in value you are required to make up the difference… it’s called a margin call.
Ben Bernanke takes over from Alan Greenspan as head of the fed. Ben is an inflation hawk and an academic. He sees what is going on in the markets and sees that all this easy credit is creating inflationary pressure and he acts to slow it down and stop the great devil of inflation. He starts a rapid program of raising the interest rates but does so to quickly as it takes about 6 months for a rate increase or decrease’s effect to be realized in the overall markets. He raised the rates until credit dried up. No longer could you borrow low and collect higher (called spreads) and as a result the housing market slowed.
Demand drives prices the more demand the higher the prices get. No one was loaning money so the prices of housing slowed in growth (bad for HELOC’s) and eventually stabilized and then proceeded to decline (bad for margin).
Ben had raised rates too far but hadn’t done it slow enough to be able to back off in time. Odds are he didn’t understand what he had done because virtually no one knew how convoluted this housing boom had become or how far its reach had gotten.
As house prices declines margins were called and companies no longer had the revenue coming in to meet the obligations… they went under in a wave of bankruptcy. Thus began the Subprime Slime.
Next up came the Alt A mortgage companies, Alt A wasn’t quite as bad as subprime but it wasn’t good, they had jobs but not enough of a job to afford what they had bought. Alt A companies go under.
HELOC customers are now in trouble as are those who made them their loans. They had borrowed 20% more than the house is now worth and are trapped. They can’t sell cause they owe more than it’s worth the lenders are panicking cause if they homeowner goes bankrupt they’ll be eating a huge loss.
No one will buy SIV’s any longer because they are scared of them. The ones that are out there begin losing value since there is no demand. More Margin calls and write off start.
We now begin to see how much of this crap is out there… possibly trillions of dollars of it.
The Fed acts to slow to avert the crisis. They lower the interest rates but it’s too late to stem the collapse no one will loan anyone money for fear it won’t be repaid and they have more than enough risky loans on their books.
The economy both at home and abroad grinds to a halt and bellies up and dies the Housing Boom is over and we stand on the brink of a crisis as bad as the Great Depression.
The reason this is so much worse than the Dotcom boom is that the money created in the tech bubble wasn’t real it wasn’t backed by homes, land and other hard assets so when it went away it didn’t leave destruction.
Once again the Boomers have seen their nest eggs reset to where they were when they started and in this case they are much deeper in debt and after 16 years it’s really too late to grow what’s left of their resources into something meaningful in time… as I said earlier time is the most important asset in growing wealth.
The bailout packages are needed, it’s a crappy deal for those who didn’t get in over their heads but if there isn’t a bailout they are going to suffer worse than if there is.
If confidence in the functionality of our markets is not restored so that the wheels of capitalism begin rolling again we will get a second depression… I’m glad I listened to my grandparents and great grand parents about those times because I think that might give me and my family a better chance of surviving the coming mess.
There is MUCH more I could say on this but I think I've hit the main time line of events that got us where we are.