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Taleb: I Have Discovered The Solution To The Global Financial Crisis
Nassim Taleb and his hedge-fund partner Mark Spitznagel weigh in in the FT with an analysis of the world's problem (too much debt) and a reasonable solution (convert some of the debt to equity).
Taleb explains how banks can end the mortgage crisis, lowering monthly mortgage payments by converting mortgage debt to equity:
Excerpt: The only solution is to transform debt into equity across all sectors, in an organised and systematic way. Instead of sending hate mail to near-insolvent homeowners, banks should reach out to borrowers and offer lower interest payments in exchange for equity. Instead of debt becoming “binary” – in default or not – it could take smoothly-varying prices and banks would not need to wait for foreclosures to take action. Banks would turn from “hopers”, hiding risks from themselves, into agents more engaged in economic activity.
Excellent excellent excellent!
The Financial Crisis and How to Fix it: Video of John Allison at The Ayn Rand Center for Individual Rights: The ARC Lecture Series
Incredible video, a must see even though it's an hour long! If you want to understand how we got to into this financial-crisis, and our options for getting out, this is a must listen too speech. John Allison—the longest-tenured CEO of a top-25 financial services company "BB&T"—argues that this crisis is a legacy of the government’s anti-capitalist policies.
Mr. Allison uses his unique inside view of the financial services industry to show how massive government intervention into the U.S. economy—from the creation of the Federal Reserve in 1913 to a reckless crusade to encourage home-ownership—laid the groundwork for an unsustainable real estate boom. And he shows how the government’s response to the inevitable bust—a frenzied series of bailouts, nationalizations, and “stimulus” efforts—is only making things worse.
Finally, Mr. Allison explains the underlying philosophical reasons for the crisis, and discusses the immediate and long-term solutions. He shows that capitalism, far from being the cause of today’s crisis, is its only cure.
This is an incredible historical study and commentary provided by the Ayn Rand Institute
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Liquidity issues in the capital market reflect inflation. residential real estate investment bubble, $500 billion, came at the expense of more productive investments. Governmetn 4 primary source: Federal Reserve, FDIC, SEC, Fannie and Freddie.
Federal Reserve is designed to prevent short term volatility, but trades short term benefits by creating long term volatility.
Years of Greenspan low interest rates replaced by sudden Bernake high rates.
FDIC creates false sense of security. Allows for underfunded start-up banks with no experience and no right to be in the mortgage lending business. FDIC enabled the real estate bubble.
Increase in homeownership beyond natural market supply-demand forces. Tax policy driving homeownership takes investment money out of other more productive uses.
Fannie and Freddie 50% of mortgage market under Clinton. Gov guaranteed mortgage securities. Leveraged $5 Trillion. Role of politics in Fannie and Freddie: a social policy to dramatically increase homeownership, even to people who could not possibly afford to won their own home. Religious belief in affordabel housing combined with Fannie-Freddie lobby dollars to Democrats. Biggest source of Democrat campaign funding!!
Financial institutions and the global Liquidity
problem. Banks can pool resources, leverage them, and diversify credit risks to meet the capital needs of expanding markets. Liquidity vs. solvency.
Financial Institutions: banks leveraged at 10:1, investment banks at 40:1. Governemnt supports this because they need inflation to finance gov overspending.
Before Federal Reserve, banks leveraged at 1:1.
Federal Reserve - Banking system - Residential Real Estate: housing values need to fall about 30% to become affordable again. $500 Billion lost so far. That's $5 Trillion in liquidity. There's still another $150 Billion in housing values to fall. That's another $Trillion plus in lost liquidity!
Treasury wiped out the debt holders of investment banks with TARP. $750 Billion. Washington Mutual debt holders wipeout ended private investment in banks, closign the capital markets for banks.
How did the USA housing problem go global? Securitized mortgage bundles and Credit Default Swaps insuring that crap.
Why the residential real estate collapse at this time? How did residential re get into the capital markets? A lot of subprime mortgages ahd been sold into the capital markets with AAA ratings (Standards Poor, Moody's and Fitch). Investment grade ratings. Loss of confidence in ratings agencies. This loss of trust in subprime ratings led to a huge lock up in all credit ratings! Refinance and finance related directly to the loss in confidence in the ratings agencies. Liquidity and the flight to quality needs trust.
Fair value accounting rules is recent: mark-to-market. Violates the basic law of supply and demand because it is a snapshot of the moment. Markets might not exist at that moment!
The only buyers today are deep discounters! No one will take the accounting risk to buy at higher rates - the "expected" or assumed market values.
Fair value accounting does not take into account "gains" or projected cash flows. what's the liquidation value at that moment. This is not a private market accounting. The government owns and operates the accounting system in the US. Sarbanes-Oxley "transparency" effect is a disaster.
The interest expense on a mortgage based on rising home values. High growth markets targeted. WAMU, CountryWide, DiTEch: FDIC made this crap possible - garyedwards on 2009-03-03
A history of the Mortgage - Housing dilemma by Arnold Kling | EconLog | Library of Economics and Liberty
Excellent study of how we got into this problem that the socialist are now using to kill forever the American Dream: "..... Forty years ago, depository institutions handled mortgage credit risk very differently than they do today. Back then, the depository institution, which was typically a savings and loan association, held mortgages that were underwritten by its own employees, given to borrowers and backed by homes in its own community. These were almost always 30-year, fixed-rate loans, with borrowers having made a significant down payment, often 20 percent of the price of the home. Call this approach to mortgage lending "Method A."
Today, mortgage loans held by depository institutions are often in the form of securities. These securities are backed by loans originated in distant communities by unknown borrowers, underwritten by mortgage brokers or other personnel not employed by the depository institution. The loans are often not 30-year fixed-rate loans, and the borrowers have typically made down payments of 5 percent or less, including loans with no down payment at all. Call this approach to mortgage lending "Method B."
If you compare the two methods using common sense, then Method B does not pass a simple sanity check. In fact, the current financial crisis consists of banks that are up to their necks in Method B......"
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Add Sticky NoteMethod A suffered a breakdown in the 1970's, because inflation was allowed to get out of control. The 6 percent mortgage interest rates that were commonly charged by savings and loans became untenable when inflation and interest rates soared to double-digit levels. The savings and loan industry went out of business. Whether Method B could survive a similar shock is unclear. The right lesson to learn from the 1970's was not that we should use Method B. The right lesson to learn is that we should not let inflation get out of hand.
- Government inflation (thank you Jimmy Carter) as the cause of the savings and loan collapse! - on 2009-03-02
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Add Sticky Note
The secondary mortgage market began in 1968, when the United States formed the Government National Mortgage Association (GNMA). GNMA pooled loans originated under programs by the Federal Housing Administration (FHA) and the Veterans Administration (VA) and sold these pools to investors. The purpose of this, as with the quasi-privatization of the Federal National Mortgage Association (Fannie Mae) that took place that year, was to take Federally guaranteed mortgage loans off of the books. President Johnson, fighting an unpopular war in Vietnam, wanted to save himself the embarrassment of having to come to Congress to ask for larger and larger increases in the ceiling on the national debt.
Thus, the first steps toward mortgage securitization were taken in order to disguise financial reality using accounting gimmicks. It has been the same ever since.
- There it is, in all it'snaked glory. The government created the secondary mortgage market, spinning up Fannie, Freddie and Ginnie for the purpose of taking federally subsidized and guaranteed mortgages off the the official government books. hence the quasi-gov orgs. It's an accounting gimmick!!!! - on 2009-03-02
Robert Murphy on the SEC and Government bungling of fraudulent investment scams
Whenever a government regulatory agency proves itself to be incredibly incompetent or corrupt, the respectable media swoop in to declare that the "free market" has failed and the agency in question obviously needs more money and power.
Whether it's the Department of Education's failure to produce kids who can read, the FBI's accusations against innocent people in high-profile cases, or the FDA cracking down on tomatoes, the answer is always the same: proponents of bigger government argue that yes, mistakes were made, but the solution of course is to shovel more taxpayer money into the agencies in question.
In the private sector, when a firm fails, it ceases operations. The opposite happens in government.
How to Repair a Broken Financial World - Michael lewis and David Einhorn - NYTimes.com
Continued from "The End of the Financial World As We Know It"
The End of the Financial World as We Know It | Michael Lewis and David Eihhorn The End of the Financial World as We Know It - NYTimes.com
Full Article in NYT: AMERICANS enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street.
Michael Lewis And David Einhorn: Bonfire Of The Absurdities
Two of the sharpest minds in the Wall Street analysis and commentary business--Michael Lewis and David Einhorn--team up in the NYT to provide a recap of our historic charge off the financial cliff.
The main message: Sure, greed played a role, as it always does, but the ridiculous conflicts, self-interest, and short-termism in our system made the current mess inevitable.
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