Understanding the Financial Crisis
By Barry Ritholtz - October 21st, 2008, 8:53PM
Nicely done video:
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Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
October 21st, 2008 at 8:59 pm
Cute, but why didn’t Paulson have his glasses on during tonight’s Charlie Rose interview? Is that symbolic? Is it a conspiracy? Is the lighting bad?
October 21st, 2008 at 10:03 pm
The YouTube ditty only neglected one very important element… one that I shared with you privately.
At the same time the originators were taking on the excessive leverage that Benber N. Anke criticized in Jackson Hole (2 Holes back) as being inconsequential to their mission, they were foisting a conflict of interest on their own good faith source of operating capital… the buyers of their MBS conduits.
Thus, they destabilized the market in two very important ways… by hyping up residential housing prices to bubble levels… and too, they injured the very market they were making for their providers of capital by shaking it to its very core with derivatives induced volatility.
October 21st, 2008 at 10:05 pm
Great, the DK approach to financial understanding.
Meh.
October 21st, 2008 at 10:05 pm
Cute but a little oversimplified, in that it omits the key factors of speculation on eternal home appreciation and the network effects of CDS.
October 21st, 2008 at 10:19 pm
This is a great illustration of what went wrong. Very effective. They should show this to all members of congress… Great job, guys!
October 21st, 2008 at 10:24 pm
OPEC today sounds pretty serious about the called meeting Friday…and why not with the price of oil cut in half. This is one of the underpinnings of the financial crisis, and I would bet this time you see the cartel act in concert with less cheating…
Careful early bulls….and as Kedrosky posted today…Wal Mart is seeing paycheck to paycheck buying of baby formula for the fist time…
Not pessimistic…but need a reason to tell me the recession is going to get better before it gets worse..
October 21st, 2008 at 11:15 pm
Fiat currency coupled with unlimited leverage. Brought to you by your neighborhood Federal Reserve. Now that was even simpler. To hell with paper money printed out of thin air… SIMPLE!
October 21st, 2008 at 11:16 pm
Good grief.
Paul Solman interviewed Taleb and his mentor the mathematician on today’s Lehrer News Hour. They say this is the most serious situation we have been in since the American Revolution.
.
October 21st, 2008 at 11:18 pm
Good grief. The video closes with this assertion: “With an understanding of the fundamentals of finance, we can avoid future financial meltdowns”.
Good luck with that.
October 21st, 2008 at 11:43 pm
This video is ok, but it did however neglect to say it was the poor peoples fault. If they could just pay the mortgages then there would be no bad debts. Poor people have ruined this country. I think being poor is so un-american.
McCain 08 !
October 22nd, 2008 at 12:13 am
Mandelbrot & Taleb on Jim Lehrer -awesome.
not exactly bullish.
think our little mini-rally near over.
i’ll let you call bottoms, i’ll keep putting banks
get your fractal on.
October 22nd, 2008 at 1:06 am
I love how the video said “now we all own banks” but fails to note that we will not benefit from banks’ profits.
I think it was Jon Stewart that said “we have privatized a bank’s profit but socialized its losses.”
I’m not an economist, but this bailout plan doesn’t make sense to me. The explanation that I’ve heard is that we need to give these banks the money so that they can give us loans. But… If a majority of Americans are in debt already what good will it do to put them in more debt with these loans? Also what is going to happen when the FED, with its almighty powers, decides to raise interest rates because the 1.5 trillion that it pumped in created more inflation and people can’t afford to pay the loan back and begin to default again?
October 22nd, 2008 at 1:11 am
I love how the video said “now we all own banks” but fails to note that we will not benefit from banks’ profits.
I think it was Jon Stewart that said “we have privatized a bank’s profit but socialized its losses.”
I’m not an economist, but this bailout plan doesn’t make sense to me. The explanation that I’ve heard is that we need to give these banks the money so that they can give us loans. But… If a majority of Americans are in debt already what good will it do to put them in more debt with these loans? Also what is going to happen when the FED, with its almighty powers, decides to raise interest rates because the 1.5 trillion that it pumped in created more inflation and people can’t afford to pay the loans back and begin to default again?
If what I’m saying doesn’t make sense please let me know kindly.
October 22nd, 2008 at 2:00 am
Wait- I missed Mandelbrot on the NewsHour?
The basic premise of fractals is that the smaller pattern predicts the larger one- so the only question is- was the Great Depression the greater or the lesser low point when graphed to now?
I’l have to see that segment.
October 22nd, 2008 at 2:50 am
http://www-tc.pbs.org/newshour/rss/media/2008/10/21/20081021_solman.mp3
October 22nd, 2008 at 3:20 am
Let’s “Understand” This.
Everything else are the Implications of this action.
“Here is the article from the New York Times that was calling for Fannie Mae to open up the subprime market by order of the Clinton Administration. Maybe, all the Democrats that have had power of the congress and have been led around by the nose by the lobbyist from Credit Suisse and UBS should stop
saying that the Republican trickle down theory created this mess and take some ownership”.
Here is the article:
By STEVEN A. HOLMES
Published: September 30, 1999 !!!!!!!!!!!!!!!!
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates — anywhere from three to four percentage points higher than conventional loans.
”Fannie Mae has expanded home ownership for millions of families in the 1990′s by reducing down payment requirements,” said Franklin D. Raines, Fannie Mae’s chairman and chief executive officer. ”Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”
Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any
difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980′s.
”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”
Under Fannie Mae’s pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 — a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.
Fannie Mae, the nation’s biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more
loans to people with less-than-stellar credit ratings.
Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.
Home ownership has, in fact, exploded among minorities during the economic boom of the 1990′s. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University’s Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.
In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.
Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.
In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae’s and Freddie Mac’s portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.
The change in policy also comes at the same time that HUD is
investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants. (End Article)
Starring roles in Ms. Clinton’s new The Raw Deal played superbly by Pelosi Frank and Raines.
Its off to the re-education camps for me. Gee next year at this time use of free speech will be…………? Better, worse or the same?
October 22nd, 2008 at 5:18 am
The URL of NYT article RedRiver is referring to. Some people like to see the source.
http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260
October 22nd, 2008 at 5:42 am
Great video but too simplistic. The root problem is the mortgage defaults but the crisis is the bundling and resale of these financial “assets” to other institutions, thus creating a cascade of problems for the whole financial network.
October 22nd, 2008 at 5:43 am
Red, I’m so glad I’m an Independent!!! Assholes on both sides of the aisle get soooo caught up in there group think.
October 22nd, 2008 at 6:22 am
People might want to check the lack of transparancy in these bailout contracts at http://www.bailoutsleuth.com/. Lots of the contracts have been blackened out.
October 22nd, 2008 at 10:37 am
Barry,
Thank you for featuring our video! It’s an honor for those of us at Enspire who read your blog.
Thanks to your readers for the comments as well. A few point out that we do simplify things – completely true, but we’re hoping to reach non-experts. Explaining things fully would require a feature-length documentary, at least!
We’re working on more videos explaining other aspects of the current financial situation, so please stay tuned.
Alex
Enspire Learning
October 22nd, 2008 at 10:39 am
The whole Fannie/Freddie argument is a ludicrous canard. Banks like WaMu, Bear and Lehman were private institutions that were supposed to make sophisticated decisions about the level of risk they were taking on by holding MBS securities. Regardless of what Fannie and Freddie were doing, the blame for the failure of those institutions and the crisis that the other banks are having has to be placed squarely on them. Banks that chose to not take huge risks in Mortgage-related securities are doing well. Hedge funds that shorted subprime or bought CDS are doing well… both of those options were fully available to investment banks in particular.
October 22nd, 2008 at 10:48 am
Re: Taleb and Mandelbrot. They seem to just be riffing on the ‘anything is possible’ and ‘be afraid, very afraid’ theme…of course it isn’t their fault that the level of discussion is so low (and this is pbs!).
Watching them I wonder if all the recent theorizing on asymmetric warfare, network vulnerabilities, scale-free networks and cascading collapses should have focused less on terrorism and more on finance.
(If you want something fun to watch and haven’t seen it yet, find Taleb on BBC Newsnight.)
October 22nd, 2008 at 11:25 am
Nice little video. It does do a good job of explaining the mechanics of how a company can go BK. The root, however, is the Federal Reserve.
I think Barry downplays the CRA & the Federal policies to expand home ownership a bit, but he is right when he says that is was not the main cause of these events. Contributory factor? Yes. Main cause? No. It’s starting sound like a broken record, from both Rs & Ds.
Regards,
TDL
October 22nd, 2008 at 11:58 am
RedRiver,
You must have missed the McClatchy piece I posted in a previous thread:
PRIVATE SECTOR LOANS, NOT FANNIE OR FREDDIE, TRIGGERED CRISIS
See bottom of this thread: Home Prices Seen “Far from Bottom”.
.
October 22nd, 2008 at 12:02 pm
Ben,
“(If you want something fun to watch and haven’t seen it yet, find Taleb on BBC Newsnight.)”
That was when he was pounding on the table, because he was enraged about the fake accounting by banks, but of course he was correct.
.
October 22nd, 2008 at 1:04 pm
Must be those darned poor people that caused all those investment banks to fail. After all what kind of leadership can you expect for 1/2 billion dollars any more, like the CEO of now defunct Lehman made in the last six years. Not to worry the CEOs and top execs of the golden nine will be taken care of, they are in line
for a $75 billion in bonus this year. After all a billion won’t buy what it used to.
October 22nd, 2008 at 1:06 pm
Must be those darned poor people that caused all those investment banks to fail. After all what kind of leadership can you expect for 1/2 billion dollars any more, like the CEO of now defunct Lehman made in the last six years. Not to worry the CEOs and top execs of the golden nine will be taken care of, they are in line
for a $75 billion in bonus this year. After all a billion won’t buy what it used to.
October 22nd, 2008 at 1:18 pm
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October 22nd, 2008 at 9:14 pm
I think the real reason for the crises is really simple. Wages have been collapsing. And have for a long time. And that finally caught up with house prices. And every thing else. with out wage growth, you can support price increases for long.
October 23rd, 2008 at 5:15 am
And what about this one?
http://www.xplane.com/subprime/