Oct 22

In August, I posted an article to point readers to a public radio show This American Life where they had aired a program titled “The Giant Pool of Money,” focusing on the subprime meltdown.

Recently, they aired Another Frightening Show About the Economy which goes into even more detail, this time focusing on the commercial paper market and credit default swaps. I offer this as a sample of the explanations out there that are actually understandable by the average Joe, in this case from a radio show I’ve enjoyed for years.


Note: as the comments here are not seen without the extra click, this one was worth adding right to the post, a note from one of my regular readers (thanks, JAL!):

If you enjoyed the economic related episodes on NPR’s This American Life, you’ll probably also like NPR’s Planet Money daily podcast. In the same style as This American Life, it features discussions and interviews about the current economic situation in a plain easy-to-understand form. Check it out:
Best regards,

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Oct 11

In the classic Christmas song Winter Wonderland there is a line, “it will nearly be like a picture print by Currier and Ives.” Well, the times we are in now, are in fact, just that. Just perhaps not the scene that song was alluding to.

This print is from 1875. Will we ever learn?

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Aug 07

For those who have read my page of links to articles on the Subprime Meltdown, I’ve added one more – “The Government-Created Subprime Mortgage Meltdown” by Thomas J. DiLorenzo.

As the title implies, he holds the Government (not the treasury, nor the federal reserve, but the government itself) responsible and he cites the 1977 Community Reinvestment Act (CRA) as the genesis of our current mess. As always, any other suggestion, please add a comment.


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Dec 04

Henry Paulson spoke today about the mortgage crisis and how the government was going to encourage a rescue. I suppose the cynic in me can ask what makes anyone believe that it’s going to be done right this time. The origins of the subprime meltdown are based in a remarkable combination of greed and ignorance, and I’m sure some fraud thrown in. Paulson’s plan, while well intended, may come with its own unintended consequences.

To start, I must say I appreciated his logic in categorizing the four types of subprime mortgage holders:

  1. Those who can afford their adjusted interest rate [and] need no assistance.
  2. Homeowners who haven’t been making payments at the starter rate on their subprime loan and may not have the financial wherewithal to sustain home ownership.
  3. Homeowners [who] might choose to refinance their mortgage – putting them in a sustainable mortgage while keeping investors whole.
  4. Those with steady incomes and relatively clean payment histories who could afford the lower introductory mortgage rate but cannot afford the higher adjusted rate.

Well, (1) and (2) are not the issue. The first group seems to have gotten through just fine, and the second are clearly in the group that never should have been given a mortgage. The third and forth groups he proposes to help with a combination of state sponsored tax-exempt bonds and streamlined refinancing. The risk is this; every change in taxation has an effect. Raise the tax on a good or service and you reduce the demand for it, and perhaps raise the demand for an alternate should one exist. The tax exempt bonds, whatever their total market value, will compete for money in the bond market, raising the cost of capital elsewhere. The category (3) refinancing will make the original mortgage holders whole, when perhaps their CMO tranche didn’t deserve to be valued at 100%, perhaps it’s changed hands so many times that the current owner paid pennies on the dollar. For that investor to now collect face value does not pass the common sense test. In the end, Paulson’s plan may very well work, and we may survive this crisis without greater damage to the economy, but even so, I’ll leave with the question, “What have we learned and how do we keep history from repeating, yet again?”

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Oct 17

This is from the “random thoughts before I fall asleep department.”
As a society, will we ever learn? Two unrelated issues, similar timeframes. First, in the early 80’s we enjoyed the Savings and Loan Crisis. The origins and result of that crisis are beyond my ability to analyze on my blog, it’s easy enough to Google to read up on the history, but it’s safe to say that it wasn’t so long ago that we don’t remember that there were some painful times back then. It’s safe to say that one component of that crisis was rising interest rates, and the fact that banks were paying more on CDs than on the interest on their outstanding loans.
Today, we have the flip side of this. Rates dropping so low that the teaser rate on an ARM was 1-2% and had nowhere to go but up. And that ‘up’ somehow caught everyone by surprise. There’s enough blame to go around, aggressive mortgage salesfolk, an industry that wasn’t abiding by the rules all the time, ratings companies that misrated the resulting mortgage packages, and consumers who were, well, let’s just say they didn’t quite understand what they were buying. That’s enough for one day’s (or night in my case) thought. Tomorrow, history repeats, again. Groundhog Day, or 50 First Dates, depending on your age.

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