Posted by Dinah on October 6, 2008, at 9:53:11
In reply to Re: Oops-- there goes the economy..., posted by Deneb on October 5, 2008, at 22:58:15
I don't understand how it can be helpful to think of it in those terms. It kind of tosses out serious discussions of what happened and how to prevent it from happening again.
It has a lot more to do with greed on the part of some, poor judgment and excess optimism and fear on the part of others, and the understandable tendencies of people to ride a bubble assuming it will never burst. Which leads to overvaluation, in this case mainly of real estate. And a correction.
Why that led to a crisis is better explained by others.
http://money.cnn.com/2008/10/03/markets/thebuzz/index.htm?postversion=2008100316
I was reading this and some other articles the other day. Trying to find something past the superficial.
I don't quite understand all of it. Apparently some banks became technically insolvent because of an accounting system that was put into place to correct the overstatement that arose in the previous accounting method.
Under the old method allowed assets to be carried at what the company paid for them, with a few exceptions. This allowed companies to carry artificially inflated assets on their balance sheet, to be shown as being solvent when they weren't. This was changed to marked to market, where assets are shown at what a willing buyer would pay for them. If you have a packet of mortgage loans in a time when home values are falling and foreclosures are high, it might be hard to find a buyer willing to shoulder the risk even at a large discount on price. So if you have an asset of mortgage loans in the amount of $100, prior to the crash you may have found someone willing to pay $70 for them. But in the current situation, it might be hard to find someone to pay $20 for them. Suddenly a company went from having lots of assets worth lots of money and being solvent (holding assets in excess of debt, or possibly having enough liquid assets to pay for upcoming debt. I'm not sure.) to holding nearly worthless assets and being insolvent.
Which, I suppose, is better than the previous way where you didn't know. BUT, those assets are artificially low at the moment. They're backed by mortgages on real homes where a lot of the mortgages and a lot of the homes are worth considerably more than the $20 the market would bear right now.
Also, because buyers are only willing to pay $20 on $100 right now, lending institutions can't sell their mortgages to third parties to free up more money to make loans. Even those companies who have cash on hand aren't about to lend it out because they want to keep their liquidity for safety's sake.
This bailout, as I understand it, promises to buy some of those mortgage packages for more than $20 but hopefully less than $70. If managed well, the cost to the taxpayer will be significantly less than the initial amount funded, because the mortgages being purchased have more value in them (in payback over time and in value when the market recovers) than they are currently selling for.
The purpose is to free up money for lending by providing liquidity to the lenders who are currently unable to sell batches of their loans as they currently do. (Would this be the GNMA/FNMA series that many normal prudent investors consider a relatively safe investment?) And also to provide confidence to those lenders who are currently afraid to release their cash. And also to bolster the stock market which is unduly driven by fear, optimism, and guesses about what will happen next. But even proponents of the bill admit that Wall Street will take a while to respond, and is a secondary purpose, not the primary one.
poster:Dinah
thread:854180
URL: http://www.dr-bob.org/babble/poli/20081002/msgs/856005.html