Comments on: Financial Crisis: A Layman’s Understanding http://eliainsider.com/2008/10/02/financial-crisis-a-laymans-understanding/ On Mobile, Tech and Running Infinity Softworks Tue, 20 Jul 2010 20:01:50 +0000 hourly 1 http://wordpress.com/ By: efreedman http://eliainsider.com/2008/10/02/financial-crisis-a-laymans-understanding/#comment-542 efreedman Sat, 04 Oct 2008 12:21:04 +0000 http://mobilesuccess.wordpress.com/?p=131#comment-542 I agree with you completely, Ken. A couple of collaborative points: 1) I drew the line in the sand somewhere to explain this. Yes, we could trace back to the formation of Freddie and Fannie as being 'market modifiers'. Both of those organizations were put in place to increase home-ownership. Because they are forced to buy loans, good or bad, below a certain threshold, people who the market would consider inadequate for home ownership can now get loans. So banks take risks -- think 0% down, for instance -- with loans because they know they can dump them on Fannie Mae. We could also trace this to 9/11. In its wake, the economy contracted (recession) and the Fed dropped short-term rates to try and combat the problem. Short-term rates, the ones the Fed controls, dropped way below long-term rates. What did this cause? A lot of short-term borrowing, like all the sub-primes loans. Governor Palin, in the VP debate Thursday night, kept criticizing Senator Biden for looking backward. The only way to fix this mess is to understand how we got there first. History, as Senator Biden said, is prologue. 3) I have been thinking about this post since I wrote it and wanted to add a comment regarding regulation. To me, oversight and regulation are two completely different things that, throughout US history, have been tied together. The run of deregulation over the past two decades has thrown the baby out with the bath water. Yes, deregulation is fine but we can't stop watching the companies that used to be regulated. The SEC provides oversight. FASB, the accounting standards board, provides oversight. We need oversight to ensure that companies are transparent in regards to the businesses so everyone can work from a level playing field. I agree with you completely, Ken. A couple of collaborative points:

1) I drew the line in the sand somewhere to explain this. Yes, we could trace back to the formation of Freddie and Fannie as being ‘market modifiers’. Both of those organizations were put in place to increase home-ownership. Because they are forced to buy loans, good or bad, below a certain threshold, people who the market would consider inadequate for home ownership can now get loans. So banks take risks — think 0% down, for instance — with loans because they know they can dump them on Fannie Mae.

We could also trace this to 9/11. In its wake, the economy contracted (recession) and the Fed dropped short-term rates to try and combat the problem. Short-term rates, the ones the Fed controls, dropped way below long-term rates. What did this cause? A lot of short-term borrowing, like all the sub-primes loans. Governor Palin, in the VP debate Thursday night, kept criticizing Senator Biden for looking backward. The only way to fix this mess is to understand how we got there first. History, as Senator Biden said, is prologue.

3) I have been thinking about this post since I wrote it and wanted to add a comment regarding regulation. To me, oversight and regulation are two completely different things that, throughout US history, have been tied together. The run of deregulation over the past two decades has thrown the baby out with the bath water. Yes, deregulation is fine but we can’t stop watching the companies that used to be regulated. The SEC provides oversight. FASB, the accounting standards board, provides oversight. We need oversight to ensure that companies are transparent in regards to the businesses so everyone can work from a level playing field.

]]> By: Ken Pulvino http://eliainsider.com/2008/10/02/financial-crisis-a-laymans-understanding/#comment-541 Ken Pulvino Fri, 03 Oct 2008 17:56:04 +0000 http://mobilesuccess.wordpress.com/?p=131#comment-541 Elia, Good summary. I would add, however, that we should not overlook the impact of legislation---from the 70's, I believe, coercing banks to provide loans to otherwise untrustworthy borrowers for mortgages with the aid of Fannie and Freddie---and the deregulation of appropriate credit verification by the lenders. These two main contributors have joined with the easing of bankruptcy laws over the years and the inanity of government leaders ( like VP Cheney ) promoting "toxic" behavior with stated opinions endorsing a "debt doesn't matter" philosophy. That "toxic" behavior has been adopted by far too many Americans of all races and creeds in every socioeconomic level. They took shelter under the umbrella of false confidence that somehow they should not worry about or feel ashamed when they walk away from debts owed. This corrosive and selfish attitude aligned itself with greed on Wall Street and provided the Category 5 hurricane force of this financial Perfect Storm. It has been a long time building. It is a calamity created by Democrats and Republicans. A one-time gimmick bailout may grease the current lending stalemate but it will not diffuse this behavioral problem. It will require strong national and local leadership and attitude modification across a very wide swath of the American population. How do you awaken those who believe that it is their American right to demand assumed entitlements ( i.e. our money promised to them by politicians spending our tax dollars ) but not the responsibilities they have to our country and especially to those they are taking the money from to pay back what they borrow? If there is a high probability that you cannot pay back a loan unless “blue skies” stay in place forever, you should not take the money. Debt does matter. People ( and governments ) want and deserve to be paid back what borrowers agreed to pay. Elia,
Good summary. I would add, however, that we should not overlook the impact of legislation—from the 70′s, I believe, coercing banks to provide loans to otherwise untrustworthy borrowers for mortgages with the aid of Fannie and Freddie—and the deregulation of appropriate credit verification by the lenders. These two main contributors have joined with the easing of bankruptcy laws over the years and the inanity of government leaders ( like VP Cheney ) promoting “toxic” behavior with stated opinions endorsing a “debt doesn’t matter” philosophy. That “toxic” behavior has been adopted by far too many Americans of all races and creeds in every socioeconomic level. They took shelter under the umbrella of false confidence that somehow they should not worry about or feel ashamed when they walk away from debts owed. This corrosive and selfish attitude aligned itself with greed on Wall Street and provided the Category 5 hurricane force of this financial Perfect Storm. It has been a long time building. It is a calamity created by Democrats and Republicans. A one-time gimmick bailout may grease the current lending stalemate but it will not diffuse this behavioral problem. It will require strong national and local leadership and attitude modification across a very wide swath of the American population. How do you awaken those who believe that it is their American right to demand assumed entitlements ( i.e. our money promised to them by politicians spending our tax dollars ) but not the responsibilities they have to our country and especially to those they are taking the money from to pay back what they borrow? If there is a high probability that you cannot pay back a loan unless “blue skies” stay in place forever, you should not take the money. Debt does matter. People ( and governments ) want and deserve to be paid back what borrowers agreed to pay.

]]>