A Primer on the Looming Economic Crisis

[chimx]

Some people were griping that there wasn't enough discussion on the current economic crisis. We've all heard on the news that this is the biggest financial disaster since the Great Depression, but there isn't much substantive reports that really explain where we are at. Here's an attempt to explain what's going on in an easy to understand manner.

Investment money is what drives much of the global economy. While some daring wall street traders may try to make a quick buck off a high-risk stock, for the most part investors that run that global investment pool are seeking low-risk and slow growth investments, such as government bonds and housing loans.

Housing loans/mortgages are very safe investments generally. The price of housing is almost always rising, especially when homeowners invest into their property, communities grow, etc. Now, the problem for investors is that a single mortgage loan is way too small to invest in. You can't really trade a single $500,000 loan.

So what investors started doing is combining these housing loans into large bundles so that they could be invested in and traded. These housing bundles were then able to be divided up into smaller chunks, traded again, etc. etc.

And of course, since housing has generally always seen great returns, this made those global investors lots of money. It seemed great. People were making money off their houses, while investors were making money off of housing loan bundles.

The problem: Not everybody can afford a $500,000 mortgage to purchase a home. Working class families often times simply don't have the income necessary for that kind of investment. Most Americans are already in massive amounts of credit debt as it is and taking out a mortgage and a home loan on the potential value of their home is not possible under the current economic paradigm.

But those finance capitalists who were investing in this market wanted to keep this growth going and pushed to maximize gains under this flawed system. Mortgage lenders started giving more and more money loans to families that clearly couldn't afford them. Poor folks were told to take loans out on their homes.

When the housing bubble burst, shit hit the fan. All those investors had been trading these mortgage/loan bundles on the pretense that houses were a sure bet and would inevitably go up, but that stopped.

banks: Banks had also been heavily involved in the trading of these bundles and had influenced rating agencies to give these bundles a high trade rating so people would continue to invest their money into them. These bundles were so divided and traded, everybody had loaned money to everyone else. It was a big cobweb of trading and loaning. Essentially everybody owed everybody else money, and when one realized that they were loosing money, they all tried cashing out.

The consequences of this are that no bank has money to loan to people now. If you're trying to buy a house, good luck trying to find a mortgage. Communist League has told me he knows people that are being denied student loans because the banking system is in such a money crisis.

I would be very interested to hear people's opinions on solutions.

[Die Neue Zeit]

To the bourgeois-capitalist state:

1) Nationalize the Federal Reserve.
2) Don't buy the bad debt, but invest so that taxpayers can profit when the financial services sector recovers.
2) Establish a policy encouraging and supporting worker buyouts (per my article submission (http://www.revleft.com/vb/worker-buyouts-t88629/index.html)).

[spice756]

Housing loans/mortgages are very safe investments generally. The price of housing is almost always rising, especially when homeowners invest into their property, communities grow, etc. Now, the problem for investors is that a single mortgage loan is way too small to invest in. You can't really trade a single $500,000 loan.


What normally will happen in Canada is a company that job is to build homes will buy land and build lots of homes and make lots of money !! They can do this if there is lots of immigrants coming into the city.But if there is not many immigrants coming in than they do not build that many homes.



So what investors started doing is combining these housing loans into large bundles so that they could be invested in and traded. These housing bundles were then able to be divided up into smaller chunks, traded again, etc. etc.

I don't think it really is investors but a company that makes money building homes.

And banks make lots of money if people are buying homes ,but if people are not buying homes the banks make less money.I think the problem was people did not have enough money to pay the house mortgage .




Don't buy the bad debt, but invest so that taxpayers can profit when the financial services sector recovers


The US government should pay the debt off but will not for some reason.

[cyu]

I would be very interested to hear people's opinions on solutions.


This article is technically about capital flight, but it also applies to market crashes, currency collapses, and bank failures: from http://www.infoshop.org/rants/yu1.html (http://www.anonym.to/?http://www.infoshop.org/rants/yu1.html)


Capital Flight - What to do

You have just overthrown the government, your far left party has just won a landslide election, or your vast coalition of civic, labor, and religious institutions have simply decided to come together and ignore the existing government. Capitalists are fleeing your country in their private jets. Investors have pulled out all their money. Foreign banks run by capitalists suddenly decide they are no longer willing to make any loans to your "rogue" nation. The former dictator has packed up all his suitcases full of gold, jewels, and cash from your national treasury, and is now nowhere to be found.

Now what?

Economic collapse? Mass unemployment? Depression and starvation? No, of course not.

Wealth is not to be found in currency, in the so-called "precious" metals, in paintings by long-dead painters. None of those are needed to survive. Wealth is found in food, in warmth, in health care, and in the things necessary to produce them. All the land is still yours. All the labor is still yours. Even factory equipment remains, despite the flight of "capital" - that is, the loss of things that represent wealth, but are not wealth themselves. In fact, very little has been lost and virtually all of the productive capacity of your nation remains. All that has changed is the accounting.

Your nation may still have in its treasury the remnants of the capitalist financial structure - gold, other precious metals, paper money from nations around the world. Spend it - as soon as possible. Buy commodities - those things you need to survive and buy any equipment you need to produce the goods you need. That is the real wealth to people who actually have to do the work.

What happens in the rest of the world as the people of your nation are suddenly flooding it with various currencies and "precious" metals, while snapping up real goods? The supply of those currencies and "precious" metals go up, while the supply of real goods go down. These goods become more and more expensive, while "money" becomes more and more worthless. Thus, there is all the more reason to exchange your money as soon as possible for real goods you will need.

When all the old money has been spent, you are free to live, work, and produce the things you need. Self-reliance is the only secure form of wealth. Trade with other nations can still be conducted, but do not hold on to their money - money is mere promise of future wealth, promises that can be broken whether from malice or from inability to fulfill them. Exchange any money for real wealth as soon as you can.

Money within your own economy should be based on real wealth. When farmers produce a bushel of grain, let them issue a paper note representing that bushel of grain. Since that paper note can be redeemed for precisely that amount of grain, there is no inflation between the notes and the grain. These paper notes can be collected by larger farmer organizations that then reissue new notes based on a diversified index of what they produce. While the value of money issued in this way may fluctuate with respect to goods not on the index, it will not change with respect to the goods that back these paper notes. This is the first step to currency stability.

However, be warned that these notes are still only as good as the institutions that issue them. Either you trust that they can always be redeemed, or you redeem them as soon as it is convenient. This is especially true of money you receive from other nations that is supposedly backed in the same way. Distance makes people bolder and less hesitant to break promises. Ultimately, however, convenience would probably mean you will place your trust in an organization of like minded people who will help each other ensure that what you have is really what you have - although you should make sure there are alternatives should you decide to change your mind.

People can probably be trusted when times are easy and when prosperity reigns, but when times are tough, promises are much easier to break than the laws of survival. This is what makes self-reliance of an economy important. This is why local industry and agriculture should be protected. Productively ability is the real source of wealth of the nation.

However, natural disasters also occur. While the world as a whole may be fairly stable, the area around you is much more prone to random fluctuations of climate and geology. Thus self-reliance is not the entirety of a secure economy, but merely the supporting structure. The secondary source of security is prosperity in other geographical locations. The more prosperous others are, the more likely they will come to your aid in times of trouble. The more they have to thank you for their prosperity, the more likely they will come to your aid. Again, merely being creditors to their debt is not enough. Nations are sovereign, whether anarchist or authoritarian. They can break their promises - they can ignore any legalistic claims to debt. It is the general goodwill that can be fostered between two nations or people that will be your salvation in case your own self-reliance fails.

In the end, captial flight isn't really capital flight. Real capital - the people, natural resources, and equipment needed to produce real goods - cannot be packed up in a bag when the capitalist skips town. They will require a lot of labor if they truly want to escape with real capital. What remains when the capitalists are gone are merely the people who are doing the work, and the means to do it.

[chimx]

http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html?_r=1&em&oref=slogin

Here is an article on what Sweden did when they had a similar crisis. It involved a government bailout, but forced the rich to eat the brunt of the bullet. Perhaps Sentinel or some other Swedes could comment on it?

[spice756]

Do you think this may happen in Canada ?

[spice756]

disregard there is a thread on the economy in Canada I made the other day.

[BraneMatter]

The total number of mortgages that are actually in default at this time, according to a number of reports on the CNBC business channel, could supposedly be bought out entirely for around 100 billion dollars.

Obviously, it must then be the various deriviatives where the real problem lies, or whole other areas, where the losses are occuring. Credit default swaps would be one example, commercial paper another.

I have difficulty blaming the credit lockup totally on the residential housing bubble. It just don't add up.

I think there is a lot more stinking here than just residential mortgage defaults.

When Glass-Steagall was done away with in 1999 (thank you Senator Phil Gramm, now with McCain campaign as economic advisor), the banking industry was deregulated and allowed to own other financial companies and engage in risky, highly speculative investment instruments. This is the source of the current mess.

The Clinton and Bush administrations both looked the other way, and even encouraged the abuses by the banking and financial firms, especially in the area of sub-prime mortgages. American was supposed to become an "ownership society" and everyone would have a home whether they could afford one or not, and hence a lot of bad mortgages were written and falsified. Good for politicians and speculators, perhaps, at least for a time, but not for main street when the bill comes due.

The people writing these risky mortgages had to know what they were doing, but they bundled these bad mortgages in with a lot of good mortgages, repackaged and then sold them in bundles to investors. To make matter worse, there was a lot of leveraging going on, I suppose because of the expected continued rise in housing values. Add credit default swaps to the mix as a hedge, and you begin to see how deep it can all go.

In fact, the whole thing is so muddled, that even Paulson and Bernanke admitted in the hearings that no one knows how deep the crisis goes, and that $700 billion might not even be enough to fix the problem. Oh, what a tangled web the Wall Street crooks and speculators have weaved! No one knows how to even value it all!

If I went to a bank, and gave them a "business plan" like the Paulson bailout plan, they would have security escort me out the door into a waiting squad car that would take me immediately to the hospital for a mental evaluation! ("Mr. Loan Officer, please give me $700 billion to invest in I'm not sure what, or what it's worth, or if I will be able to get a positive return on the investment!" Yeah, right. I'll bet Paulson didn't get his Rolex from some guy selling them out of the trunk of his car!)

Sunday morning followup note: News reports claim that a deal was reached last night after midnight. It is basically the Paulson plan that was originally proposed, with some restrictions.

That the Democrats were onboard with the Bush/Paulson plan from the begining is a total disgrace and blot on that party, which claims it is for the working class. What a joke. Conservative Republicans, who stood in the way of a deal for a short time, were motivated not by any desire to help the taxpayer, but by fears that any intervention would lead to further market regulation, which they are against. In fact, they want MORE deregulation.

This is a total failure of government and the so-called "free market." Where were the all politicians, the regulators, the moral conscience of Wall Street, when all this toxic paper was being created??? The answer is that they didn't give a damn, as long as money was being made. Never mind the consequences when the people get stuck with the final bill when the pyramid schemes all collapse.

The Left has missed a key opportunity here to come out strongly in support of the working class, and against the exploitation of the people by Wall Street. Never has the class warfare been more blatant in the United States, and this bailout IS an astronomical transfer of wealth from the workers to the rich! The great majority of the people are opposed to this bailout using taxpayer money, but the politicians just told the people, "Go to hell. We don't work for you!" There have been NO public hearings, the people have NOT been heard or given a voice at the table, and the talks were held BEHIND CLOSED DOORS AND IN SECRET, BUT IT WAS THE PEOPLE'S MONEY THAT WAS AT STAKE!!! I guess that kinda says it all.