Why doesn't the market have confidence in Obama?

I do enjoy reading the various views and explanations of what occurred. I am no economist and when I tried to study it as a younger guy, me little eye balls rolled up and stuck until I quit.

What part of greed confuses people? Let folks go and pretty soon they will find a way to part you from your money. They do it all over the world. The particular way they did it this time is a compelling reason for keeping someone watching the chicken coup.

The Parakeet said:

The Fed and the White House held the interest rates low and created the bubble, but the bubble alone didn't cause the problem.

If there were tighter regulations, then the banks wouldn't have been so overleveraged and AIG wouldn't have been able to legally play so fast and loose with credit default swaps. The crisis would have hurt them, but they wouldn't have had the solvency crisis. If they weren't worried about going bankrupt for lack of liquid cash, then things wouldn't have been as bad.

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Totally agreed. For me the biggest culprits were the Government and the Banks. The Banks had huge campaigns during the bubble years for selling debt. Government does not know how to work with money, can't even stay in budget, and in effect is bankrupt at the moment, and they are now involved in managing 1.2-trillion dollars, doling out 1-trillion to failed banks. None of it makes sense to me. If there is any investigation to be had, it should be into the Banking system. They are the ones that are being bailed out, AND they are the beneficiaries of getting rich during the bubble, and now wishing to remain wealthy by separating their toxic debt from their main operations.

The Parakeet said:

A note on the SEC. What could they have done? The banks weren't doing anything illegal. It was reckless and should have been stopped through regulation, but it wasn't. What could the SEC have really done.

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They could have warned the people. The SEC may not have had any legal authority, but they do overlook the securities market and they should have at least realized that a lot of the moves were reckless. Yet, they failed to see that, just like they failed to see Madoff's scam.

The Parakeet said:

MYP - He's right about the fact that less regulation made this what it is. We've talked about this before. Unregulated credit default swaps, looser leverage requirements, and generally relaxed banking laws were a major factor. The Fed and the White House held the interest rates low and created the bubble, but the bubble alone didn't cause the problem.

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While I agree that the bubble alone didn't create the problem, it was the bubble that really made it this bad. Without Fannie and Freddie and the low rates, the bubble would've been a lot smaller and would've popped earlier.

If the government left the market alone, the bubble would have been like every other natural bubble that occurs when a new technology or way to make money is invented- it would have eventually burst, but would have stabilized in the long run. Need examples? Look at the market when virtually any new tech hits the market- from cars and airplanes a century ago to the recent tech bubble.

The Parakeet said:

If there were tighter regulations, then the banks wouldn't have been so overleveraged and AIG wouldn't have been able to legally play so fast and loose with credit default swaps. The crisis would have hurt them, but they wouldn't have had the solvency crisis. If they weren't worried about going bankrupt for lack of liquid cash, then things wouldn't have been as bad.

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It is easy to say we should've had more regulations, but please why don't you give some examples of what you think should have been done. It is a lot harder to actually come up with efficient regulations- in fact, you will eventually realize that there is no effective regulation that is fool-proof because they all distort the markets. It is best to leave the market alone so that when a company fails, the government doesn't come to the rescue and so that the government doesn't prop up bad parts of the market and expand bubbles. That is capitalism and that is what we need to return to.

Sparks said:

What part of greed confuses people? Let folks go and pretty soon they will find a way to part you from your money. They do it all over the world. The particular way they did it this time is a compelling reason for keeping someone watching the chicken coup.

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Please read my response above to Parakeet concerning regulations. It is easy to say we need regulations, but impossible to create good ones. It is better to leave everyone accountable for themselves.

I think it's going to be mess if I just quote, so I'll just address by point.

SEC Warning

Again. A lot of people saw that the bubble was going to burst. There just wasn't a heck of a lot that we could do. Heck...some random college student I know wrote a resolution for student Congress warning about it (9 months before it all started). The retired guy who drove me home from the airport a few months ago explained that his last hobby was working as a real estate agent. He returned his license 6 months before the crisis because he was disgusted with the way that people were handling mortgages.

The evidence was all there for anyone who cared. We were mainly just praying that it would work out alright. There wasn't much we could do anyway. You can't unring the bell.

Bubble

Yeah. No argument here. At least 10 years of having low interest rates to put everyone in homes was a foolish decision. The bubble wouldn't have been as bad if the rates weren't low. There wouldn't have been any solvency crisis if there were proper regulations though. It would have just been like the dot com bust (probably worse since housing starts are a little more central to the economy than tech starts, but still just a little crash).

Regulations

I've brought this up in other threads. There are a few easy ones. Credit default swaps should have required capital backing. AIG would have had to commit actual fraud to leverage themselves as badly as they did. Two bonuses to this.

One. They may have been less reckless with their credit default swaps and actually required sufficient returns to cover the capital that was being tied up in collateral. Either way, they would have been in less of a pickle when the crisis hit. As long as we are fantasizing, I'll go as far to say that they might not have collapsed under the strain. This would have helped the securities keep their value to a point and have allowed a gentle decline (pushing it...but again...fantasy)

Two. They would have had less swaps on the market. These swaps turned junk bonds into risk less assets, which encouraged the high level of trading and price inflation that occurred in mortgage backed securities.
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Bank's should have never been allowed to leverage themselves up to 1/33. That's just insane, but it was allowed by deregulation.

The crisis was primarily a crisis in solvency. It would have been limited to the few bad banks if there wouldn't have been so many concerns over which banks were really solvent. There would have always been doubt, but requiring higher reserves in the I-banks would have been a smart and non-intrusive step.
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Mortgage backed securities were probably beyond regulation, so you have a point there. Bundled securities are usually loopholes anyway. There was no real way to prevent this other than to completely outlaw it (which would be a little overkill). I can't figure out why there couldn't have been some better system for transparency though. Some regulation to prevent the mixing and matching that occurred would have been nice (if a pain to write). Some type of standardized form to report the makeup. The hodgepodge that composed these packages made it impossible to know who had what when it hit the fan.

myp said:

They could have warned the people. The SEC may not have had any legal authority, but they do overlook the securities market and they should have at least realized that a lot of the moves were reckless. Yet, they failed to see that, just like they failed to see Madoff's scam.

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I think everyone saw this, but nobody did anything about it. Almost as they were hoping it will sort itself out. This kind of security should probably never have been allowed to be created in the first place. I found it pretty rediculous at the time when they created mortgage-backed securities. I think that is the point where it should have been stopped, it should never have been allowed to happen, as real estate prices always rise and fall, recessions come and go, so the fate of those kind of securities were already sealed the moment they were created and launched.

myp, both you and parakeet have telling points that I find thought provoking. On the other hand, while leaving markets alone is generally a good idea, it can't be the only answer. Otherwise you'd have people like the Hunts (Silver Dodge) taking advantage of unregulated markets.

That a regulation is difficult to create or implement doesn't mean it isn't necessary.

WE need more regulation on wallstreet. Was it si surprising to see these big companies still trying to give crazy bonuses to their ceo's while at the same time kicking many of their employees to the curb? As I said before Japanese have a more family oriented company image in their country. This is how America was in the 1950's and we need to get back to that asap.

pingpong12 said:

WE need more regulation on wallstreet. Was it si surprising to see these big companies still trying to give crazy bonuses to their ceo's while at the same time kicking many of their employees to the curb? As I said before Japanese have a more family oriented company image in their country. This is how America was in the 1950's and we need to get back to that asap.

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Yes! I remember President Dwight D. Eisenhower (1953-1961) very well. He was a real leader.

First off, I want to say that everyone DID NOT see this coming. Otherwise this would have never happened. That is how bubbles work- if everyone or most people saw them coming, confidence would immediately go down and the bubble would burst or qwell. I don't know where you guys are getting the idea that everyone knew about it. Only a handful of people saw it coming and if you youtube "Peter Schiff was right" you will see that Schiff was one of the few and virtually every other "expert" was wrong.

@ Parakeet - You even agreed with me that the bubble would've been smaller had it not been for the Fed. As for the leveraging, you say they overlevereged, but do you know what allowed for that to happen? The answer is again, the Federal Reserve. The reserve requirements are too low and the Federal Reserve is the only reason that these requirements can stay so low. It is due to the banking cartel-type system that the Fed upholds- simple as that. So again, government was the problem there too.

This leaves your last major point: the credit default swaps. You say that the capital should've been there to back them and that is a very valid point, but do you really tink that is the job of the government or do you think it is the job of AIG and their financial team? If you think that is the job of the government, then that is just like saying it is also the job of the government to make sure people don't spend money with their credit cards that they don't have. Is this reasonable?

It is time to make these companies responsible for their own actions because making the government accountable only hurts the taxpayer and makes the markets less efficient. If AIG over did it with the CDSs as they did, they should be held accountable and if they can't pay it off, then they go under. Simple as that.

@ Ping Pong- Don't you think it is the right of these companies to spend their money however they want? It is called freedom and everyone should have it whether they are people or a corporation. As for the family-based society, that is a very different topic and anyway, the 50s led to one of the worst economic periods in American history with stagflation.

MYP - ? I just talked about two low level people who saw the subprime problem coming. A number of people figured that it was going to be a problem. Not necessarily as big of a problem as it ended up being, but a problem.

*Note on Peter Schiff. I wasn't going to rail against him, but why not...I already found the article I was looking for. He's not some economic God. He's been preaching doom and gloom for the past 20 years and he just happened to call it right once. You know what they say about a broken clock. Just read this article to see how his words of wisdom actually played out. I'll be fair and state that he's already responded and said that it was cherry picked information. Then again, Schiff and other gold bugs always cherry pick gold pricing to support their side.

http://www.ritholtz.com/blog/2009/01/peter-schiff-was-wrong/

It was a problem that we hoped it would work its way out. We saw the bubble forming, but we obviously didn't know just when it would burst. Everyone else was just playing it for all they could.

Leveraging had nothing to do with the Fed. The Fed handles the reserve rates for banks. I think you're getting them mixed up. Fractional Reserve banking allows for low reserve requirements. That's something different entirely.

The problem was in the investment banking industry and I believe most of that deregulation happened in Congress at the urging of conservatives. I know for sure that the deregulation on credit default swaps was a Congressional decision.

And yes. It is the job of the government to ensure a health financial system. If I spent a bunch of money by lying on my credit card form and misleading them into thinking that I'd be able to repay, then that would be fraud. I know you are libertarian, but I think you are drinking the Kool-Aid on this one. A basic capital requirement would have made sense and not hurt anything. Game theory states that they will destroy the whole industry just to make a buck. We just saw that happen...I really just don't know how to respond to this one besides saying what good did not regulating them have.

AIG should get hurt for what they did. They are being hurt as much as we realistically can. We've been over this. Letting all of those CDSs fail would have wiped out a bunch of banks. It wouldn't even have been their fault. They believed that AIG had the power to fulfill their end of the bargain.

That's part of the government's job. Regulation ensures certain things. It effectivelys improves the information available on the market. This is always a good thing for the free market.

The big problem is that the financial sector is linked to a whole bunch of innocent businesses that will get pulled down with it. How is that fair under your ideals?

Parakeet, first of all I am not saying Schiff was the only one who saw this and you may know a couple of people personally who saw it, but my point is the vast majority of people, including most analysts and experts did not see it coming. Take a look at housing expectations over the past five years if you need proof of that. Almost everyone was bullish on it from the short-term to the long. The government certainly did not see it coming and neither did most of Wall Street and the public. If that many people actually saw it coming, then a lot less people would have invested in the CDOs or bought houses they couldn't afford with the intention of flipping them.

As for Schiff, he was not a broken record. He simply saw the market failure way in advance. In fact, most Austrian economists agreed with Schiff and knew that sooner or later this would happen- many like Schiff just weren't sure of the precise moment it would happen. Still a lot better than the cohorts of economists that believed that the housing market would never go down- no?

As for the other Schiff predictions tackled in that post, this crisis is far from over and you can't throw aside what he believes will happen just yet. And for gold, you can say whatever you want, but you can't change the fact that it is very strong right now and as countries debase their currencies to spend more, it will still retain its value- the same can't be said for the currencies. At the end of the day, commodities are the safest bet because they will never lose their value, whereas a piece of paper with something like 1 dollar or 1 pound printed on it can one day be valued as only a piece of paper.

As for fractional reserve banking, you need to look at the big picture to see that both aspects are tied together. The Federal Reserve is connected to the low reserve requirements because the reserve rates for banks are what allows fractional reserve banking to occur by influencing the amount of money that can be created off of those reserve rates. This money that is created is directly correlated with the low reserve requirements because the money that is created by the banks is taken from the reserves and essentially drives the requirements. The reserve rate between banks and the reserve requirements are really very related, so really we are both right. Since it is the Federal Reserve that sets the reserve requirements, the Fed is very relevant in this debate. I wrote a post explaining the fractional reserve banking system on my blog a bit back, if you are interested in reading it: http://www.mirajpatel.com/the-fractional-reserve-banking-system

Let me add that the Austrian school of thought is all for sound money and very low reserve rates (some even call for no fractional reserve banking) making the market a lot more stable and crisises like todays a lot less likely to happen (and certainly not to this scale.) I am also for lower reserve rates.

And now on to regulations... Why not hold the people acountable for what they do? It is very inefficient for the government to do it because in the long run it will only bankrupt the government. Not only will it increase the bureaucracy, but it will also slow down market transactions and hurt growth as well as push the tab from the people to the government. How exactly do you plan on regulating the capital behind purchases? The only way I can see this in a sustainable way is to simply get rid of loans, but that is very impractical and would hurt the markets severly.

And as for fraud, again I am all for oversight and making sure fraud does not happen. This is different than regulations though because it doesn't interfere in the markets nearly as much and certainly doesn't distort them.

And for your last point about the financial institutions being linked to other markets: again everyone should be accountable for themselves and those companies should've done more background research on the companies they were putting their money with. Believe it or not, there are a lot of banks out there that did stay away from the mortgage market and they are doing just fine.

OK, I'm not an economist here. But it would appear we had two economic events here. One the recession - a normal event. The other abnormal event banks on the verge of insolvency due to buying and selling of mortgage-based securities. I am certain if one went through the history that house prices always rise and fall. And if they did rise more than what they should that they could fall more than they should. When they decided to create the mortgage-backed securities, surely someone should have been able to do a feasibility "what if" study that would have pointed at the very real threat of people being unable to pay their mortgages. These securities should never have been approved by the authorities. Does anyone know who was responsible for creating these securities? Why did they ever succeed past approval stages?

deanhills said:

OK, I'm not an economist here. But it would appear we had two economic events here. One the recession - a normal event. The other abnormal event banks on the verge of insolvency due to buying and selling of mortgage-based securities. I am certain if one went through the history that house prices always rise and fall. And if they did rise more than what they should that they could fall more than they should. When they decided to create the mortgage-backed securities, surely someone should have been able to do a feasibility "what if" study that would have pointed at the very real threat of people being unable to pay their mortgages. These securities should never have been approved by the authorities. Does anyone know who was responsible for creating these securities? Why did they ever succeed past approval stages?

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First off, this recession was created by the housing crisis. They are not two separate events because they are linked together. The housing crisis led to all of these toxic assets which led to the big banks losing a lot of money and not having capital which then led to other industries being strapped for money because there was very little to no credit. That is an oversimplified version, but it gets my point across- that both occurrences were connected.

As for housing prices, the problem was that the majority of people simply thought that the market would either keep going up forever or it would go up for a long period of time before it leveled off. Very few people (although there were some like Schiff and the guys Parakeet was talking of) actually thought of the very realistic possibility that we were in a bubble and housing prices would dip drastically. Kind of absurd isn't it? That's Keynesian economics for you.

As for mortgage-backed securities, they were first invented by non other than Fannie Mae, the government sponsored enterprise. The major problem with the ratings given to these securities was that the rating agencies either truly believed the market was very strong and gave AAA based on that or they just gave AAA in order to make sure they get the return business of the asset holder- no one really knows if the latter is true and all of the agencies deny it, but some do think that is what happened.

myp said:

First off, this recession was created by the housing crisis. They are not two separate events because they are linked together.

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I don't understand. I thought big corporate companies like the auto manufacturers were in trouble too, so how are they linked to the housing crisis?

myp said:

As for mortgage-backed securities, they were first invented by non other than Fannie Mae, the government sponsored enterprise. The major problem with the ratings given to these securities was that the rating agencies either truly believed the market was very strong and gave AAA based on that or they just gave AAA in order to make sure they get the return business of the asset holder- no one really knows if the latter is true and all of the agencies deny it, but some do think that is what happened.

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It's just so incredible that those players responsible for allowing this crisis to happen are not only still firmly in their seats, but actually given a trillion dollars to bail them out (the biggests players being the big banks and Government).

deanhills said:

I don't understand. I thought big corporate companies like the auto manufacturers were in trouble too, so how are they linked to the housing crisis?

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Well, when the housing market went down, a lot of the mortgage-backed securities started to go toxic, so a lot of the major banks were in the negative because the assets they were holding were worth less than what they paid for them. These losses created shortages in capital, which meant shortages in loans that could be made- a shortage of credit in the market. A shortage of loans means that other businesses and people that need the loans can't get them and the market freezes up. People also started to panic and we saw a couple of bank runs with Washington Mutual and IndyMac bank.

In the case of the automakers, people were buying less cars and also, especially in the case of GM, GMAC bank (which was owned by GM) also started to fail and ended up having to convert to a bank holding company so that it could get TARP funds. Add this to the fact that the big three's car sales were already weak as it was, and you have the problem that we have now.

Deanhills - MYP said most of it, but yeah, the housing crisis caused the recession. The securities were overvalued, but suddenly lost a lot of value over night. This meant that a bunch of banks were out in the cold and insolvent. The inter-bank lending rate went up to about 5% at one point because all of the banks were afraid that all of the other banks didn't have as much capital as they said they did. This meant that they basically didn't want to lend to anyone.

The larger problem is that a lot of businesses don't keep all of their cash around. They have a cheap line of credit to cover big short term hits (like payroll). This lets them operate better in most situations, but they found that they couldn't get these loans either (or there was fear that they might lose their line of credit if things continued to get worse).

So basically the whole market froze up and people started panicking. This led to layoffs and a nice snowball effect.

The reasoning for the AAA rating is simple though. They were insured by credit default swaps. They were effectively riskless assets. That's one of the reasons that their value plummeted after AIG went under (and why we had to prop them up).

For sake of organization I'll just cover MYP's response in another post.

Parakeet, first of all I am not saying Schiff was the only one who saw this and you may know a couple of people personally who saw it, but my point is the vast majority of people, including most analysts and experts did not see it coming. Take a look at housing expectations over the past five years if you need proof of that. Almost everyone was bullish on it from the short-term to the long. The government certainly did not see it coming and neither did most of Wall Street and the public. If that many people actually saw it coming, then a lot less people would have invested in the CDOs or bought houses they couldn't afford with the intention of flipping them.

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I'd personally argue that most of them knew that they could never have it last forever. They just didn't think it would burst as hard and fast as it did. The problem really came when the credit default swaps fell apart. If it had been a normal pop, then most of them would have come out ahead.

In a bubble, the logical thing to do is often just act like it won't end. A lot of the banks needing a bailout made money hand over fist while it was going on. They just didn't think they'd get caught as hard.

As for Schiff, he was not a broken record. He simply saw the market failure way in advance. In fact, most Austrian economists agreed with Schiff and knew that sooner or later this would happen- many like Schiff just weren't sure of the precise moment it would happen. Still a lot better than the cohorts of economists that believed that the housing market would never go down- no?

As for the other Schiff predictions tackled in that post, this crisis is far from over and you can't throw aside what he believes will happen just yet. And for gold, you can say whatever you want, but you can't change the fact that it is very strong right now and as countries debase their currencies to spend more, it will still retain its value- the same can't be said for the currencies. At the end of the day, commodities are the safest bet because they will never lose their value, whereas a piece of paper with something like 1 dollar or 1 pound printed on it can one day be valued as only a piece of paper.

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One. I'll admit that out of all the gold bugs he generally seems to have the best understanding of how the system really works. Take that for what it is.

My points still stand though. The article I linked showed that he made 12 predictions that were just flat out wrong, leading to roughly 40% losses for his clients (I found verification in Fortune magazine, so I'll throw it out there).

This would seem to indicate that he just got lucky and called this one aspect right. It helps that it fit with his usual bearish profile. It wasn't exactly a leap of faith for him.

I won't derail this thread about gold, but I've never understood this argument. Gold has no real value. Some commodities might, but they are just as volatile as currency if you are being realistic. Gold is only good for jewelry at this point (I believe they stopped using it in motherboards). This means that its worth is only held by what people think its worth. It's the same as currency ultimately.

Plus commodities are just as theoretically volatile as currency. If the US prints a zillion dollars tomorrow, it will be worthless. If we discover antimatter energy tomorrow, then oil will be fairly worthless. Same with any other commodity.

As for fractional reserve banking, you need to look at the big picture to see that both aspects are tied together. The Federal Reserve is connected to the low reserve requirements because the reserve rates for banks are what allows fractional reserve banking to occur by influencing the amount of money that can be created off of those reserve rates. This money that is created is directly correlated with the low reserve requirements because the money that is created by the banks is taken from the reserves and essentially drives the requirements. The reserve rate between banks and the reserve requirements are really very related, so really we are both right. Since it is the Federal Reserve that sets the reserve requirements, the Fed is very relevant in this debate. I wrote a post explaining the fractional reserve banking system on my blog a bit back, if you are interested in reading it: http://www.mirajpatel.com/the-fracti...banking-system

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I'm well aware of fractional reserve banking. It's made possible by the nature of banking though. The Fed is actually what limits the banks. If they could, they'd happily run with a 1% reserve. We don't let them.

It happens because most people don't withdraw their entire savings each day. They just want a little bit. If you have enough costumers, then you can safely run with a low reserve requirement and be fine.

That has nothing to do with what we're talking about though. The Fed didn't influence the I-banks in this matter. It was Congressional deregulation. They don't handle the banks' capital requirements to make investments. They just handle how much of a reserve they have to keep based on consumer savings. It's an entirely different area of regulation.

Let me add that the Austrian school of thought is all for sound money and very low reserve rates (some even call for no fractional reserve banking) making the market a lot more stable and crisises like todays a lot less likely to happen (and certainly not to this scale.) I am also for lower reserve rates.

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The market wouldn't necessarily be any more stable. There just wouldn't be as much activity. That's all fractional reserve banking allows for.

And now on to regulations... Why not hold the people acountable for what they do? It is very inefficient for the government to do it because in the long run it will only bankrupt the government. Not only will it increase the bureaucracy, but it will also slow down market transactions and hurt growth as well as push the tab from the people to the government. How exactly do you plan on regulating the capital behind purchases? The only way I can see this in a sustainable way is to simply get rid of loans, but that is very impractical and would hurt the markets severly.

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?????? Do you actually understand what I suggested? I said that they should have a law stating that they have to have X amount of capital for Y amount of investments. That's really bloody easy to do and to enforce. If they work around it...then it's fraud.

You seem to have jumped onto the bailout. With proper regulations, we wouldn't have to bail them out (at least not any more than under the current system). I really don't get your point.

And as for fraud, again I am all for oversight and making sure fraud does not happen. This is different than regulations though because it doesn't interfere in the markets nearly as much and certainly doesn't distort them.

And for your last point about the financial institutions being linked to other markets: again everyone should be accountable for themselves and those companies should've done more background research on the companies they were putting their money with. Believe it or not, there are a lot of banks out there that did stay away from the mortgage market and they are doing just fine.

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You missed the point though. If I buy a toy for my niece, I expect it to be lead free. A company has all the incentive in the world to use cheap lead paint in production. Firm's are profit seeking by nature. They would use whatever cheap materials they could if it wouldn't affect their profit overall (if the savings are greater than sales lost). You would argue that I should research them better...but how? Information isn't perfect. We need an unbiased central player to act in the role. We have regulations that state that they can't use lead paint. They are effectively providing information and limiting the company. This allows for better general welfare and a more confident market.

Why shouldn't financial firms have the same rules? AIG had no incentive to care about their capital. They should make as many credit default swaps as possible. It's not their problem if they can't repay. They'd just go bankrupt and screw all the other companies who trusted them.

It's irrational to say that things would have been better without regulations. We saw how that worked in this case. AIG did stupid things that they thought they could get away with. Companies trusted the contract because it seemed alright at the time they signed it.

Why shouldn't there be some rule around to require that they actually honor the contracts that they make. It just seems like there is a major disconnect in your logic.

The Parakeet said:

I'd personally argue that most of them knew that they could never have it last forever. They just didn't think it would burst as hard and fast as it did. The problem really came when the credit default swaps fell apart. If it had been a normal pop, then most of them would have come out ahead.

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Ok, how then do you explain the cohorts of people who were extremely bullish on the market in both the short and long runs: http://www.youtube.com/results?search_type=&search_query=peter+schiff+was+right&aq=f

These people didn't think that the bubble was smaller than it really was, but instead, they didn't even see a bubble at all.

The Parakeet said:

In a bubble, the logical thing to do is often just act like it won't end. A lot of the banks needing a bailout made money hand over fist while it was going on. They just didn't think they'd get caught as hard.

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How is the logical thing to do is act like it will never end? If they say the bubble coming they obviously would've gotten out of the market and they would've found themselves out of the crisis right now. There are several smaller banks who did realize it was there and they stayed away from it and are doing fine now. Need an example? Here you go: http://www.forbes.com/2009/04/03/banking-andy-beal-business-wall-street-beal.html I'd say that guy is doing 1000 times better than those banks who got swamped in this mess because they invested in it.

The Parakeet said:

My points still stand though. The article I linked showed that he made 12 predictions that were just flat out wrong, leading to roughly 40% losses for his clients (I found verification in Fortune magazine, so I'll throw it out there).

This would seem to indicate that he just got lucky and called this one aspect right. It helps that it fit with his usual bearish profile. It wasn't exactly a leap of faith for him.

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Again, they may have faced losses in the short run, but Schiff's overall investment strategy is for the long run in all aspects. Now he may have been wrong about a deadline or two by a little bit, but in the long run he has been right and his predictions are starting to come true. You can't say the same for all of those guys who were bullish on the housing market.

The Parakeet said:

I won't derail this thread about gold, but I've never understood this argument. Gold has no real value. Some commodities might, but they are just as volatile as currency if you are being realistic. Gold is only good for jewelry at this point (I believe they stopped using it in motherboards). This means that its worth is only held by what people think its worth. It's the same as currency ultimately.

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And herein lies your problem. You don't understand the argument behind gold, which is why you don't understand Schiff's strategies. Gold does have value and it will always have value because although it may not be necessary to live with, it has always been demanded by the people and it still is being demanded. The problem with paper money is that when it is devalued, it becomes simply paper. When gold gets devalued, it is still gold and people just want it. It's human nature I guess- we just like gold.

The Parakeet said:

Plus commodities are just as theoretically volatile as currency. If the US prints a zillion dollars tomorrow, it will be worthless. If we discover antimatter energy tomorrow, then oil will be fairly worthless. Same with any other commodity.

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Wrong. Why? There will still be demand for oil even if there is unlimited supply for it because we will still need it for our cars, homes, etc. Paper money we will not. And also, think rationally on this one. How likely is it that we will find an unlimited supply of oil or metal or gas or atleast a large enough supply that will dip the price that much?

The Parakeet said:

I'm well aware of fractional reserve banking. It's made possible by the nature of banking though. The Fed is actually what limits the banks. If they could, they'd happily run with a 1% reserve. We don't let them.

It happens because most people don't withdraw their entire savings each day. They just want a little bit. If you have enough costumers, then you can safely run with a low reserve requirement and be fine.

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I don't understand what point you are trying to make here. I too am for a low reserve rate, but you do realize that that would be possible without the Federal Reserve right? Also, you realize that the currenct system has a direct proportionality between the Federal Reserve notes and the amount of money that can be created right?

The Parakeet said:

That has nothing to do with what we're talking about though. The Fed didn't influence the I-banks in this matter. It was Congressional deregulation. They don't handle the banks' capital requirements to make investments. They just handle how much of a reserve they have to keep based on consumer savings. It's an entirely different area of regulation.

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The Federal Reserve does make more capital availible through the fractional reserve banking system though. Anyway, why are you trying to downplay the Fed's role in this crisis? Even if you don't want to talk about the fractional reserve banking, you even admitted yourself that the rates were way too low. That was a HUGE part of this crisis. As for the Congressional deregulation, my argument is that along with that there should have also been a separation between the state and market and the government should've cut ties with the market by privatizing Fannie and Freddie and stopping legislation that forced certain loans. This way, the banks would know they didn't have something to fall on and would've made better choices. If they didn't then too bad- they would simply fail and go under. Capitalism at its best.

The Parakeet said:

The market wouldn't necessarily be any more stable. There just wouldn't be as much activity. That's all fractional reserve banking allows for.

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The market would be more stable during times of crisis because you wouldn't have as many bank runs like we say with IndyMac and WaMu. Also, less credit would've ensured more sustainable growth instead of the artificial growth we saw in the bubble.

The Parakeet said:

?????? Do you actually understand what I suggested? I said that they should have a law stating that they have to have X amount of capital for Y amount of investments. That's really bloody easy to do and to enforce. If they work around it...then it's fraud.

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Well the fractional reserve banking requirements are essentially this. Other than money created through that system, all other investments should be backed with 100% capital and they are. Please explain this more, I think we are on different pages here.

I looked at your original post on the deregulation, but I think we drifted off somewhere. Anyway, can you give me the exact legislation you are speaking of when you say deregulation? If it is the Gramm-Leach-Bliley Act then let me tell you that that was pushed by Democrats and signed by Clinton, not conservatives as you said in your post. The left is trying to push that act as the "deregulation" that caused this mess and they are trying to say the Republicans are responsible for it, even though both parties played a major role in getting it passed and it was really the Dems that started it in the first place. Either way, if the act hadn't been passed, this crisis would've still been horrible because it simply didn't play a major role in the problem- the major factors in this crisis were as I explained before the natural bubble with the creation of CDOs along with the government (Fannie/Freddie, the Fed mostly) which is what turned a natural bubble into a disasterous and propped up one. Personally, I actually like the GLB Act, but I think we need higher reserve requirements and sounder money along with it.

The Parakeet said:

You seem to have jumped onto the bailout. With proper regulations, we wouldn't have to bail them out (at least not any more than under the current system). I really don't get your point.

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Or, with a real free market we could just let them fail and not bail them out.

Had to split it up because the message was too long:

The Parakeet said:

You missed the point though. If I buy a toy for my niece, I expect it to be lead free. A company has all the incentive in the world to use cheap lead paint in production. Firm's are profit seeking by nature. They would use whatever cheap materials they could if it wouldn't affect their profit overall (if the savings are greater than sales lost). You would argue that I should research them better...but how? Information isn't perfect. We need an unbiased central player to act in the role. We have regulations that state that they can't use lead paint. They are effectively providing information and limiting the company. This allows for better general welfare and a more confident market.

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You, along with a lot of the left-wing (I am not saying you are part of the left, I am simply saying they tend to agree with you here) seem to underestimate the power of the consumer and the power of the demand curve in the market. In today's age with the internet and the mass media there IS a way to get this information in an unbiased way. The consumer just needs to be wary- that is all. Government really can't do anything about it anyway. Currently, most of these toys and such aren't recalled until after they are released and when someone complains or gets hurt anyway. We can just cut out the middle man of government because the media would report it anyway and stores, for the sake of making their consumers happy and staying with them, would simply warn customers.

The Parakeet said:

Why shouldn't financial firms have the same rules? AIG had no incentive to care about their capital. They should make as many credit default swaps as possible. It's not their problem if they can't repay. They'd just go bankrupt and screw all the other companies who trusted them.

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Again, make these other companies self-responsible by making them do the research. If they make a bad investment, it is their fault not the governments. Anyway, how is government supposed to catch it before it happens? Most likely, just as in this case, it will be overlooked by inefficient programs like the SEC. The government should monitor for fraud, but getting dirty into the books of companies is a very dangerous thing because it holds the government responsible and in the long run it is very costly to the people.

The Parakeet said:

It's irrational to say that things would have been better without regulations. We saw how that worked in this case. AIG did stupid things that they thought they could get away with. Companies trusted the contract because it seemed alright at the time they signed it.

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By law the government does make sure the contracts go through and if they don't the other companies can sue. I am not arguing against holding legal contracts valid- obviously I am for that if I am for private markets. What I am saying is that AIG should have applied for bankruptcy instead of getting a government handout and if the companies who bought their assets saw a breach in contract, they could sue.

The Parakeet said:

Why shouldn't there be some rule around to require that they actually honor the contracts that they make. It just seems like there is a major disconnect in your logic.

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Government is supposed to be there to uphold contracts, so I have no idea what you are talking about. Anyone for a private market knows that the government would uphold contacts. There is no disconnect in my logic, there is simply the understanding that with certain things you will have fraud and delusion, but it is better to let the market solve it. With your logic, you look to the government for help and think it is some sort of savior, which is fine, but the problem is that you have nothing to back that up with because history has always shown government hasn't been efficient at regulating markets and it always ends up making things worse. Why don't you give me actual examples of the regulation you want and tell me how government will physically carry out the regulation. Also, I want to know the actual deregulation that hurt us- the actual names of legislation and the actual actions of government. Screaming "Regulation is good! Deregulation is bad!" is not really an intelligent approach to this matter.

Sorry for being a bit crude at the end here, but as you can tell we really disagree on these points and I think some of your arguments are just absurd. Nothing personal though.

myp said:

Ok, how then do you explain the cohorts of people who were extremely bullish on the market in both the short and long runs: http://www.youtube.com/results?search_type=&search_query=peter+schiff+was+right&aq=f

These people didn't think that the bubble was smaller than it really was, but instead, they didn't even see a bubble at all.

How is the logical thing to do is act like it will never end? If they say the bubble coming they obviously would've gotten out of the market and they would've found themselves out of the crisis right now. There are several smaller banks who did realize it was there and they stayed away from it and are doing fine now. Need an example? Here you go: http://www.forbes.com/2009/04/03/banking-andy-beal-business-wall-street-beal.html I'd say that guy is doing 1000 times better than those banks who got swamped in this mess because they invested in it.



Again, they may have faced losses in the short run, but Schiff's overall investment strategy is for the long run in all aspects. Now he may have been wrong about a deadline or two by a little bit, but in the long run he has been right and his predictions are starting to come true. You can't say the same for all of those guys who were bullish on the housing market.

And herein lies your problem. You don't understand the argument behind gold, which is why you don't understand Schiff's strategies. Gold does have value and it will always have value because although it may not be necessary to live with, it has always been demanded by the people and it still is being demanded. The problem with paper money is that when it is devalued, it becomes simply paper. When gold gets devalued, it is still gold and people just want it. It's human nature I guess- we just like gold.


Wrong. Why? There will still be demand for oil even if there is unlimited supply for it because we will still need it for our cars, homes, etc. Paper money we will not. And also, think rationally on this one. How likely is it that we will find an unlimited supply of oil or metal or gas or atleast a large enough supply that will dip the price that much?


I don't understand what point you are trying to make here. I too am for a low reserve rate, but you do realize that that would be possible without the Federal Reserve right? Also, you realize that the currenct system has a direct proportionality between the Federal Reserve notes and the amount of money that can be created right?

The Federal Reserve does make more capital availible through the fractional reserve banking system though. Anyway, why are you trying to downplay the Fed's role in this crisis? Even if you don't want to talk about the fractional reserve banking, you even admitted yourself that the rates were way too low. That was a HUGE part of this crisis. As for the Congressional deregulation, my argument is that along with that there should have also been a separation between the state and market and the government should've cut ties with the market by privatizing Fannie and Freddie and stopping legislation that forced certain loans. This way, the banks would know they didn't have something to fall on and would've made better choices. If they didn't then too bad- they would simply fail and go under. Capitalism at its best.

The market would be more stable during times of crisis because you wouldn't have as many bank runs like we say with IndyMac and WaMu. Also, less credit would've ensured more sustainable growth instead of the artificial growth we saw in the bubble.


Well the fractional reserve banking requirements are essentially this. Other than money created through that system, all other investments should be backed with 100% capital and they are. Please explain this more, I think we are on different pages here.

I looked at your original post on the deregulation, but I think we drifted off somewhere. Anyway, can you give me the exact legislation you are speaking of when you say deregulation? If it is the Gramm-Leach-Bliley Act then let me tell you that that was pushed by Democrats and signed by Clinton, not conservatives as you said in your post. The left is trying to push that act as the "deregulation" that caused this mess and they are trying to say the Republicans are responsible for it, even though both parties played a major role in getting it passed and it was really the Dems that started it in the first place. Either way, if the act hadn't been passed, this crisis would've still been horrible because it simply didn't play a major role in the problem- the major factors in this crisis were as I explained before the natural bubble with the creation of CDOs along with the government (Fannie/Freddie, the Fed mostly) which is what turned a natural bubble into a disasterous and propped up one. Personally, I actually like the GLB Act, but I think we need higher reserve requirements and sounder money along with it.


Or, with a real free market we could just let them fail and not bail them out.

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Well, again, they made a lot of money by playing the bubble. I don't think they expected the solvency crisis, since they didn't think AIG would go under or that the credit market would freeze like it did.

As far as gold goes, do you see the problem in your argument? People want gold because they have faith in it...kinda sounds like a currency. There isn't any intrinsic value to it (not at the moment at least). People just like it because it has traditional value. You don't seem to get the link with the oil one either. The chance of the US instantly devaluing the money is about as likely as us magically not needing a commodity anymore. The only benefit is that it has an international market, so it wouldn't necessarily be hurt by national policy. It also won't help in rallies though. It's just a half-decent counter-cyclical hedge.

I'm also confused about your thing with the fractional reserve. You brought it up as something relevant to the argument and I was just pointing out why it wasn't really. The reserve rates for savings accounts don't carry over to the funds of the I-Banks.

Yes. It'd be possible for there to be a low reserve rate with the Fed. It would probably be 1% at a lot of places and ther would be huge concerns over bank solvency. The Fed acts as a standard to ensure that they actually keep the reserve at reasonable levels.

The low reserve rates do lead to more money in circulation. That's Econ 101. I'm confused as to why you ask this.

Your next point is a little odd. I've downplayed the role of the Fed because it isn't in contention. They shouldn't have kept the rate low. That wasn't necessarily part of the crisis though (it was part of the mess...but not the heart). The crisis was a crisis of solvency. It had bigger problems than some bad loans.

I'm also not sure how less regulation would have done a dang thing to protect against bank runs. Keeping a proper reserve does that.

I'm not sure what you're talking about the fractional reserve system. It's simple. It's talking about only having to hold a certain percentage of one's savings. It really doesn't have much to do with investment banking. I believe they are governed by different leverage rules. What exactly are you talking about with the rest? It's just something that happens in banking.

That's probably the act. I don't know about the exact politics. It appeared to be fairly bipartisan when it was discussed in an economic seminar a few months ago. You are still ignoring one thing though. The choice to not regulate CDS. If those had been regulated, then the mortgage backed securities would have been rated properly. The bubble was created by the Fed and bipartisan housing goals, but it became a crisis because of the bad ratings and insolvency.

Let me also speak on one point. You keep saying that we should have just let them fail. Do you understand the gravity of that? The entire credit market would have locked. Business would have collapsed and a whole lot of businesses would have been unfairly taken out in the fall.