I would like to add props to Scylla, who brings a lot of knowledge to the Dope (even if he is, you know, a CONSERVATIVE!) [hides women and valuables] There was a post he made a couple of months ago on why (in his view) the accumulation of debt by the gov’t is not a bad thing. I found it very interesting; I wish I could find it.
Oh, and so this isn’t a total hijacking, the bond markets are teh suXX0r!!!1!
It’s a pitting by someone who doesn’t understand the stock market. I don’t understand the stock market either, but I know enough about it not to make boneheaded OPs.
The problem, as I understand it, is not so much that these instruments were created, but rather that banks bought them without understanding their riskiness, and in many cases did not (and still do not) appear to know what this exposed them to. But maybe someone who actually knows what they’re talking about will see this as a boneheaded remark - it’s certainly an oversimplification.
The problem, as I understand it, is not that the risks weren’t understood- it’s that they weren’t considered.
Once these packages of iffy debt have been securitized, it’s virtually impossible to analyze how crappy the underlying assets are. You could in theory, but we’re talking about offices full of people going through hundreds- even thousands- of individual mortgages and even unsecured loans. Those of you who’ve had a mortgage or auto loan have a vague idea of the kind of time we’re talking about.
Since careful analysis of these “investments” is obviously not time- and cost-effective, nobody bothered. This, by itself, should have made these investments too risky to consider- not knowing the risks is effectively no different than knowing that there is a huge risk. When the (usually) reliable financials saw how much money was being made (at least on paper), though, they decided to get in on it too.
Eventually, somebody started looking carefully at what they were buying, and the whole house of cards toppled.
IANA economist, I may also be a bonehead, etc.
I didn’t realize this. If that’s the case, can we expect Warren Buffet to start buying up the companies holding this “frozen” debt on the cheap?
Another way of looking at it: dividing up assets to spread the risk is all right in principle. It’s why stocks work, for example (don’t own one company, own a piece of many companies). But it only works if the risks of the fundamental assets are unconnected. That is, whether or not a particular mortgage fails isn’t affected by the status of other mortgages. When the real estate bubble collapsed (which reasonable people could easily predict it would, the when was the hard part), this becomes manifestly not true. When many mortgages fail at once, the division of risk is worthless and the collateralized instrument is as risky as a single high-risk loan.
I think the OP’s rage is misplaced. If you’re going to pit the bond markets, you might as well pit any form of an economy above barter. You might as well pit bartering too, because bubbles will always form. A bubble burst always distorts/hamstrings the economy. The effect is actually called something, I believe. Pit greed, but we all experience that in form of another. Any economy, even planned/command ones are cyclical. Corrections always hurt.
Ahh, I see! I agree as well. Part of me says fuck’em, your risk, your loss. But, I sincerely believe that market distortions caused by the government (namely Fannie and Freddie) were a large contributor to all of this. Of course, they didn’t hold a gun to our heads, but our own greed took over. Because government helped cause the problem, perhaps they should also provide a remedy (I don’t want to call it a bail out)? I honestly don’t know. The S&L solution of the 1980’s didn’t seem so bad, maybe this one won’t be either.
I don’t fear a recession. I fear a Great Depression.
Er. Fannie and Freddie were private operations after 1968 and there were repeated statements that the US in no way extended them full faith and credit. The markets did not believe these statements, believing the twins to be too big too fail, and the markets were correct.
But that’s not the main problem I’m having here. The main problem is that focusing on the 2 GSEs feels nice ideologically but puts a cap on understanding the underlying issues. Here’s another take, emphasizing lack of due diligence:
Emphasis in original dutifully copied.
I’ll note that a lot of the shenanigans was both noticed and not acted upon at the higher levels of government. And a lot of it occurred in 2006-2007, after the problem became more than a little obvious.