Is it not more likely that the volatility is the result of the downward pressure on the market, rather than the cause?
I saw the graph. To me, that just indicates that the market generally trends upward (which I think everybody knows), unless something happens to spook investors - in which case you get volatility as people try to decide what’s going on and what might fall.
A wizard did it.
Oh, the volatility does not cause anything, it is just an indicator. Periods of high volatility frequently precede downturns.
I suspect a considerable portion of the blame lies with the residential construction industry. They’ve pretty much stopped building housing for middle income people. All they ever build are these McMansions. Then the real estate salesmen sell them to middle income people, and the financial industry came up with all these ARMs and sub prime loan instruments to make it possible for them to buy the McMansions. Now all fall down, go boom. (Not that I think there has been a crash for the economy in general. Yet.)
In 1987 I was with one of my journalism profs (our class did a campus-news page in the city paper) when he got a phone call and told me, “The stock market just crashed.” He was an old newspaper hand and not given to exaggeration.
I recall reading about a Chicago Tribune headline that said “Dewey Wins!!”…
-XT
Except that people lose money on the stock market every day, and it doesn’t require a crash for people to lose money. You can lose your entire investment in one day if you leverage yourself enough.
In order to qualify as a crash, the entire market has to have lost a substantial amount of value. 1987 would qualify, the dot.com bubble would qualify. The entire market losing 15% of its value might qualify. One guy losing 15% of the value of his portfolio doesn’t qualify as a crash. And a “crash” doesn’t imply a 1928 style economic meltdown with stockbrokers jumping off of buildings.
The thing I can’t figure out with this whole sub-prime loan debacle is who was buying up all these worthless loans? I can understand homebuyers stupidly agreeing to these loans, I can understand mortgate companies agreeing to these loans if they could sell them off to hedge funds and the like.
But why would the hedge funds buy the loans? Was it that they thought if you buy enough really bad loans you’d get enough that wouldn’t default to make up for the ones that would? That’s like the old joke about making it up in volume.
The three most recent entries in James Howard Kunstler’s weekly “Clusterfuck Nation” online column blame the events on a financial sector based on ill-advised mortgages, in turn based on unsustainable “cheap energy capitalism.”
A piece on NPR said the reason the bad loans could exist is that they were bundled and sold with better loans, so that your risk was spread out. If the bad loans went south, you still had income from the good ones.
I think Fannie Mae may have had a hand in this, but I am not certain.
The real question, is why this didn’t prevent the housing market crash. How bad did things actually get?
It’s not so much a “housing market crash” as a slowing of the “housing market bubble”. Everyone and their grandmother could see that the bubble was unsustainable, everyone knew that houses were selling for prices that didn’t make sense.
So extending loans that were practically guaranteed to default was one of the ways the housing market bubble was overinflated. But still, even bundling a bunch of mortgages that are guaranteed to default with a bunch of mortgages that aren’t guaranteed to default doesn’t mean it makes sense to offer those mortgages in the first place. It makes sense for the mortgage companies to get rid of these bad loans any way they can, so it makes sense for them to bundle the bad loans with good loans in a package deal. But it would make even more sense to bundle good loans with other good loans, and not make the bad loans. If the mortgage companies hadn’t made these bad loans in the first place, they wouldn’t have to get rid of them. Of course, if they can temporarily disguise the fact that these loans are bad loans long enough to unload them on some stupid hedge fund manager, I suppose it makes sense.
So the home “owner” wins, in the sense that they get to default on the loan, let the house be foreclosed, and they walk away with nothing worse than bad credit for the rest of their lives, or maybe bankruptcy. The mortgage companies win, because they’ve sold off the bad loans and pocketed the fees already, the only downside for them is that those days are over. The hedge funds are the ones left holding the bag, but my sympathy for those masters of the universe who bought this crap is fairly limited. The only problem is that the managers who bought this stuff will have lost a lot of money for the widows and orphans who bought the hedge funds, thinking they were “safe investments”.
In any case, that this is collapsing is actually good news, the only bad news is that it should have happened years ago.
According to the Times, a 10% decline in a bull market represents a correction, and we’re only half way there. So it isn’t a crash. The times today said that small investors aren’t affected very much, only large, rich ones using sophisticated models, which aren’t working at the moment. So I’m not shedding any tears.
On the other hand, a crash of a thousand miles begins with a single step. The more interesting question is whether this represents the true end of the housing bubble, and whether there will be a liquidity crisis. That the banks can’t find anyone to take the debt for the Chrysler buyout seems far more disturbing than a 6% decline in the market. Could these things tip us into a true crash?
Oh, for pity’s sake.
That part about him touring a new hospital and wondering how they’re going to be able to afford heating it in a few years? Pure gold. Ever hear of a little substance known as coal?
Wow. Of all the threads I expected BrainGlutton to quote James Howard Kunstler on peak oil, I sure didn’t imagine this one! 
Huh…tells you what YOU know. How will we dig out the coal with the stock market crashed, smarty pants?!? Its not like they could dig out coal during the Great Depression…or something.
Um…RIDGEMONT HIGH FOOTBALL RULEZ!!!
-XT
The widows and orphans who invested in the hedge funds? That must be a whoosh.
It is not only that the loans were bundles, they used a whole bunch of sophisticated tecniques that are beyond me, derivatives etc, that have never really had prove they work before now. Yes, some large speculators were willing to take more risks in return for being offered greater gain. And yes some of them have crapped out.
Oh, they worked okay. The trouble is, they were guaranteed to work given that their model was correct, and I think lots of people look at computer models and see something a lot more solid than is actually there. When conditions changed enough so the model didn’t work, they crashed and burned.
Casinos have a model that guarantees they win in the long run, but in the short run they might lose also.
That’s the problem, he plays the stock market. Sounds like someone is gambling and not indexing and is out of his proper asset allocation for his age and retirement expectations. His personal crash is his own fault. Even then, 15% isn’t a crash.
Naw. The Market got to 14,000, investors “knew” a “correction” happens when it hits a mark like that and they sold. All those things like “market is nervous over the mortgage industries” is bullshit. it could just as well been “the market is bullish over mortgage industries”. Yes, things like “mortgage industries” can cause uncertainty but that can cause buying too. (You sell your mortgages and buy Blue Chip).
The VIX index measures implied volatility (of the S&P500 stock index options), not the volatility in the stock market.
It would be possible in principle for the stock market to stay completely flat and yet for the VIX index to rise at the same time. (I.e., if the option premiums asked by sellers and paid by buyers were rising.)