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the liquidity crisis

2008-09-30 14:33:42.866484+00 by Dan Lyke 15 comments

I'm leaving town shortly, back on Thursday, so I don't have time to watch this Harvard panel discussion on economics, but Elizabeth Warren's pointer to it says:

At a Harvard panel discussion yesterday, economist professor Ken Rogoff made an interesting point: The liquidity crisis isn't real.  Or, to restate it: Any liquidity crisis is caused by the promise of a government bailout. Ken said that his many friends in investment banking said that there is plenty of money to invest in financial services, but right now it is "sitting on the sidelines."  Why?  Because the financial services industry does not want to pay the terms required to get that money back in circulation (e.g., give up equity).  As he put it, why do business with Warren Buffett who will negotiate a tough deal, if you believe that the government will ride in soon with cheaper cash?

[Edit: The comments to that entry say it was actually Greg Mankiw, and claims that Elizabeth Warren took it out of context, now I really wanna see the video]

To me it seems like... well... a parable:

We live in a neighborhood. Maybe not the best neighborhood in the world, but it ain't bad, and people from other neighborhoods are clamoring to live here, so we're kinda happy here. Some folks starts to build a high rise in our neighborhood. At first we're a little concerned, 'cause we do occasionally have natural disasters here, but the promises of how modern buildings are going to turn our little neighborhood into a very desirable city in a few years keep us from protesting too loudly. Yeah, the engineering looks a little shakey, in fact one of the guys working on this building even refers to the idea that it can be built as high as is planned as "irrational exhuberance", but construction continues.

It seems like this building has hit a reasonable height, but down the street a used car dealer comes in and says "hey, you can use scrap steel from my used car business to build that thing even higher!". Many of our neighbors say "great, I'm gonna get a condo in that building". Soon, some of us who were uneasy with the building in the first place start to notice that a disproportionate number of people seem to be dying in crashes of cars bought from the used car lot, so we start to look closer at the building. And now we notice that if the building falls over, it's gonna wreck a good bit of our neighborhood, crush our houses and shrubberies.

And we start saying something.

Now the guys building this building and the guy with the used car lot catch on to this and say "Woah! This building's on shakey ground! We need everyone in the neighborhood over here, quick, to hold this building up! We need to buy lots of support to keep this building from collapsing all over the neighborhood!"

And those who have had second thoughts about this building are starting to say "well, why don't we take a couple stories off the top, rather than just putting temporary reinforcements around the bottom?" Of course our neighbors who bought condos in this building are hollering at us that if we take stories off the top, they'll lose their condos, so they're siding with the used car guy.

No matter what, you don't take the first deal you're offered by the used car guy. And, indeed, collapse may be imminent, but it seems like double-checking the engineering of the people who brought us the unstable mess is in order before we start slapping 2x4s on the first story of this skyscraper to figure out how to really keep this thing from falling over, or at least to figure out how to take off a few of those unsustainable stories safely.

Oh, and if I hear one more person blaming tranches and bad rating systems on the 30 year old legislation that is the CRA, I'm gonna have to lay about with me with a clue stick. I'm not necessarily a fan of the CRA, but the arguments I've seen blaming all the sub-prime lending by non-CRA conforming organizations on the CRA are beyond absurd.

[Edit: Fixed "tronch" to "tranch" spelling]

[ related topics: moron Economics Real Estate ]

comments in ascending chronological order (reverse):

#Comment Re: made: 2008-09-30 16:27:24.507545+00 by: ziffle

Well an anology is not an argument.

Oh, and if I hear one more person blaming tronches and bad rating systems on the 30 year old legislation that is the CRA, I'm gonna have to lay about with me with a clue stick. I'm not necessarily a fan of the CRA, but the arguments I've seen blaming all the sub-prime lending by non-CRA conforming organizations on the CRA are beyond absurd.

Your argument here seems to drift. Care to clarify? All banks have the Community Reinvestment Act poster in the lobby. They were required[Wiki] to loan in bad areas and to less qualified people so that home ownership is increased. This in addition to the fed pumping too much money out caused the problem. The government is the problem and now they try to fix it by printing even more money. This will delay any solution and cause it to really pop when we finally have to stop the insanity.

Whats ahead? Currency reissue in New Dollars? Required sharing of our homes with others because they deserve to have a nice home too? Rationing of food? They already stopped Ron Paul dollars because it was gold and silver based. Stay tuned for currency controls.

#Comment Re: made: 2008-09-30 16:43:08.181+00 by: JT

I absolutely adore Elizabeth Warren's explanation of what happened. It's clear, concise, and seemingly accurate from my knowledge. Wonderful video in plain english, I actually plan on distributing this to a few friends who are confused about what has happened and is happening with the bailout.

#Comment Re: made: 2008-09-30 18:47:41.843242+00 by: m [edit history]


You don't have to "Stay tuned for currency controls." -- they are already being tightened.

So far it is for expatriates who give up their passports, and those who yield their green cards. It is a tax on the gain of their worldwide holdings under the so called "Heroes Earning Assistance and Relief Tax" (HEART) Act. The Act went into effect 18Jun08. With hokey names like these, there is always a bomb in the middle ready to explode upon the unsuspecting.

More info at: http://etresoi.ch/Denis/bondage.html

#Comment Re: America, Then and Now made: 2008-09-30 20:14:44.514469+00 by: jeff [edit history]

And to think they can go after you for attempting to get out of the sanatorium? Meanwhile, the Haliburtonites and Blackwater slime avoid paying any tax and live in Dubai legally off our backs? This is sounding more and more like living in America, circa 1770.

Which state will be the first to attempt legally to succeede from the Union? Maybe Vermont?

#Comment Re: made: 2008-10-01 04:22:27.55464+00 by: Dan Lyke

Ziffle, I'm having trouble finding specific numbers, but, among many other lenders, none of Countrywide's loans weren't made under the CRA, and even for those loans that were covered under the CRA, there wouldn't have been nearly the investment in them if they hadn't been tranched into derivatives to appear to be far more profitable (because the rating and return models weren't accurate on the tranched data).

Yes, the fact that banks could so easily sell the CRA loans made those CRA loans much more attractive to the banks selling them, but who wouldn't, given that a broker could make a heck of a lot more money selling the sub-primes to the derivative makers than selling primes?

#Comment Re: made: 2008-10-01 19:30:32.423546+00 by: jeff

A few interesting videos here.

#Comment Re: made: 2008-10-01 21:06:26.61174+00 by: JT

Any clue why Ron Paul tried to correct him and say "coins" when he used the term "coin currency"? Is RP not familiar with the term "coin currency" or does it seem a confusion between the terms with him? "Coining currency" is printing currency, not necessarily just coins.


#Comment Re: made: 2008-10-02 01:03:49.329277+00 by: jeff

I believe he was alluding to backing currency by something "tangible and real," vs. the endless printing of money we see today (hence, the government's intention to hide and conceal M3 numbers).

#Comment Re: made: 2008-10-02 11:43:01.957657+00 by: radix

CRA as currently written is not 30 years old. It was vastly expanded under the Clinton administration. You can trace the increase in home prices and expansion of subprime mortgages directly to it.

This admittedly partisan video has many links to source data on this topic: http://www.youtube.com/watch?v=1RZVw3no2A4

Republicans were on the payroll of Fannie and Freddie too, a fact not mentioned in the video.

#Comment Re: made: 2008-10-02 13:45:19.987526+00 by: Dan Lyke

radix, have you got a text version of that link? Reading the commentary at 10 words per minute and the references at several per second doesn't work for me.

#Comment Re: made: 2008-10-02 15:29:21.652326+00 by: radix


seems to have chased down a lot of them.

Here is one link with the graph showing the CPI and housing prices decoupling: http://www.safehaven.com/images/mauldin/6329_a.gif

And it wasn't just the CRA revisions but also the loosening of standards at Fannie and Freddie that fed the bubble/decoupling.

#Comment Re: made: 2008-10-03 23:32:34.682448+00 by: TheSHAD0W [edit history]



Of course, it's academic now; the bailout bill has been passed, and the money is being stolen as we speak.

#Comment Re: Shadow Government made: 2008-10-04 03:39:29.660267+00 by: jeff

If there were ever a doubt about our "shadow government," Brad Sherman's testimony and the plain facts reveal all.

I can't help but refer back to the quote of Amschel Mayer Rothschild who said (circa 1838), "Permit me to issue and control the money of a nation, and I care not who makes its laws."

It looks like the Fed feels like it has the power to control our military as well. Where are the generals when you need them?

#Comment Re: made: 2008-10-05 14:32:05.503494+00 by: Dan Lyke

Radix, it sure looks to me like it was the changes at Fannie and Freddie that had way more of an effect than the CRA stuff.

#Comment Re: made: 2008-10-05 15:05:00.853982+00 by: ziffle

I suppose when I see CRA I really see the government interfering and lump it all together so so whether its the CRA or whatever its still part of the bigger problem.


Pressured [by congress] to take risk, Fannie Reached a Tipping Point

With that self-assurance, the company announced in 2000 that it would buy $2 trillion in loans from low-income, minority and risky borrowers by 2010.