http://www.youtube.com/watch?v=ztLg0Y-u6i4

Is that the point? that these illiquid mortgage assets which are what the economy is based on are now not worth the paper they were written on? but weren’t they never really worth that paper?

Seriously, just trying to understand – or confirm that I do.

Thanks again!

“I still think Americans–including me–have trouble understanding how the grinding of these financial gears plays out in the real economy. For all the handwringing about the worst financial crisis since the Great Depression, my local Dominos is still selling pizza, and I can still pull cash out of my ATM to pay for it, and there’s still gasoline at my local filling station, and I still pay my credit card bill at month’s end. Until any of that changes, it’s going to be hard for people to accept the need for a 700-billion dollar rescue plan. (Of course, if we’re lucky, much of that money will not go down the drain but will simply be parked somewhere till the market recovers.)”

I refer you to Newsweek Sept 29 issue 2 pieces, one written by Robert Samuelson and another by Jane Quinn. While the losses are real, it appears that the loss of confidence is feeding on itself and exponentially exasperating the situation. Of the approximate 50 Million mortgages outstanding in the US about 1.5 million are in trouble or foreclosed. That is bad but does not seem disastrous enough to frreze the economy.

My 2 cents worth.

Shakeel

You might also consider an analysis of the now forgotten May rebate checks. These checks totaled $106 billion, nearly 20% of the proposed bailout. But the post mortem on the rebate checks is they were a nice shot in arm for consumer for about 30 days and helped pay for gas and groceries, but had little impact on the underlying economy.

An explanation of a very complex matter in plain, good chosen words, understandable by all.

Now that all understand, will they be start enough to vote for a long overdue change of what we have had for the past eight years?

That is the big question today.

The ancient Greeks used to say that “to make a mistake once is human.” (Electing Bush the first time.) “To make the same mistake twice, is stupid.”
(Reelecting of Bush.) The American public deserves its fate! The unfortunate thing is, to quote another Greek saying, “together with with the burning of the dry good for nothing wood, the green bushes also burn.”

Great work explaining commercial paper. Most people don’t get how credit helps operate all of the small and large businesses we interact with. Your work in this regard helps a lot. Here’s my rambling suggestion:

Consumerism finally broke it big into cars, and homes, where the growing middle class could reach for it. It did it through the invention or creative placement of incentives for those who guarantee and provide credit. Incentives in the form of cash, for those who loan it out.

The credit markets have been going through all sorts of gyrations in the last few years, and we could probably build a series of undergrad classes around them. How they operate. Who set them up. How they’re traded. How they’re marketed. Who wins, and loses.

But back to the incentives. What I mean is, with the end of the last wave of wealth to blow through the middle classes during and after dot com, suddenly, there were neat new ways to buy houses. Creative financing. Additionally, car loans were getting longer and longer on their terms. When we live in a world when people want a new car every two to three years, how can we rationalize five year and longer car loans, or loans with balloon payments on the back end that will be twice the value of the car in any condition? In a world where the depreciation of cars is about as bad as it can get?

Consumerists renationalized by the merits of another market – homes. Home equity was booming, but it was simply another market on the same trend as cars, just in a different phase; a different business cycle. The Consumerists saw it as the next wave to ride. Home equity would cover the bets on cars and crap with the House later. Pass me the dice; I feel lucky.

But I passed on the incentive point again, didn’t I? What made the car loan idea worked was the same mechanics operating in the home business, in a way. The incentives were for the loan officers, the underwriters, and their bosses. I’m all for incentivizing a boring, administrative process, but there needs to be some limits. I lack the data at the moment, but I do recall reading stories about how loan officers were being given jobs at lightning speed, and their training had a hard focus: close the deal, get the commission. I recently read that at one major institution, people with bad credit on applications were sent to the “Art Department,” or an office where the borrower’s “story” could be creatively cleaned up, so they’d qualify. This kind of bureaucratic buffoonery only works when they watchmen themselves have found that they can benefit more from working the system than they can operating it correctly.

Here’s the kicker: They did this in their own neighborhoods and they did it to their own friends and communities. The Man didn’t ride in on a steed and drop cash from his mount, with chains for Consumerists (or traditionally downtrodden Blacks or Hispanics) to wear when they weren’t looking. The people who cut the loans and made the deals live on my street, and work down the road from me in the nearest Countrywide building, or Local Title office, or at the car dealer. Sure, Wall Street, through financial instruments put it in place. But if credit is the grease of the commercial world, then my Consumerist neighbors have their hands on the controls of the machine that invents and eats credit. Go look at stories around Maryland’s own Prince George county – how the mortgage cum foreclosure story is a complete lesson. While some people want to cry out and say that this is yet one more rape of Washington DC’s most classically troubled county, I ask: Who marketed the homes? Who bought the homes? Who sold them the homes? Who cut the loans and titles for these homes? Who bailed out and ran? I suspect that one answer to all of those questions is: Prince George county residents, for the most part.

It seems that this model of close-them-get-paid went far enough up the chain that the managers allowing shaky deals to go through were more on the Consumerism side of the line as opposed to the Safety-of-the-Business side of the line. I suspect that the market for incentives found a sweet spot in the hearts and souls of the spenders (I think I just channeled Jackson Brown). I suspect that the managers who sent these loans up the line were also the same people buying six-year loans on Cadillac Escalades and getting the latest X-Box on their recently limit-extended credit cards; that by the time the loans were packaged into larger instruments, the managers who oversaw this stage of the game were either still Consumerists themselves, or that the process below them covered the tracks of the bad deals well enough from sight.

In other words, the watchers of deals were now of the same type and class as the purchasers of the deals. The Consumerists fucked each other in the end, so’s the way I see it.

I’d tell you this was my .02, but I’m not sure I’d spend it right now.