What is the "Credit Crisis?"

This is a pretty good visual analysis of the credit crisis... its 10 minues long, but it explains everything better than anything else I've seen:

Like playing hot-potato with a timebomb... Overall, this is very good, but it is missing answers to the following:

  • What amount of leverage did banks have in the past? The 100-to-1 ratio of credit-to-cash is a bit of an exaggeration... Investment banks and lending banks used to be legally separate entities. Lending banks were careful with cash (10-to-1 leverage), investment banks were free-wheelers (30-to-1 leverage). When Clinton repealed the requirement that they be separate, dangerous levels of leverage were inevitable... but it never got as bad as 100-to-1.
  • Why don't people understand that homes are HORRIBLE investments? The common wisdom that being a homeowner was a good idea only worked because of the demographic shift of the baby boomer generation. Suddenly there were a bunch of well-off families that wanted a home, and demand exceeded supply. This drove prices up, and fooled people into thinking that home ownership was a good investment. Home ownership in America will never be that great of an idea... unles we all have tons of kids, we import a lot of immigrants, or your local area has an equivalent demographic shift of new people.
  • Why did Greenspan steadfastly refuse to raise interest rates, when the economy was clearly overheated? He himself said Wall street demand for bad mortgages drove the financial crisis... He could have stopped all of this if he raised interest rates in 2004. Why did Greenspan do absolutely nothing useful when he was in charge? A bowl of soup would have done a better job...
  • Where were the credit ratings agencies in all this? The only reason sane investors purchased these crappy bundles of sub-prime mortgages was because folks like Moody's and S&P claimed sub-prime mortgages were "safe." If it weren't for the idiotic ratings agency, everybody would know it was a time bomb, there wouldn't be much demand for them, and we wouldn't be in this mess. These folks should be fired, and legally barred from from doing any job that requires math.
  • What is the size of the "credit default swap" market? The last estimate was about $44 trillion dollars: more than all the money in the world! The only reason Wall Street used such odd terms was because if they called it "insurance," then it would be regulated. Some government official would have audited their books years ago, and said "hang on a minute, you don't have enough cash to repay your obligations if something REALLY bad happens. You can't sell this anymore!" In effect, folks like AIG made "promises" to repay people if their stock market investments lost value... but naturally, AIG didn't have $44 trillion dollars in cash to cover all their promises... selling insurance when you cannot pay claims is FRAUD, thus every executive at AIG belongs in jail.
  • Finally... why do all sub-prime mortgage owners smoker cigarettes???
Feel free to add your frustration in the comments...


Subprime Smokers

Because like buying a house that you can't afford, smoking is another poor choice.

Actually, I dunno but smoking is increasingly becoming a sign of lower class standing.

I smoke cigars...

only two or three times per year... but I still do it!

smoking should be like having a fine wine. A "one in a while" indulgence. More than that would be idleness ;-)


So far, I haven't seen the same stigma attached to cigars.

Bad Investments

It's great. I was a Jr/Sr. in college when the housing market was going crazy. I toyed with the idea of buying a home, and then I thought really hard about what that meant. I stopped thinking a home as an investment (what I was taught by many, many, many people... regardless if I wanted the lesson), and started thinking about it as a home, a place to hang the hat. Also I thought about how it make me less mobile, and more dependent on the location I am currently at. With Kokomo IN being the 3rd most 'dying' city in America according to Forbes.com, I think I'll pass.

After thinking about that, and the taxes, the interest, the repairs/upkeep, I determined that unless it returns extra-ordinarily high, it isn't a good investment. One thing that my observation tells me (and this started at an early age, around my era of collecting baseball cards and POGS) is that if you are the one buying while it's hot, your too late. Better to flush the money down the toilet, at least it doens't take up space in your closet then. If the only reason to buy a house is because it's a 'good' investment, I figured we were too late to the party to make it work. I think that was right.

My wife and I set our goal as first time home buyers to put down >%20 and own the home in <10 years on a 15 year mortgage. If the numbers don't match-up at buying time, then we won't pull the trigger. We are years away from that reality, as we are still paying off student loans. I think everyone should plan like that, and I know not everyone can, but part of that centers around the fact that housing has become unaffordable for the majority of Americans; but some don't believe it. Couple that with the exorbitant amount of college debt some families start with, you have a large majority of people that are already living well into earnings yet to be realized (mortgaging the future).

In my opinion, Greespan didn't raise interest rates because he KNEW where everyone was already at. Raising interest rates at that point would have brought today back to 2004, only probably not as severe. He only started to raise them as he exited and everything blew up shortly after. Bernake is signing us up for hyperinflation in the near future, and seems to think pumping the economy full of funny money will somehow help the fact that everyone is insolvent. Insolvency isn't cured by more credit, it's cured by paying the present for the already mortgaged future.

Great Video

Jonathon Jarvis put a crap load of entertaining information in this video and being the money illiterate person that I am I have no idea why we are in such debt - this puts it in plain english though will have to watch it a couple more times to fully comprehend it all though - it is always easier to understand stuff when there are pictures over the voice :)

Recent comments