Daily Archives: December 5, 2008

Our Economic Death Spiral Explained in Bullet Points

Oh dear, what a mess we have now.  Here is a pretty ugly cycle to think about.

  1. The housing bubble peaks and home prices stop increasing.
  2. People who assumed they would be able to sell or refi before their adjustable rate mortgages adjusted… couldn’t.
  3. Many of those people, especially the least likely to be able to pay among them who had gotten “subprime” mortgage loans, defaulted on their mortgages and got foreclosed.
  4. The foreclosures hurt the value of bonds that had been sold to finance the loans.
  5. As the value of the bonds decreased, the risk exposure of bond insurers (sellers or financial instruments called credit default swaps) increased.
  6. As the risk exposure of these insurers increased, the likelihood of some of them defaulting on their insurance policies increased.
  7. Because the credit default swap market is completely unregulated (thanks to Phil Gramm and his Republican friends) it is impossible to know what the likelihood is that any of these insurers would default on their policies.
  8. Which has lowered the value of the credit default swaps that people have bought (the insurance policies).
  9. Credit default swaps are carried on banks’ balance sheets as assets.
  10. The amount of lending banks can do is dependent on their asset base.
  11. When the value of the credit default swaps went down, the value of the asset bases of the banks went down, and they became unable to lend to businesses because their asset to lending ratios were out of whack… they had become too risky.
  12. Because businesses and consumers haven’t been able to get loans, the real economy has gone into a nose dive.  Over 2 million jobs have been lost this year, including 500,000 in November alone.
  13. These newly unemployed people are beginning to default on mortgages that had never been considered risky and a new round of completely unexpected foreclosures has begun.
  14. This is going to further impact bond prices, which will increase the risk that bond insurers will default, which will further lower the value of credit default swaps, which will further lower banks’ asset base, which will further curtail their ability lend………..

Now we’re in a death spiral.  We can’t get out of it by just riding the current.  Yikes.

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Auto makers, bailout, moral hazard… Pork, pork, pork.

Reporters say it seems very likely that with GM and Chrysler threatening bankruptcy within the next 60 days “something” will be worked out by Congress to help them.  Some in Congress say that the auto makers are playing chicken with Congress.

Does anybody else have a sense of deja vu?  We already know what it takes to overcome skittish lawmakers’ concerns.  It takes pork. Lots of pork.  That’s what it took to get the $700 billion bailout package through, and that’s what it will take to get the $34 billion auto bailout through.

The warnings about a moral hazard were more prescient than we knew.  I assumed they meant things like “if we bail out the banks, next we’ll see the auto companies at the trough.”  What I didn’t think, but should have, is that once Congressional Representatives are in charge of picking winners and losers, we need to remember that their services and decisions do not come for free.  They are for sale to the highest bidder, and the bids don’t have to have anything to do with the matter at hand.  They are as corrupt as the Mafia Dons.

It’s a shame so many of them can’t ever seem to make a decision based on what is right or wrong or what is best for the country.  It always comes down to what fills their campaign coffers.

Shame on them.

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Filed under economy, Politics