Is America's Financial Crisis Rooted in Decades-Old Policies?

[Astronuc]

or 2+ trillion . . .

I heard an interview with Charles Morris last week, and I just happen to find his book last night. Two trillion is a revision of his earlier book "Trillion Dollar Meltdown".

New Book Predicted Mortgage, Credit Crises
http://www.npr.org/templates/story/story.php?storyId=89123972
Morris, a banker and lawyer, is the guy whose company developed the software that investment companies, e.g. brokers and hedgefunds, use to do complex transactions. He says the software has been misused!

https://www.amazon.com/dp/1586485636/?tag=pfamazon01-20


The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash
http://www.publicaffairsbooks.com/publicaffairsbooks-cgi-bin/display?book=9781586485634

Investors should probably read this book.


Newsweek interview with Morris: http://www.newsweek.com/id/124231

The Two Trillion Dollar Meltdown
https://www.amazon.com/dp/1586486918/?tag=pfamazon01-20

Financial writer Morris explains the current sub-prime mortgage crisis that is affecting countless numbers of families in the United States and the economy as a whole. Morris details, in great length and description, where the market went wrong and the economic downfall that is soon to be ravaging the country and the global market.

By Andy Ross "Swimming with Dolphins"

This is a great book for those of you like me who are not in the financial services industry but who want to understand why our economy is melting down as we speak. It will also help you understand why this upcoming election is so important: The author describes the seismic ideological shifts over the last 40 years, from the Liberal/Keynsian era that imploded in the late 70s, to the current dying embers of the Chicago-School free market ideology that has held sway from Reagan up to the present moment. The author believes it is time once again for the pendulum to swing in the direction of more activist, socially conscious government intervention. He is not a liberal ideologue but a former banker who comes to his conclusions based on objectivity, knowledge, and lucid thought. The integrity of his thinking shines through every page. This is not always an easy book to read; due to the subject matter it is rife with all sorts of financial industry acronyms and terms like "tranch" and "quant" and "put", but don't let that throw you. Just keep reading with the big picture in mind and it will all come together in the end. It's well worth the effort!

By Rolf Dobelli

In this excellent, highly readable book, Charles R. Morris combines legal and financial experience with literary craft. No ideologue, no partisan and certainly no salesman, Morris traces the roots of the 2007-2008 mortgage securities crisis to its distant origins in the 1970s. He argues that policy missteps under the Nixon, Ford and Carter administrations, when Arthur Burns chaired the Federal Reserve, led to dollar debasement. He contends that the decline of America's currency and its business sector at that time led in turn to the Reagan administration's zeal for deregulation and Chicago-school economics. He details his belief that Alan Greenspan's policies took America from a relatively healthy financial status to a position perhaps as dire as in the late 1970s. Morris also reveals the privileges enjoyed by an out-of-control financial services system. getAbstract found this to be a trenchant and provocative read.

Morris indicates the current situation is more a problem of solvency than liquidity, but basically there is an inability to cover all outstanding debt, hence the huge losses (writedowns). The sub-prime mortgage problem is one of the contributing factors, but their negative effect was amplified by the various complex financial instruments built around them.

Solvency - the quality or state of being solvent, i.e. able to pay all legal debts

Liquidity - a: consisting of or capable of ready conversion into cash <liquid assets> b: capable of covering current liabilities quickly with current assets.

Morris slams both liberal and conservative, right and left policies. I would hope Obama would have read the book, but I doubt it. It's provides a lot of 'food for thought'.

Some more info on the book: http://www.publicaffairsbooks.com/publicaffairsbooks-cgi-bin/display?book=9781586485634&cover=pb

 

[mheslep]

or 2+ trillion . . .

I heard an interview with Charles Morris last week, and I just happen to find his book last night. Two trillion is a revision of his earlier book "Trillion Dollar Meltdown".

The Two Trillion Dollar Meltdown
https://www.amazon.com/dp/1586486918/?tag=pfamazon01-20By Andy Ross "Swimming with Dolphins"By Rolf DobelliMorris indicates the current situation is more a problem of solvency than liquidity, but basically there is an inability to cover all outstanding debt, hence the huge losses (writedowns). The sub-prime mortgage problem is one of the contributing factors, but their negative effect was amplified by the various complex financial instruments built around them.

Solvency - the quality or state of being solvent, i.e. able to pay all legal debts

Liquidity - a: consisting of or capable of ready conversion into cash <liquid assets> b: capable of covering current liabilities quickly with current assets.

Morris slams both liberal and conservative, right and left policies. I would hope Obama would have read the book, but I doubt it. It's provides a lot of 'food for thought'.

Some more info on the book: http://www.publicaffairsbooks.com/publicaffairsbooks-cgi-bin/display?book=9781586485634&cover=pb

I read it couple months back (first version). Morris certainly has some business and financial cred, and I agree with your comments as far as they go, but I got the impression it was a bit of a rush job, too general, and did not really try a build a self consistent framework of what happened. I don't think we still have yet to see THE book yet on the credit/mortgage collapse. I am hoping McLean will do one.

 

[Astronuc]

I'd certainly like to know the details of who did what and when. I'd like to know going back to say 2003 about:

the GSEs, Fannie Mae and Freddie Mac, and what they did in terms of originating mortgages, bundling them into securities, and what high yield investments they bought for their portfolios,

Countrywide and others

GS, Lehman Brothers, Merrill Lynch, Bear Sterns, . . . . and their derivatives and SIVs,

AIG and its insurance

the Fed and Treasury,

Congress


who did I leave out?


I'd like to know more about ABSs, MBSs, CLOs, CDOs, CDSs, . . . .

However, I get the feeling those who know don't want this information made public.

Apparently McLean is writing a book with Joe Nocera on the 2008 financial crisis - according to the Wikipedia article about her.

 

[DrClapeyron]

However, I get the feeling those who know don't want this information made public.

Not surprisingly, financial derivatives were given the blame for the 1987 stock market crash. However, the stock market in 1987 had a steeper decline (based on DJIA) and was quicker to recover than the 2008-2009 stock market crash. There is a common theme that if people cannot remember their history then thay are condemned to repeat history. Same scenario as 1987, out-of-control financial derivatives, declining oil prices and a stock market crash, and not surprisingly the blame is put on the same thing.

As best as I can say, the repo market grew rapidly from the end of the Clinton administration to 2006. Repos, or repurchase agreements are shert-term (most often overnight) collateralized instruments dealt amongst large primary-dealer banks (those banks like Goldman Sachs and Lehman Brothers). Their collatorel: mortgages. These are essentially mortgage-backed securities.

What are repos used for? Financing of overdrafts within the Federal Reserve system. What is so signigicant about 2006?

Discontinuance of M3
On March 23, 2006, the Board of Governors of the Federal Reserve System will cease publication of the M3 monetary aggregate. The Board will also cease publishing the following components: large-denomination time deposits, repurchase agreements (RPs), and Eurodollars. The Board will continue to publish institutional money market mutual funds as a memorandum item in this release.

Measures of large-denomination time deposits will continue to be published by the Board in the Flow of Funds Accounts (Z.1 release) on a quarterly basis and in the H.8 release on a weekly basis (for commercial banks).

M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years. Consequently, the Board judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits.

http://www.federalreserve.gov/releases/h6/discm3.htm

Eurodollar data indicates oversea's interest rates on dollar denominated deposits and time deposits have significance toward how reserve requirements are calculated. Here is how M1, M2 and M3 stood last time M3 was published:

Type Date Billions($)____% from last period AR___% change from last year
M1 - 2006 02 781361.5________-11.166%______________0.487%
M2 - 2006 02 146702·3_________3.095%______________4.933%
M3 - 2006 02 1810276.1________6.552%______________8.035%

http://www.economagic.com/fedstl.htm

I think it is quite obvious that those who know do not want this information public.

 

[mheslep]

Not surprisingly, financial derivatives were given the blame for the 1987 stock market crash. ...

Actually I find it very surprising that derivatives were given credit for '87. Source?

 

[mgb_phys]

Morris indicates the current situation is more a problem of solvency than liquidity, but basically there is an inability to cover all outstanding debt, hence the huge losses (writedowns). The sub-prime mortgage problem is one of the contributing factors, but their negative effect was amplified by the various complex financial instruments built around them.

Surely with mortgages this is less of a proplem than derivatives.

Derivatives are an unlimited bet - you might end up in a position where you 'owe' 100x the market cap of a stock because your bet is leveraged on movements.
But mortgages are real money transfers, every $million lent to someone who can't pay it back was paid to the seller of the house - all the money is still in the system.
So a $T bailout to the banks to cover bad mortgage debt must equal a $T in savings accounts belonging to sellers/developers - it's pretty much a zero sum game.

 

[DrClapeyron]

Actually I find it very surprising that derivatives were given credit for '87. Source?

One thing we do not have to walk away with is double digit inflation, supposedly. Rising OPEC oil prices in the 1950's and 1960's never resulted in significant impacts on the US economy; at the time the US was not a net oil importer. By 1973 when the Yom Kippur War broke out, embargoes were placed on the US, gas prices however were slow to catch up to the rising oil prices. The result was double digit inflation. By the 1979 oil price increase the US economy would not feel the same effects as it had in 1973.

The repeal of regulation Q in the mid-1980's and declining oil prices in the mid-1980's lead towards a new kind of financial derivative trade - mortgage-backed securities. Oil futures themselves were introduced in the 1980's and lead toward real estate value increases in Louisiana, Texas and Oklahoma. The failure of MBS followed the 1987 stock market crash, only this time around declining oil prices, failure of MBS's and decline in the stock market have all happened nearly at the same point in time...but not really.

 

[Jimmy Snyder]

Rising OPEC oil prices in the 1950's and 1960's never resulted in significant impacts on the US economy; at the time the US was not a net oil importer.

This website seems to say that the US was a net oil importer in the 1950'sand 1960's.
http://tonto.eia.doe.gov/dnav/pet/hist/mcrimus1m.htm"
This website seems to say that oil prices weren't rising (except for inflation) in the 1950's and 1960's.
http://www.inflationdata.com/inflation/Inflation_Rate/Historical_Oil_Prices_Table.asp"
This website implies that OPEC didn't even exist in the 1950's.
http://www.opec.org/aboutus/history/history.htm"
Am I missing something?

 

[mheslep]

This website seems to say that the US was a net oil importer in the 1950'sand 1960's.
http://tonto.eia.doe.gov/dnav/pet/hist/mcrimus1m.htm"
This website seems to say that oil prices weren't rising (except for inflation) in the 1950's and 1960's.

That's correct, though you want _net_ imports. The only non-war time the US was a net exporter was in the 30's with the large Tx discoveries and the Middle East's cheap oil was not yet widely available.
http://tonto.eia.doe.gov/dnav/pet/hist/mcrntus2A.htm

 

[Jimmy Snyder]

That's correct, though you want _net_ imports.

How careless of me. Fortunately you got my back.

 

[DrClapeyron]

Am I missing something?

Yes, the 1956 Suez Cannal Crisis caused a sharp increase in oil prices and the same occurred during the Six-Day War. Price flucuations were caused by OPEC embargoes or OPEC decreases in production; to their dismay these actions had no discernable effect on the US economy. For onething, the US could go to countries within OPEC who were not participating in the embargo or countries like Mexico and purchase oil for import.

 

[Jimmy Snyder]

Yes, the 1956 Suez Cannal Crisis caused a sharp increase in oil prices and the same occurred during the Six-Day War. Price flucuations were caused by OPEC embargoes or OPEC decreases in production; to their dismay these actions had no discernable effect on the US economy. For onething, the US could go to countries within OPEC who were not participating in the embargo or countries like Mexico and purchase oil for import.

Perhaps one reason there was no discernable effect on the US economy is that there was no discernable effect on the price of oil. Here is data from the Historical Oil Price website linked to above, there are the numbers around 1956:
1955 $2.93
1956 $2.94
1957 $3.14
Barely keeping up with inflation. According to the site these are average annual prices. Opec didn't exist in 1956.
These are the numbers around 1967
1966 $3.10
1967 $3.12
1968 $3.18
Falling behind inflation. Do you have something you can cite to show that "Rising OPEC oil prices in the 1950's and 1960's" ever actually occured?

 

[DrClapeyron]

What was unique about 1973 was that for about the first time in US history, production and prices outside the US had a considerable effect on domestic gasoline prices. Inflation sky-rocketed after the 1973 embargo and was generally high throughout the 1970's, with the CPI (consumer price index) reaching a change of 13% in 1979 after the Iranian Revolution.

However, since the early 1980's rising oil prices have not appeared to cause large increases in the CPI on the magnitude of those which occurred in the 1970's, i.e. we have not seen double digit inflation since the early 80's. What is the difference? How about a huge increase in the US government budget deficit and the US public debt? Despite the downturn in the stock market food prices have not increased by the levels in the 1970's.

There is a trade-off with large budget deficits and inflation - either you have large budget deficits and keep inflation low or you have do not have large budget deficits and see whether or not consumer prices will increase. The Clinton administration found the need in maintaining a budget surplus during periods of low oil prices.

Conclusion: the spoils of war wane.