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News Two Trillion Dollar Meltdown

  1. Feb 14, 2009 #1


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    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
    By Andy Ross "Swimming with Dolphins"
    By Rolf Dobelli
    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: THE TRILLION DOLLAR MELTDOWN
    Last edited by a moderator: May 4, 2017
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  3. Feb 25, 2009 #2


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    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. Im hoping McLean will do one.
    Last edited by a moderator: May 4, 2017
  4. Feb 25, 2009 #3


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    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,


    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.
    Last edited: Feb 25, 2009
  5. Feb 25, 2009 #4
    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?


    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 146702ยท3_________3.095%______________4.933%
    M3 - 2006 02 1810276.1________6.552%______________8.035%


    I think it is quite obvious that those who know do not want this information public.
  6. Feb 26, 2009 #5


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    Actually I find it very surprising that derivatives were given credit for '87. Source?
  7. Feb 26, 2009 #6


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    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.
  8. Feb 26, 2009 #7
    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.
  9. Feb 26, 2009 #8
    This web site 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" [Broken]
    This web site 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" [Broken]
    This web site implies that OPEC didn't even exist in the 1950's.
    http://www.opec.org/aboutus/history/history.htm" [Broken]
    Am I missing something?
    Last edited by a moderator: May 4, 2017
  10. Feb 26, 2009 #9


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    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 [Broken]
    Last edited by a moderator: May 4, 2017
  11. Feb 26, 2009 #10
    How careless of me. Fortunately you got my back.
  12. Feb 26, 2009 #11
    Yes, the 1956 Suez Cannal Crisis caused a sharp increase in oil prices and the same occured 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.
  13. Feb 26, 2009 #12
    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 web site 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?
  14. Feb 27, 2009 #13
    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 occured 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.
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