Financial History

[Engineer]

Not trying to pick a fight Engineer,  you are just very firm on the way you see things and it makes your non-buggy posts seem  like more of a rant than a discussion or debate.

I feel that the root cause of the whole housing bubble and current credit crisis is Joe sixpack    thinking he deserves a 250k house and a brand new beamer eventhough he only makes 28k a year. Second on the list is the banker that filed the paperwork knowing Joe couldn't ever pay for it.  After that I don't care.  I don't feel sorry for those in general that are being booted out due to forecloser.  Sure there are a few that got a raw deal, but you are supposed to plan for that shit in advance.  Like buying a small house for starters and gradually working your way up to a mansion, not buying one right off the bat. 
I also feel that credit should go back to the way it started.  With an account at the mom and pop store down the street where if you didn't pay it off at the end of the week or month, then you couldn't charge any more.  Also, if you had to borrow money to buy a house, your mortgage stayed with the bank that you bank at.  Banks couldn't loan more money than they had, and people couldn't borrow more than they could pay back.

I am pretty young, but so far feel that I am doing things the way they should be done.  For the most part I don't spend what I don't have, but if I do, I make damn sure I can pay it back in the near future.  I am also willing to accept the consequences of any decision I make.  Even if it means moving back in with mom and dad, living in the back of my truck, or going to jail.

Nice post Boost.  Interestingly we believe exactly the same thing.

I agree 100%, no one takes personal responsibility, and now they blame it on predatory lending practices....  Mabey Trojan is right, we need "common sense" regulations like if you don't graduate highschool, you can't get a credit card or buy a house or vote.  Wonder how the libs would like that.

If you have been following the issue, you know that my whole argument is aginst the government who required Freedie Mac and Fannie May to give 50% of their home mortgages to people with little chance of repaying the loan.  The bankers who did this were not your local bank.  They aren't stupid, they would never make those loans.

Now some local banks did make the loans, only because Freddie and Fanny would in turn buy the loans from them.

It is my belief that local people (banks) will act responsibly and not loan irresponsibly.  However huge corporations CitiBank, Freddie, Fanny, don't show the same responsibility, but now the Government tells us that they are to big to fail.  I say let them fail, let the business return to the local banks, and let them thrive again.  This would be the natural process of capitalism.  But somehow (probably because of the millions in campaign contributions) the politicains believe it is in their best interest to give taxpayer money to these corporations to keep them alive, and to continue the excesses and waste.

Barack Obama was right that we needed a change.  The change we needed was less government intervention not more.  Barrack Obama is just an extension of Dub-ya.  He just wants to spend even more.  I believe the change we need is a return to conservative values.  However that doesn't give politicians more power, so it is unlikely to happen.

[Engineer]

Ill have a go at this one if you dont mind, as I have quite a bit of inf about it rattling around.

You will need to go back a bit into recent history to fully explain this, so please bear with me its a little lengthy.

Back in the olden days the US gove mandated that banks would not use discretionary powers to discriminate against people who COULD pay back a mortgage but had little in reserves afterwards. These are the sub prime borrowers and they should have the chance at the home ownership dream.

Way back in 94 the Barrings Bank collapsed (had we forgotten that it isnt a new phenomenon?) immediately after this the US economy went into overdrive.

In 96 the MSCI World Market Capital passes through th e$10 Trillion mark, every body is making money.

97 was a little shakey as the Asian currency crisis hit but that was shortlived and back into overdrive again

98 saw the Russion debt crisis destrpy the USSR causes a dip and the US Gov relaxes monetary policy (key point).

Mid 99 saw the Euro launched and a confident investing market looked for places to throw money abd tech stockes were that place... what are tech stocks/ and why did they burst so dramatically?

A simple example. I rent a small office, buy 3 desks and 2 large servers, organise a heap of phone access capabilities and start selling access to teh internet, soon the money is rolling in. I decide to float the company and sell of teh shares at a ridiculous price based on turnover. All is well for a coupel of years until it turns out I couldnt manage a flee market let alone a multi billion dollar comp and it all falls over. When th eauditors comein the yfind no money in the accounts (liek im gonna leave that there) and no assetts to sell, remember 3 desks and 2 now, second hand servers. Suddenly my hugely expensive high divident shares are worth crap. A classic tech stock crash.

By Feb 2000 the crash is in full swing and the gov is lowerin ginterest rates to help reduce the landing.

Suddenly Enron collapses in mid 2001.

Sept 11 2001, need to go there.

The Gov panicks and reduces interest rates to ridiculous levels, 0.96 in mid 2003.

Suddenly people who couldnt afford a home loan in normal times can do so and teh banks cant say no (remember the gov mandate of years ago?). Also they pay their sales staff on a commission basis so they go hell for leather making huge personal incomes (part of the problem).

By mid 2005 people are starting to get into trouble by mid 2007 int rates hit 5.28% and the sub prime crisis is in full swing.

Now int rates are down to 0.02% and people still arent borrowing, seem ssome lesson were learnt.. but how many and for how long?

The sub prime issue on its own didnt cause all this and on its own you guys could have dealt with it. What did your gov do wrong? What didnt thay do wrong, could they have avoided it? Prolly not. IMO..

Your history lesson is impeccable!  Are low interest rates your conclusion?

Your assessment of the tech bubble is spot on.  Huge values and no assets to back them.

Trojan posted the chart that showed inflation corrected housing prices going through the roof.  But the question is what caused the housing prices to rise so rapidly, and get so out of control?

Obviousely there are many factors and you listed several.

I think that the combined affects of to low interest, with more buyers made eligible, and mortgage vehicles like the ARM with an Introductory rate, combined to create the bubble.

Another problem may be 20 years without a recession to keep people responsible.  The new stance of the fed to cut intrest in an attempt to always keep the economy at a boil will only lead to a bigger crash in the end.  People these days don't plan for "down" times because they have forgotten they ever happen.

Like you point out, the interest rate is at .02% and people aren't borrowing.  Keep in mind that is not the rate that individuals can borrow at.  The current rate for 30 year mortgages is around 5%.

I really believe that the ARM is the reason for many mortgages failing.  A few years ago I was offered a 1/1 ARM at a 1.9% introductory rate.  That means that it would be 1.9% for one year, (the first 1) then adjust yearly thereafter (the second /1).  The adjusted out rate was prime +2.  Prime was 5% at the time, and it could adjust 2 points per year.  It was clear when I asked these questions that it was the first time they had been asked of this salesman.....  So the introductory payment was about half of what the adjusted out payment would have been.

When I built the house, I did take an ARM that was a 3/3, but it didn't have a ridiculous introductory rate.  I never did sleep well until I refinanced to a fixed rate before the first adjustment.

These days all people ask is what is the payment?  It's no wonder we are in trouble.  I think we have an ignorance bubble building......... hehe

[fabr]

Your history lesson is impeccable!  Are low interest rates your conclusion?

Your assessment of the tech bubble is spot on.  Huge values and no assets to back them.

Trojan posted the chart that showed inflation corrected housing prices going through the roof.  But the question is what caused the housing prices to rise so rapidly, and get so out of control?

Obviousely there are many factors and you listed several.

I think that the combined affects of to low interest, with more buyers made eligible, and mortgage vehicles like the ARM with an Introductory rate, combined to create the bubble.

Another problem may be 20 years without a recession to keep people responsible.  The new stance of the fed to cut intrest in an attempt to always keep the economy at a boil will only lead to a bigger crash in the end.  People these days don't plan for "down" times because they have forgotten they ever happen.

Like you point out, the interest rate is at .02% and people aren't borrowing.  Keep in mind that is not the rate that individuals can borrow at.  The current rate for 30 year mortgages is around 5%.

I really believe that the ARM is the reason for many mortgages failing.  A few years ago I was offered a 1/1 ARM at a 1.9% introductory rate.  That means that it would be 1.9% for one year, (the first 1) then adjust yearly thereafter (the second /1).  The adjusted out rate was prime +2.  Prime was 5% at the time, and it could adjust 2 points per year.  It was clear when I asked these questions that it was the first time they had been asked of this salesman.....  So the introductory payment was about half of what the adjusted out payment would have been.

When I built the house, I did take an ARM that was a 3/3, but it didn't have a ridiculous introductory rate.  I never did sleep well until I refinanced to a fixed rate before the first adjustment.

These days all people ask is what is the payment?  It's no wonder we are in trouble.  I think we have an ignorance bubble building......... hehe

BINGO!

[fabr]

7 years ago we did not accept credit cards.People would ALWAYS ask a price before buying and grumble.NOW and for the last 7 years we accept cards and I hardly ever get asked"how much?". THey just flip out the credit/debit card and happily go on down the road not caring a bit. Why?  Because they can make the minimum monthly payment. .LIFE IS GOOD when dealing with idiots.

[artie on edge]

Your history lesson is impeccable!

It would want to be..he he....  its what i do for a living.... 

[artie on edge]

  Are low interest rates your conclusion?

My conclusion is that the end result is an accumulation of many factors but primarily knee jerk reaction from your gov, the burning desire to own a home which over rode common sense and common greed of the vendor (banks).

The poor old US never really stood a chance, as you correctly say, it had been too long since the last real correction and people had 'forgotten' what it could be like..

[fabr]

Damn artie,TWICE in one day we agree!

[Engineer]

My conclusion is that the end result is an accumulation of many factors but primarily knee jerk reaction from your gov, the burning desire to own a home which over rode common sense and common greed of the vendor (banks).

The poor old US never really stood a chance, as you correctly say, it had been too long since the last real correction and people had 'forgotten' what it could be like..

Very nice.....  Now you can help us convince Trojan. 

[artie on edge]

Very nice.....  Now you can help us convince Trojan. 

No way! if Troj says it that way, then that way it is! He da man, we gonna elect him our Prime Dumbfoock at the next election..

And I must point out that I am quoting Fed Res rates, not those that the banks actually pass on to you poor bastards.

My mortgage in Aus is around the 5.75% mark and this is the lowest we have been for ages, Im enjoying it. Of course it isnt any better than it was a year ago cause I have to 'pay more' for stuff I get from the US so im no better off... a slave to buying buggy parts......

[artie on edge]

7 years ago we did not accept credit cards.People would ALWAYS ask a price before buying and grumble.NOW and for the last 7 years we accept cards and I hardly ever get asked"how much?". THey just flip out the credit/debit card and happily go on down the road not caring a bit.

This is just so correct, It isnt the hard currency you are passing over so its a psychological denial of reality. Im guilty of it and I work in the financial services industry, I should know better! (actually I do, its just a matter of degrees though).

[Boostinjdm]

I like to keep my private cash stash in $100 bills cuz they are harder to part with.  

[Engineer]

If every American had to fork over a shoe box full of franklins at tax time, instead of having it deducted, and getting "free money" from the govt every year, I think they would be a little more serious come voting time.

[fabr]

If every American had to fork over a shoe box full of franklins at tax time, instead of having it deducted, and getting "free money" from the govt every year, I think they would be a little more serious come voting time.

ANOTHER BINGO!!!!!

[fabr]

IMO guys, and this is coming from a person that is not nearly as educated in these things as others here ,is that all of the financial ills really come from US (not the U.S.) and our willingness to spend ourselves into a bottomless abyss of debt. That is the root problem. All the shady fancy financial dealings in the world will not overshadow responsibility at the personal level. Without the small "sheep" following along with the idea of "you can have it .Don't worry about paying for it. Get an interest only loan, etc. etc., etc.." we would not be in this mess and the Gov wouldn't have had the balls to promote it either. WE ,the citizens,of not only the U.S. but of the whole world are the reason this has happened.

[Engineer]

WE ,the citizens,of not only the U.S. but of the whole world are the reason this has happened.

I agree with what your saying Fabr.  I can't speak for the rest of the world, but life has been pretty easy in the US for the last 30 years, and I think that our standard of living has made the sheeple extra suceptible to not having a clue about personal responsibility.  It used to be that the American dream was to own a home that you could retire in.  Where I live there are massive new developments where people in their 50's and 60's are selling their homes where they raised their families, and moving into a new house, and a new mortgage, almost at retirement age.......


Besides....  If the rest of the world is making Socialism work, they must be geniuses.  :-\