Re: {OT} Merkel criticises US over crisis

The criticism of the German Chancellor has nothing to do with budget deficits, it has to do with cheap money. The Federal Reserve, an independent agency, largely determines interest rates in the US and the supply of money available when they loan money to banks, who in turn loan it to individuals and companies. Interest rates in much of Europe (especially home mortgage rates) and Asia are even lower than in the US.

The real problem has been loose restrictions of borrowing money, especially for mortgage loans. This was largely determined by Fannie Mae and Freddie Mac who purchased 50% of all mortgage loans made in the US for resale on the secondary markets as mortgage backed bonds, and therefore they set the standard for acceptable risk of individual borrowers. As long as Fannie Mae and Freddie Mac would purchase a mortgage, the mortgage companies did care beyond that about the credit worthiness of the borrower.

Fannie Mae was started by FDR to provide liquidity in the home mortgage financing debt market and later became (with Freddie Mac) a quasi-independent government chartered company (somewhat separate from the US government). The Board of Directors for these two companies is still nominated by the President and confirmed by the senate, but it was otherwise run independent of the government (sort of like the Federal Reserve). These loose money lending guidelines were partly based on the faulty assumption that real estate prices would keep increasing (or at least not decrease), making foreclosures not a big deal (the real estate could be sold at auction for at least 90% of the mortgage balance). The loose lending was also based on a desire to make home ownership available to as many Americans as possible (with a somewhat political and social mission involved).

The other major problem in the current crisis are the "credit default swaps". Since a lot of institutions were buying these repackaged loans in the form of Fannie Mae and Freddie Mac bonds, they wanted some insurance in case of default. So banks and insurance companies began offering credit default swaps, which were basically insurance in case the bonds defaulted. However, unlike "real" insurance, which is regulated by government to make sure the underwriter has capital reserves to cover any and all claims, credit default swaps and other derivatives were deregulated in the Clinton administration and anyone could offer them, even if they could not make good on the claims if the loans went bad. Clinton's treasury secretary Robert Rubin was a big believer in deregulating these instruments, as were many Republicans including Phil Graham.

So when the mortgage backed bonds started to default, the credit default swaps came into play as institutions tried to make claims against those other institutions who guaranteed the Fannie Mae and Freddie Mac bonds. But since the credit default swaps were not regulated like insurance, they could not cover all their losses (higher than expected), and a domino effect cascaded across the financial sector as real estate prices dropped, mortgage backed bonds (especially for sub-prime loans) became toxic assets that no one wanted, and the whole system collapsed.

The current problem really has nothing to do with US government budget deficits. The deficit problem may come later, but it is neither the cause of the current problems, nor is it a problem right now. Don't expect Obama to balance the budget. The last president who tried to balance the budget during a recession was Herbert Hoover, which turned a recession into the Great Depression of the 1930 with about 25%-30% unemployment. In his 60 Minutes interview, Obama said that no economist (left or right) has advised to even think about balancing the budget any time soon.

I can't say for certain at this point in history whether the money spent on Iraq or Afghanistan will be deemed to have been worth it . Even assuming it was not worth it, and even if it causes massive problems in the future as a result of a larger US debt, it has nothing to do with the current financial crisis. Nothing.

Interest rates on government bonds are so ridiculously low right now (because they are risk free and everyone wants them), that the US interest payments on the national debt are lower now than they were in the 1990's even though the total debt has ballooned to much larger numbers. The total US debt may bite us in the future, but it has nothing to do with the current problem. Nothing.

Correct - nothing to do with it. I was simply commenting on the waste of money as a standalone issue. The objective of the expenditure has not been met.

You treasonous bastard. Don't you read?

Go back and read my posts that explained it in more detail.

It was Fannie Mae and Freddie Mac buying loans issued by mortgage companies (they purchase 50% of all mortgage loans issued) that were not credit worthy (which incented the mortgage companies to make more loans without worrying about credit worthiness of borrowers), and credit default swaps that were basically insurance issued by financial institutions to guarantee the Freddie Mae and Freddie bonds (backed by mortgages they purchased from mortgage companies) that did not have the capital to pay off when the mortgage loans (and Freddie Mac Bonds) went bad.

Since many people knew the Fannie Mae bonds were risky, they bought "insurance" on the bonds, which were called "credit default swaps". With "real" regulated insurance products, the insurance company is required to have capital reserves to pay off all claims. With credit default swaps (and other derivatives), the financial institutions were just gambling that the loans would not go bad (or that they could auction off the foreclosed properties without loosing too much money), and they did not have the reserves to pay off the defaults.

You can also check out the CBS 60 Minutes archives on the web to hear more about the credit default swaps.

The current collapse has nothing to do with budget deficits or national debt. Those problems, if they occur, will occur later.

Oh CRAP!!!!!!! Now you've done it. You've kicked the jambs out from under any future comments from Sot or dbu about a way of handling Iran without putting 4000 more American soldiers in bags with zippers.

By the way, I think Nixon did more than "peruse" that policy of detente.