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Tuesday, August 19, 2008

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Blissex

«It wasn't simply credit that dried up, it was trust - the whole basis of interbank money markets. Banks were unwilling to trust the disclosures or assurances of their counterparties. As a result central banks had to pump hundreds of billions into financial markets to address the liquidity spiral and to ensure the solvency of key financial institutions.» That's entirely ridiculous -- usually as in the recent event it is solvency issue that causes illiquidity. Once most banks realized that there were a trillion or two of losses in the banking system, that's when liquidity disappeared, not viceversa. Banks were unwilling to trust their counterparties because they knew most of them had to be insolvent, not just because they suddendly became paranoid. Central banks have put hundreds of billions to address that insolvency, not the liquidity problem, which is just a code-word for not wanting to say "insolvency". The basic problem is not that CDOs are illiquid and one has to hold them to maturity to get cash out of them, but that they are largely worthless and who holds them is insolvent, and once the ponzi scheme stopped because banks had run out of greater fools, they found themselves holding too much of the worthless paper they had created, or even worse, having lent too much money to those who were buying them. Vendor financing is a wonderful way for salesmen to tunnel money our of their companies...

Andrew Garland

Banks are intermediaries with one major job, to evaluate risk and make good loans. It became clear that they were fools, completely unaware (at best) how to run their central business. After proving this, why should they still be in business?

The "Banking Crisis" will only resolve after the managements of these banks are fired, either explicitly or by going out of business.

Eva

I wonder what is supposed to be so new about that analysis? Anyone working in the financial sector was aware of this around this time last year!

jim

Re: not in a recession

Only if you accept the veracity of the governments numbers. I submit that anyone that accepts and promulgates a recession argument using these politically manipulated figures is naive or corrupt. Either way, it's a statistic that has been engineered to become meaningless. It's the new depression.

Arthur Eckart

Obviously, U.S. government data are correct. For example, if inflation is understated, then so is nominal GDP.

The Panic of 2008

The Bush Administration and the Bernanke Fed recognize the problem. Bad debt locked-up lending to the point where banks wouldn't even lend to each other. The $700 billion injection of cash, in exchange for bad debt, will remove the reason banks are distrustful of lending. It's a brilliant policy, and supports my statements on the causes of this crisis.

The U.S. already captured the real assets and goods, in exchange for employment of export-led economies, and the U.S. government will sell those MBSs in the future when housing prices rise again, which this policy will facilitate. I've stated before, this is an appropriate response to the government policies of export-led economies, and the benefits of this policy will far exceed the costs.

francis

In simple terms, a crisis caused by banks being too nervous to lend money to us or each other. Where they will lend, they charge higher rates of interest to cover their risk. In the real world, that means more expensive mortgages, dearer credit cards, pain for pension savers and other investors as stock markets fluctuate wildly, and in the worst cases repossession and bankruptcy. There is often confusion between the two but they are not the same. A recession is usually taken to mean two successive quarters of negative economic growth. A credit crunch can be separate to or part of a recession. Years of lax lending inflated a huge debt bubble as people borrowed cheap money and ploughed it into property.Lenders were free with their funds, especially in the US, where billions of dollars of so-called Ninja mortgages - no income, no job or assets - were sold to people with weak credit ratings.
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Will Cochran

Now that government has created the housing bubble it is on to health care!

Sade Jordan

This analysis isn't new, nor that insightful. Anyone with an ounce of economic sense understands that the underlying force of inflating a "bubble" is greed and the deflating element is "fear".

Sam

Nobody ever relates the solvency crisis to when fast food restaurants started accepting credit as a form of payment, but it always turns back to housing. People have to eat too! There were a lot of Whoppers and Taco Grandes being eaten in those McMansions. Heck, that's practically why they're called McMansions!

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Many think this might be viewed as underestimating the economic climate and what it can produce; others imagine it as long term vision and common sense.

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administration so dont give up saving our nation. We support you.God bless you.

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Very interesting. I am personally wrestlying with the constructs of the Universe that we see indirectly, but have no explaination, such as Wimps. Big Bang as perhaps a collision of universes

Michelle Boudreau

The analysis and qualitative survey shows how financial integration and innovation can make market and funding liquidity pressures readily turn into issues of insolvency .

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Very interesting. I am personally wrestlying with the constructs of the Universe that we see indirectly, but have no explaination, such as Wimps

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The analysis and qualitative survey shows how financial integration and innovation can make market and funding liquidity pressures readily turn into issues of insolvency .

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«It wasn't simply credit that dried up, it was trust - the whole basis of interbank money markets. Banks were unwilling to trust the disclosures or assurances of their counterparties. As a result central banks had to pump hundreds of billions into financial markets to address the liquidity spiral and to ensure the solvency of key financial institutions.» That's entirely ridiculous -- usually as in the recent event it is solvency issue that causes illiquidity. Once most banks realized that there were a trillion or two of losses in the banking system, that's when liquidity disappeared, not viceversa. Banks were unwilling to trust their counterparties because they knew most of them had to be insolvent, not just because they suddendly became paranoid. Central banks have put hundreds of billions to address that insolvency, not the liquidity problem, which is just a code-word for not wanting to say "insolvency". The basic problem is not that CDOs are illiquid and one has to hold them to maturity to get cash out of them, but that they are largely worthless and who holds them is insolvent, and once the ponzi scheme stopped because banks had run out of greater fools, they found themselves holding too much of the worthless paper they had created, or even worse, having lent too much money to those who were buying them. Vendor financing is a wonderful way for salesmen to tunnel money our of their companies...

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Forex Trader

Well its good to read past posts as this shows how close the global financial sector came to complete colapse. I hope the sub-prime market will never be allowed to exist again and something good can come out of all this mess.

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A concise account of how the credit crunch happened. I feel that the more people that understand how this happened, the closer we will be to preventing it happening once more.

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A rise in interest rates made housing prices plummet. Why did this situation force home owners to default on their mortgage payments? Was it because they couldn't keep borrowing against the value of their homes and using that money to make those mortgage payments? And if so, wouldn't these home owners have reached a point of no return, even if interest rates had remained low? You can't borrow from Peter forever to pay Paul. I'd be interested in an answer.

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administration so dont give up saving our nation. We support you.God bless you. thanks

Preston Wilcott

The real culprit was greed, reinforced by terrible risk management.

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