The crisis on Wall Street - Is all in your head?

Reaganomics started it back in the 1980s with Phil Gramm and John McCain leading the pack - end government regulation to encourage a free market, reduce taxes to the movers and shakers, and wealth would trickle down to all of us.  We've had Republican control of the Whitehouse or Congress or both for 26 of the past 28 years and these policies have held.

Now we have news of a major financial disaster that Alan Greenspan called the worst he's seen. 

Phill Gramm said that the current crisis is all in our heads - we are a nation of whiners  http://www.youtube.com/watch?v=1mHsuL6FfY4

McCain temporarily distanced himself, but now Gramm is back full force as McCain's economic advisor.  Can we expect more of the same failed economic policies that got us into this mess?  where does McCain really stand on the economy?  Do his recent statements like this one at Townhall.com point to him abandoning the policies he's adhered to for decades and advocating regulation? 

"Our economy, I believe, still, the fundamentals of our economy are strong, but these are very, very difficult times, so I promise you: We will never put America in this position again. We will clean up Wall Street," McCain said."

What do you think?  How's this all working out for you so far?  Do you believe the economy is strong?

Hold it. Someone help me.

2 million households in foreclosure x median house price of (say) 150,000.

That's 300 billion.

300 billion is less than 700 billion the gov wants to spend.

Is my math right??????

Even if you refinance every house in trouble and apply 150,000 to their value - you couldn't spend as much as the Fed wants to spend.

not sure what the median house price is -- areas like Florida and California have higher home prices than the rest of the country

and not sure how many more problematic mortgages are out there -- we still have another 12-18 months of resetting payments to get through

uh, it can't possibly be as simple as what you've presented ;D

I just read this and it makes a lot of sense to me.

that's the kind of solution that would definitely help. the vehicles are already in place to make it happen. unfortunately, the current administration has left no legislative wiggle room to allow congress to take some time to thoroughly legislate such a solution.

did Iggy write that blog? ;)

No, I was busy watching heroes on teh slingbox. Seems reasonable at first blush.

Not that our government would adopt something that actually might deal with the problem.

http://www.americanprogress.org/issues/2007/0 3/foreclosures_numbers.html

Had the government faced this music even in March of 2007, the result would have been 10 times better than what we're facing now. But instead, 'fiscal conservatives' were too busy whining about 'nanny states' and 'personal responsibility' - without regard for heinous and deceitful acts of their brethren in the financial world.

God Almighty. It is abundantly clear that this current bail-out is a maneuver that was well-orchestrated within the administration. They want to bail out the bastards that got everyone in this mess to begin with, with almost no help for the actual citizens that are in the jam.

 

There are fiscal conservatives in Congress?

No. Evidently not in the White House either, contrary to the Republican platform.

 

They just claim to be in order to get elected.

Original Post by kathygator:

No. Evidently not in the White House either, contrary to the Republican platform.

 

lol, I don't think bush ever dared call himself a fiscal conservative in the last six or so years.

Hey Kathy, I can't get that link to work. #186

I clicked on it and it seemed to work. Dunno....

hmmm it worked in Classic...but not in Plus.

I googled the following and found it: estimate number of mortgages deemed to be at risk

fixed the link for you

Thanks Iggy. I'll read it when I get home. I couldn't find it by google either. But sometimes my work network is goofy.

Original Post by kathygator:

35: Only in the sense that their ability to go into debt is greatly diminished.

How did we expect the banking industry not to be deeply hit by the mortgage bubble, I guess is my question. 

 the mortgage bubble was created by supposedly brilliant investment bankers creating a security based on bad loans. They perpetuated bad credit right on up the food chain to the sharks. They did this because they needed some basis of wealth to make the economy "look good." Maybe they were "acting as if" they believed bad loans were good investments, they would be? Or maybe they had this Bail Out in the back of their minds all along.

Investment Banker: If we throw enough Americans out of their homes, then they'll let us take billions of dollars to "fix it."

President: Hmmmm. This could work.

Now, this is where I go really off the beam, whack job, crazy theory: I don't think the President understood just how stupid allowing the Towers to get blown down was going to mean to this country's wealth. Or perhaps as a country we are now a fangless giant. Our intelligence services could not find hundreds of assassins who took flying lessons for months or years before they executed this perfect plan. Of course, maybe they posed as drug dealers to get a free pass anywhere they wanted to go. I guess I believe it's possible that our security forces are led by such incompetence that they can't find anything but those "mooninites" under the El.

Wanda Sykes  take on things ( HILARIOUS!! Love her!!)

Original Post by ignayshus:

Original Post by kathygator:

171: shorts still artificially lower stock prices, don't they?

I mean no matter how well one corporation does at managing itself, doesn't short-selling make it look worse than it is, because the sector it's in is doing badly? Am thinking of Morgan Stanley here.

There's nothing artificial about it. People that buy shorts are committed to buying a stock at a specific price down the road. People that sell are committed to selling stock at a specific price down the road.

Naked shorts - commitments to sell something you don't own at a specific price is a legitimate concern, but ultimately it comes back to this:

The price people are willing to pay is artificial anyway. It always comes down to a gut feeling: am I winning or losing on this deal? Since finance is weak, REALLY weak, and nobody knows where the next bomb will drop people are understandably willing to offer less when there's a time factor involved.

But if you know that owners are essentially stuck with these stocks and they may be subject to nationalization, making these stocks near worthless, who's going to buy them at any price?

It just seems so counter-productive, which is why I think there's something big that I must be missing.

Sort of... but there are a lot of flaws in the above description.  I will detail in a moment.

I am definitely getting the feeling there is something big we're missing. Actually I get the feeling there is something that we're not being told. The argument for the bail out just doesn't make sense to me.

But then I am not certain how securities based on sub-prime mortgages could be considered a good investment...

I don't fully understand the whole thing.  I do see the history of how this happened, with deregulation followed by some well meaning encouragement of granting loans to people in neighborhoods that had been redlined.  Then the financial institutions are the ones who came up with all these products, like no credit check loans, to people they knew wouldn't be able to pay. 

I hope congress can hammer out a solution, because if they don't, or if it's the wrong one, we'll be in the deep doo doo for decades.

Meanwhile I'm trying to find out how hard it will be to live in my car.

 

Original Post by yountsmonster:

Original Post by ignayshus:

Original Post by kathygator:

171: shorts still artificially lower stock prices, don't they?

I mean no matter how well one corporation does at managing itself, doesn't short-selling make it look worse than it is, because the sector it's in is doing badly? Am thinking of Morgan Stanley here.

There's nothing artificial about it. People that buy shorts are committed to buying a stock at a specific price down the road. People that sell are committed to selling stock at a specific price down the road.

Naked shorts - commitments to sell something you don't own at a specific price is a legitimate concern, but ultimately it comes back to this:

The price people are willing to pay is artificial anyway. It always comes down to a gut feeling: am I winning or losing on this deal? Since finance is weak, REALLY weak, and nobody knows where the next bomb will drop people are understandably willing to offer less when there's a time factor involved.

But if you know that owners are essentially stuck with these stocks and they may be subject to nationalization, making these stocks near worthless, who's going to buy them at any price?

It just seems so counter-productive, which is why I think there's something big that I must be missing.

1) Essentially, a stock price is a function of how much the greatest fool thinks a company is worth divided by the number of shares outstanding.  The vast majority of corporations have overvalued stock prices.  NYSE loves buyers... they even skew the rulebook so as to bring in more buyers and deter sellers.  For more information on how they do this, read some material from Seth Klarman, Graham and Dodd, and Warren Buffet.

2) You don't "buy" a short.  Essentially, you are borrowing someone else's shares and giving them an IOU for the number of shares they lent you.  There is no monetary value attached on the loanership.  The shares you BORROWED are then immediately sold on the market and you now have $xxx in your margin account.  At some point in the future, you have to fulfill the IOU.  What a shorter is hoping is that if he borrowed and sold the shares at $10 each, then it will cost him less than that to repurchase the shares when he covers (ie. gives the shares back).

There is nothing inherently bad about shorting.  Instead of Buying and then Selling, you Sell, then Buy.  In the end, they balance out.  If we are going to reward people for correctly predicting that a company is going to go up in value, why shouldn't we reward those who correctly predict a company's value will fall?

3) Naked shorts exist when you aren't borrowing shares from anyone, but instead are essentially illegally selling shares that don't exist.  When naked selling occurs, SUPPLY increases without any change in DEMAND.  Everyone knows that this results in a decrease in price.  Tons of problems then ensue such as Failures to Deliver (FTDs) which screw everything up.  The Nasdaq Threshold List has tons of companies that have been attacked by naked short selling and therefore have tons of FTDs.

--------------------

To address IG's theory on what will happen when banning short selling:

If you eliminate short selling, essentially you are removing a large percentage of the SALES that will occur.  With fewer shares on sale, supply of the stock available to buy will decrease and assuming demand stays the same, the price will then go up.  As the price goes up, people who have not covered their shorts yet will begin to lose money and therefore cover their shorts by BUYING shares to fulfill their IOU.  This is what we call a shortsqueeze and it usually involves extremely rapid appreciation of share price.  Eventually, all of the short sellers will cover their shorts and the price will balance out higher than it was before.

Unfortunately, this price will NOT be a proper indicator of the company's worth and instead will be inflated.  Banning short selling ultimately creates bubbles.