For that reason, we also have “beginners” posts, most of which are collected on the Financial Crisis for Beginners page. The idea is that if you read all of those, you should be able to understand all the other posts. If you don’t – that is, if you find a piece of jargon in a regular post that is not explained in a beginners post – let me know and I will put it on the list of stuff to cover in beginners posts. (Right now there is nothing on that list.)

A couple of naive points…

1. Bailout, for the most part, did not expand credit market(s). Bailout was, effectively, a transfer of liability from private sector firms to public sector [transfer of balance sheets.] Foreign purchase of treasury bonds, without waste by government, is a method of expanding domestic credit market(s). Foreigners would have likely, but not necessarily, invested in U.S. credit markets if interest rates were high(er).
2. Inflation will occur, from printing of monies, lowering of discount rate, and lowering of federal funds rate, when housing prices re-appreciate. Crudely stated, a cost of current strategies will be realized at a future date.
3. Capital Purchase Program creates opportunities for influence peddling.
4. Changing yield of treasury bonds create profit opportunities in secondary market.

If economic growth is measured in dollars that are created by fancy financial derivatives, then we are not measuring anything real. We are finding that much of this so-called growth can disappear in the blink of an eye.

It is very hard to come up with a definition of something with intrinsic value. Neither money, nor real estate, nor oil, nor gold has any intrinsic value. Yet our modern world depends on having some measure of value. When whatever it is at the moment that we think of as the best holder of intrinsic value starts to lose value (meaning whatever the market says it is), then the world goes into turmoil.

Someone could win a Nobel prize for untangling this conundrum.

Also, your situation statement does not adequately describe the level of sleaze, fraud, and conflict of interest in the mortgage markets (origination, rating, securitizing, sales to buy-side) that existed in late 2005, 2006, 2007, and early 2008. When “liar’s loan” entered the common vocabulary in 2007, anyone who was paying attention then knew that a major solvency problem would hit US financial institutions.

Why did the banks offer mortgages to people who could not pay them back? Someone with an income of 30k, should qualify for no more than 90k, depending on debt load. 50k income, 150k mortgage ALSO figuring in the taxes, insurance AND Mortgage insurance if the down payment was less than 20%. A no down loan should never have existed, I’m not sure if 5% was a good policy…The blame goes on lax restrictions, greed and ……..well …….more greed.
Now we all have to pay the piper and it will take some time to pay off the mortgage that was put on OUR futures.

http://abyss.uoregon.edu/~js/images/m51.gif

maybe perhaps this has something to do with the current turmoil on our planet… perhaps it is time to seek a donor planet with new resources since earth’s capacity has almost reached it’s summit or carrying capacity for humans…

dan
master of arts
educational technology
universe city of northern iowa alumnae

(much of my knowledge of critical thinking outside of the box i attribute to frje echeverria, my painting professor) who taught me that the visual learning world of seeing/looking/perceiving is just as or more important than the verbal/talking world of thinking/learning…sometimes our best ideas or solutions come when we quiet our minds and turn off our thinking…. i.e. carlos castaneda “the art of dreaming”

Many shall be purified, and made white, and tried; but the wicked shall do wickedly: and none of the wicked shall understand; but the wise shall understand. Zech. 13:19, Rev. 14:13; Ps. 1:5

And he saith unto me, Seal not the sayings of the prophecy of this book: for the time is at hand. 10:4;
Dan. 8:26

just a few thoughts to consider in our neo post-modern world ;-)

To respond to your questions: first, it is much easier to be in my chair than in Henry Paulson’s. I freely admit that. You are right that we attribute a lot of significance to the decision to let Lehman and AIG’s creditors lose their money. However, while that was the precipitating cause of the panic, protecting those creditors in particular would not necessarily have prevented the panic. One could argue that the crisis would have just spread to the next investment bank (Morgan Stanley in this case), and it’s not certain that a string of serial bailouts would have prevented some type of credit crisis. And I think it is highly likely that the US at least would have ended up in a recession in any case. However, it’s almost certain that the intense panic of September 15 to October 15 deepened the recession.