The question is still valid: if mortgage rates were 2% higher, would people have paid so much for houses? But I don’t think you can answer the question that quickly. If you believe that the housing bubble was caused solely by option ARM loans with artificially low payments for the first year, then maybe. But a lot of the buying was being done by people with prime mortgages who were actually looking at their cash flow to decide how much house they could buy. When 30-year rates are around 6%, an increase of 2 percentage points means roughly 33% higher payments; put another way, instead of a $400,000 house, you can only buy a $300,000 house. (I know these figures are off because you have to look at the principal as well, but I don’t feel like looking up a mortgage calculator at this hour.) That seems like a big difference to me.

Nobody forced American’s because it was forced on us. You see, China never lent American’s foreign money. China lent American’s American dollars. Let me explain exactly how this worked…

American’s buy Chinese goods with US dollars and US dollars go to China. In China, no business or person is allowed to keep US dollars, they are forced to hand them over to the Chinese government at a fixed exchange rate. Now the Chinese government has a couple options: they can buy US goods with their dollars; they can buy dollar denominated products like oil; or they can unload their dollars in the foreign currency markets. Because we have a trade deficit with China, they always end up with left over dollars so they need to put them somewhere. Well since they don’t want their renminbi to appreciate in value they can’t or wont exchange them on the foreign currency market which is exactly what would happen if they did. SO, what does China do with all those US dollars, they ship them over to the US to buy into US investment and treasury markets. So, yes China did force those dollars on us because they choose NOT to allow the renminbi to appreciate by dumping them on the foreign currency market which is what true capitalism calls for. It does take two to tango!!!

We don’t make anything in the US – we consume. Tightening the belt doesn’t work when it’s wrapped around our throats, as we’re seeing now. And yet you’ve got people rooting for the demise of the US auto industry b/c they hate unions. I don’t get it.

As for boosting China’s domestic demand, of course, that’s China’s plan. It will also mean the destruction of the US if we haven’t brought back a manufacturing base by then. Tick tock.

But no one seems to understand the difference between investing and speculating. And how this crisis has has its seeds in 30 years of forgotten, web-like, interconnected history. There is some kind of amnesia afoot and it’s very strange indeed.

To refresh all you young whippersnappers:

The recycled petrodollars of the late 70′s energy crisis helped feed the Japanesse bubble/burst economy which simulatiniously scared the hell out of China and started them down a path of economic changes that damn bubble and burst feed dollars back into the US and abetted the asian currency crisis of the late 90s which is connected to that dislocation that fed more fleeing wealth back to the US for diminishing returns on bonds, which gave a good mojo to jack up the dot com bubble that almost but not quite got a chance to bust and beal before it was rescued by greenspan’s reckless, mindless, vacuuous response to 9/11 and the half decade of free money that forced everyone to take that dough, swallow that dough, choke on that dough. It was Free Money as Patti Smith says.

But back to the forgotten definition of investor and speculator. An investor makes a return on cash flow. A speculator makes a return on capital gain. It’s a simple distinction. An easy one really.

But this last 15 years has been hell on an investor trying to make a real cash flow living. Impossible in fact.

Investors, and I lump my self in this class, could only speculate. We could not invest. There needs to be adequate cash flow returns to investors in order for there to be saving. Why save if money is free and there are no rewards for saving? Everyone has to become a speculator. It’s not so crazy. It’s not so mysterious. It’s not so amoral. Think it through. Bank savings account — 0.00125% return or 2% mortgage bet on a house price appreciation. I’d still take the 2% mortgage. So would you.

You guys are overthinking it. Over the last 20 years you were burned if you saved and rewarded if you speculated.

No one seems to know the difference anymore. How sad.

Oh, and China still remembers the Opium Wars like they were yesterday. If I were Chinesse, I would want to get even…… but that’s another post.

If the US didn’t start the Greenspan credit expansion in the first place, China wouldn’t be able to accumulate such large Forex reserves in the first place. Japan also contributed with the carry trade.

There are valuable lessons to be learned (or more accurately relearned)from a careful analysis of events that lead up to the current financial crisis. If we don’t analyze what went wrong and take corrective action, we will soon be confronted by another similar crisis (the old lessons of history argument).

The principal economic view of the Republican party since Reagan was elected President has been that unfettered, unregulated markets are efficient in allocating resources and lead to stable equilibria in markets. Acting on this belief, Bush allowed the opaque unregulated shadow global banking system to evolve into a behemoth(on the order of $10 trillion in assets) large enough to challenge the regulated banking system and take significant market share. In the end, this shadow banking system came to pose enormous systematic risks to the global economy (see: http://www.newyorkfed.org/newsevents/speeches/2008/tfg080609.html for a discussion by Geithner of the nature of this risk) and proved to be unstable in the face of a series of relatively small shocks (the sub-prime crisis). The Lehman bankruptcy caused a massive run on the then teetering shadow banking system that required a massive government intervention in capital markets to prevent the total collapse of the global financial system.

The are a lot of lessons that needed to be relearned here. The process begins by analyzing what went wrong and isolating the primary causes of the crisis.

Can you explain how the dollar value gains or loses against other currency? Is it that simple other countries try to buy more dollar and keep it as reserve? In this case US economy is in recession and why there is a demand for dollar now? Or do other countries buy US treasury bonds now that put the dollar on demand now? How does dollar vaues get affected in respect to oil price?