The Housing Bubble

And Harding died in August 1923. So…Coolidge gets the credit? Or both?

True - Woodrow’s the perp.

“…which directly lead to WWII.”

Did you mean ‘indirectly?’ The German invasion of Poland is what directly led to WW2.

Nah. Backlash from TR’s misguided trustbusting. (semi-snark.)
Sheesh you guys. Every morning we get this didactic blame-fixing, and every morning you miss the larger picture. Governance is messy, imprecise, and necessary…and nothing happens in a vacuum.

Laton McCartney’s “The Teapot Dome Scandal,” is a wry and prescient account of the Harding administration’s all-too-familiar bumbling.

Woodrow was also a mean sonofaB to women.

Wrong again, Skroodle. Once a treaty is approved by 2/3 of the Senate, the President has no role. The treaty is approved.

Not to rub it in, but Harding couldn’t have signed the Treaty of Versaille. The U.S. Senate rejected the Treaty of Versailles on November 19th, 1919.

So a bunch of presidential aides taking bribes, during an administration that lasted half a term, caused a great depression 10 years later?

That isn’t what we’re talking about, and never was. Perhaps you should try, you know, reading the other comments.

I was trying to strip away the layers of sarcasm and name-calling in your post to see if there was any substance there. If you have a point to make, maybe you could just say it straight.

Oh, I think my point is fairly easy to understand: Harding was an idiot, not some misunderstood free market genius. Doing nothing and having it turn out not as bad as it hypothetically might have been is not astute policy making, it’s dumb luck. Or maybe it was nothing at all, since the other possible outcomes are hypothetical anyway.

If you want to hold up Warren Harding as an exemplar of laissez faire leadership, feel free. That’s about as compelling as arguing that real estate always goes up.

As far as substance goes, you’re the one making the argument that flies in the face of historical consensus. Why don’t you give us some evidence that this revisionism you seem all fired up about actually amounts to a hill of beans?

So ET, you are not fond of laissez faire leadership. You prefer the current bunch in there taking over everything in sight and printing more money than we can ever hope to pay back. That’s cool…you should just come out and say it.

“Government big enough to supply everything you need is big enough to take everything you have” — some white guy

Because gold is some peoples bible.

What is - some folks feel compelled to pick up the slack for Alad?

Gold is for printed circuit board contacts, electronic components, and grills.

It matters not whether it is gold, what matters is that the SUPPLY is relatively fixed and not able to be counterfeited by government.

Gold happens to be impossible to counterfeit (so far) and the relative above-ground supply only grows by a rate of 1-2% per year (far less than productivity gains).

I go on these rants because I know that counterfeit money (whether legal or not) undermines society. Ignorance, if allowed to persist, will prevent lasting solutions from developing.

Everyone that comes to this board is ranting about the ignorant masses buying houses they cannot afford and not understanding compound interest… why bother? Because you hope *someone* will read it and learn. The fact that a housing bubble (as we know bubbles) would be IMPOSSIBLE without fractional reserve lending (or a printing press) is the ULTIMATE realization anyone who despises bubbles (everyone here) must make. To end the bubble after bubble economy, we must end fractional reserve lending and shut down the printing presses!

Don’t forget teeth! Gold is a good material for crowns.

Gold is good for door knobs at the Sultans new airport in Saudia Arabia. Over 1000 gold door knobs.

Just found out, Martha told me, gold doesnt show finger prints and smudges.

Just wanted to share that homemaking tip.

Your welcome.

hehehe

I do not believe that fraud is the root cause of debt cycles. It may abound when easy money is the rule, but that does not make it the cause.

Credit cycles are the result of mob psychology. False expectations of limitless gains leads to credit bubbles. Hard limits force default and dissillusionment. Rinse and repeat.

“False expectations of limitless gains…”

That is a pretty good explanation for the 1849 California gold rush, as well. No credit is needed for manias to happen.

The recession problem isn’t solved by moving to gold, or any other standard of currency, it’s demand deposits. Banks should charge for security (similar to a savings deposit box) for demand accounts, and should only finance loans with fixed term borrowings. The problem with that cure is that loans become very expensive, so there would be far less economic activity (and specialization) in the economy. That’s a heavy price to pay for not having recessions (possibly heavy enough that accepting recessions/depressions is the lower cost event).

A teller once noticed my pattern of taking some cash everytime I deposited my paycheck, and immediately going to my safety deposit box. “Ya know, you’re not allowed to put cash in the safety deposit box.”

I asked why the hell not. She didn’t have an answer.

“The problem with that cure is that loans become very expensive, so there would be far less economic activity (and specialization) in the economy.”

The problem is that people put far too much emphasis on “economic activity” and far too little emphasis on “economic health”. The two are increasingly at odds with each other.

IMO the correlation between economic growth and lending is quite loose - if valid at all. Certainly credit contraction causes economic pain - this is however because business has become dependent on credit for its survival - much the same way the consumer has.

If someone lives in an meth addicts’ world, and occasionally sees someone try to quit the addiction, and the pain caused by the act of attempting to quit - this someone would therefore come to the conclusion that addiction to meth is a good thing. It is of course an incorrect conclusion.

The problem with the argument that less money available for lending will result in a “less prosperous” economy ignores the fact that the money not used for loans WILL be used for other uses. It ignores the fact that without a stable supply of money it makes economic calculation impossible so people make UNSUSTAINABLE business decisions.

Wealth is finite and cannot be created out of thin air. So the question becomes, how can we increase net wealth? Transferring value from person A’s savings via money printing (without their permission) to give to debtor B while creditor C takes a profit results in A losing wealth, B investing using false signals (interest rates too low to be sustainable), and C taking a profit for doing nothing means that you cannot get ahead by printing money via fractional reserve lending. Ultimately the COSTS will be far more than the short-term gain.

Comment by VirginiaTechDan
2009-03-30 07:33:44

“If anyone loses money in an on-demand account at a bank, then the owners of that bank should be thrown in jail for THEFT”

Dan, your time posted comments noted above and mentioning THEFT sounds very MUCH like an article which I read earlier today without the possible credits or an identifying link to the authors.

Just a point and feel free to correct me if I am wrong

Mikey,
I can give you my word that I wrote that myself off the cuff. Anytime I quote anything on this blog I clearly identify its source. Could you provide the source of the article you read? My ideas are not exactly unique and are held my many bloggers.

“Everyone benefits from the lack of FRAUD except the fraudster and big-government.”
Them, and the people borrowing at north of 15% interest, which would be everyone under 100% reserve banking. At what interest rate would money in a 100% reserve system be leant out, giving the banks profit while covering their overhead?

“Wealth is finite and cannot be created out of thin air.”

No, it is created by hard work and good economic policies. I don’t really get the appeal of a “gold standard” as it is being discussed in this thread. I cannot accept that it is finite.

What I will say is this: I attended technical school with a student loan and subsequently worked 8 years as a field engineer. I then went through the oil bust in New Orleans in 1986, and then did undergrad Physics at UNO with a combination of Pell, loans, and savings. I then went to grad school. If it weren’t for the advantages of inexpensive loans I would still be changing tires and batteries at Sears.

I want credit available for productive endeavors and beneficial enterprises. If I get that, then I’m all in.

Roidy

ACH,
Credit will be available for productive endeavors… but the key for productive endeavors is that they are profitable. If lending you money for your education is more profitable than other endeavors then it makes sense for me to lend it to you.

If going to school would not be profitable due to high interest rates (lots of people competing for the finite savings which must be produced before they can be consumed) then perhaps you should consider other more profitable choices.

If the monetary unit must be devalued to enable lower interest rates, then all you introduce is an accounting gimmick that hides losses (unproductive uses of limited capital).

One last note, 100% reserve lending is what you do when you lend a friend money for dinner. Fractional Reserve Lending is when you print new money to lend your friend that you promise to destroy when your friend pays you back.

A large number of people get a perceived benefit of lower interest rates, but lower interest rates only serve to cause people to go into debt for unprofitable businesses after you unwind all of the accounting tricks and look at *real* returns vs. nominal returns.

I would rather pay 15% on a 100K loan than 5% on a 300K loan. If everyone has cheap debt, then all you get is inflation and the perception of more wealth than is real.

VirginiaTechDan,

Your word is good enough for me Dan I DO stand corrected and apologize. If I encounter the article which reminded me of that, I will let you know.

You are correct about a lot being written in much the same way. Perhaps I try to read to much of it and then it ALL begins to sound familar. Again …sorry

“…….you should consider more profitable choices.”

Which, by your standard, would mean that the ONLY reason to go to college for the past 15-20 years would be for finance and real estate. Which seems to be where all the “best and brightest” have gone.

And we all know how well that’s working out.

This utopian “we wouldn’t have all these problems, if we were on the gold-standard” talk is getting tiresome. I’d like to turn back the clock on a lot of things, but wishing for it isn’t going to make it happen. And if it did happen, somebody would come along and make decisions that would screw it up.

Um, I was not suggesting anything about outlawing debt.

The depositor is a creditor and the banker the debtor.

The banker is using leverage (depositor’s money) to make new loans (mortgages). Yet more debt.

If you could not see that I specifically allowed for debt and interest then I must question your reading comprehension.

If I was selling tickets on an airplane then I am selling you a debt (one air fair) that will be paid months in the future when you take your trip. Now, if I sell 10x the tickets because “most people end up rescheduling” then I have committed a fraud! I sold 10x as many promises as I was able to deliver on. My fraud can only continue as long as people keep rescheduling. Bankers commit the same fraud with gold/silver and this is what I want to outlaw.

Not going to happen.

I’ll just open my own local informal lending where I will do the leverage thing. So would any other “smart businessman”.

FPSS,
By smart “businessman” you mean fraudster. In a society where money isn’t printed out of thin air a bank has two options: 1) issue warehouse receipts payable on demand. 2) issue debts of the bank. You are now a peddler of your own debt and you are paying interest for your debt unless you “naked short”. The buyers of your debt know they carry the risk of default. The depositors with receipts are giving you their property for safe keeping.

A bank that borrows everything from depositors and lends it all as mortgages is already infinitely leveraged as they had 0 money in the game.

Imagine you run a secure storage business and you let people deposit their valuables. As a side business you borrow as much money as you can and attempt to lend it out at a higher rate. You are essentially betting that other lenders over-estimated the risk of lending to your clients. (Otherwise your clients would borrow from your own lenders). Now your lending business fails… you are still not the owner of the contents of the storage units nor can you use those contents to pay off your debts without committing theft.

Now imagine that you have your own storage unit that contains 100 gold coins. You print out receipts and go to town and tell the local business that he can take this receipt and go pick up his gold coin at his convenience. You go through town and buy 1000 gold coins worth of stuff. That evening everyone in town comes to get their gold only to discover you defrauded them. This is fractional reserve lending!

“This is fractional reserve lending!”

and where or when was it ever different?

If fractional reserve lending means banks lend out 10x as much money as customers deposit, why do bank balance sheets show Loans to Deposits ratios of 0.5 to 1.5 instead of 10?

Blue Skye I keep asking the same question. When and where has this ever happened. Still haven’t gotten an answer.

There are 100% reserve banks in existence today. The history of banking shows that the original goldsmith would store gold for people. Then he realized that people started trading his receipts so he issued more from nothing and made a profit. The people caught on to the fraud, but then wanted “in” on the profits and government legalized a certain reserve requirement.

Lucy, when we were on a gold standard and you deposited 1 oz of gold, the bank could then write 10, 1oz bank notes. When you deposit a bank note, they must reverse the reserve requirement so a 1oz bank note only increases their reserves by 1/10 of an oz. This is the difference between high-powered money (gold/treasuries) and low powered money FRN.

The fact that we are so far removed from the gold/silver that people have started treating notes as money, instead of a debt, is what causes much confusion regarding reserve requirements and fractional reserve lending.

The Bank of Amsterdam
was a good example - a full-reserve bank that was profitable and extremely stable from 1609 until the 1780’s when - surprise - they started going fractional reserve by lending their reserves to the city of Amsterdam for its use.

There are no known examples today.

Simply put - there’s too much power in the hands of the greedy in order for it to be allowed to happen.

“There are 100% reserve banks in existence today.”

Not sure I’d say that. Got some names?

I’ve heard things like goldmoney.com, but these aren’t really “banks” in that they only keep metals in reserve, and metals aren’t legal currency. In essence - full reserve banks in the U.S. (and I think every country in the world) are outlawed, by virtue of the legal and exclusive use of a fiat currency (or fiat currencies) in that country.

Only in a country without a fiat currency can a true full-reserve bank exist, where the bank actually stores legal currency in full reserve.

Lucy, with regard to the reserve requirement.. if the bank is required to keep 10% in reserve, how do depositors lose 100% when a bank fails? (Ignoring FDIC for now).

Blue Skye has probably read a website where they misrepresent fractional reserve lending, and they think that they are now an expert.

A fractional reserve of 10% would mean if someone deposited $100, you could lend out approx. $81. That would make your reserves $19.

Reserves = $19/$181 = .10

VirginiaTechDan, i would appreciate it if you could give a simple and direct answer to my question. Thanks. This is the question

“If fractional reserve lending means banks lend out 10x as much money as customers deposit, why do bank balance sheets show Loans to Deposits ratios of 0.5 to 1.5 instead of 10?”

There was an indian tribe that I read was setting up a 100% reserve bank. For the life of me, I cannot find it on Google any more.

The reason that you don’t find them today is because they cannot compete against printing presses. Their interest rates would have to be higher because their supply is not printed from nothing, but requires depositors to actually save first.

Gresham’s law says bad money will drive out good money. Thus fractional reserve banking drives out 100% reserve banking.

Lucy, the banking system is very complex today, but the answer lies in the difference between high-powered money and low-powered money.

When the FED prints money it is high powered, the other banks can use $1 of treasury debt (purchased by the FED from nothing) to lend out $10 of loans. The reserve ratio was originally the ratio of physical gold to gold notes. So if you mined gold, took it to the mint to coin it, and then deposit it then you would have increased the monetary BASE. From that BASE the banks could issue 10x the BASE meaning there are 10 bank notes for every 1 coin.

Once the BASE has been fully expanded via fractional reserves to 10x the gold supply then it can no longer grow (and a chain of defaults starts as there is not enough gold to pay the interest on all of the fictional gold). The fed responds by monetizing treasury notes. The FED has no reserve requirement and can write as many checks as it wants to to buy everything it can until FRNs lose all value.

Now that we are not on the gold standard the reserves is referred to as the monetary base which is a very small fraction of the money supply. This monetary base has doubled / tripled with recent fed action, once the fractional reserve process is give the chance to work its magic the money supply will also double.

Austin, did you not read what I said about lending under 100% reserve? Time deposits can be lent, on-demand deposits cannot. Any system that ONLY uses gold/silver coin is legit. EVERY BANK NOTE must be 100% backed by gold UNLESS it is marked as an unbacked DEBT of the bank. The 100% backed bank note has a different value than a DEBT of the same bank. To represent a DEBT as real gold on deposit is FRAUD.

I can lend you a gold coin without increasing the supply of gold coins! If I give you an IOU payable on demand for a gold coin I do not have then I commit a fraud and create the *perception* of more gold and therefore inflation.

What is so special about *money* that cause people to lose all concept of reality? When you lend a house, your car, etc they are all 100% backed… yet when a bank lends money it can be different? Money is just a commodity people!

You’re now talking about fractional reserve banking with gold backing.

If you lend me a coin that someone else has deposited, you HAVE increased the gold outstanding.

If the person you lend a coin to puts their gold into your bank, how much deposited gold do you then have? More than the amount of gold. Therefore you have fractional reserve banking.

Austin,
The key is that TWO people do not have CLAIM to the gold at the same TIME. It does not matter how long the chain of lending/spending is… what matters is the simultaneous purchasing power. The money available to bid up goods and services. As soon as you put money in a CD you have purchased savings for 1 year. Your money is no longer available to you.

Please explain the difference between lending housing and lending gold as far as “fractional reserves” are concerned in both cases.

Exactly, a non fractional reserve bank (or a fully reserved bank is essentially a closed end bond mutual fund). “Depositors” don’t have demand rights on their deposits (in any currency be it gold, US dollars, euros or trade credits), and when a loan is made it doesn’t create dual claims on the original money. In fractional reserve banking a loan becomes a second claim on the same currency, since at some group of institutions two or more people have a checking account with the loaned amount which they consider available money (the trick is that they will rarely actually use that available money).

It would result in vastly less volatility in an economy, but the cost is high. Fully reserved banking (especially if it’s tied to gold would require a massive decrease in trade from current levels).

I think of fractional reserve monetary systems essentially like a highly engineered bridge, vs fully reserved systems as a very large plank. The highly engineered bridge operating uses vastly less materials, but will fail if any component fails. The plank won’t fail, but requires substantially fewer bridges being built with the same intial resources.

There are pros and cons to any system, and my suspicion is that since fraud has occured with every bank that has attempted to operate on a fully reserved basis, it isn’t possible to make a fully reserved system that lasts (in a fully reserved system, it would be extraordinarally profitable to cheat). So, I think it is better to allow fractional reserves, but to maintain very strict requirements on all institutions that become fractionally reserved. Then arm the population with the idea that since everyone knows that recessions/failure will occur eventually, they can better take the precautions they deem prudent. I blame a decent amount of the problems we’re dealing with today on the existance of the FDIC which caused people to ignore that fractional banks can and do fail and if enough fail most governments couldn’t honor their demand deposit guarantees.

mathguy, definitions are important so let me clarify.

My definition is every bank note is backed by a weight of gold/silver. (No naked shorting the metal)

If you remove bank notes from the equation and force everyone to physically exchange gold/silver coins you can still have lending with no FRAUD and no changes to the gold supply. In fact, there is no need for bank “reserves” if you use gold coins because either you lent the coins to the bank for a fixed period of time (during which the bank can do what ever they want), OR the bank is storing *your* gold for you to aid in checking/transactions. In the second case, the money isn’t the banks to lend out.

The fact that gold/silver are not even in the equation today is the direct result of too many notes for too little gold. These notes could never be redeemed and the government violated contract law when they closed the gold window.

VirginiaTechDan, let’s do a hypothetical example with no notes, and a banking system that was based on gold coins.

Say I deposit one gold coin in the bank, on a time-deposit contract that guarantees I will not ask for it back for one full year. The bank then turns around and lends it out on a six-month contract, because they know they will have it available for at least that long.

How is that not 0% reserve lending? I get your point that they have not committed to lend out money that someone may walk in and demand because it was in a demand-deposit account.

But even if the bank is required to have another gold coin in reserve in order to make the one-coin loan, that’s still a 50% reserve policy. They’re lending one coin, on a base of two coins.

How would you characterize the policy you are advocating in terms of reserve levels?

Ok, the major disconnect seems to be what defines “reserves”.

If I lend you $10 at interest, you would think I was crazy if I asked you to keep $1 “in reserve”. You would only borrow $9 because that last $1 would be doing neither of us any good. When people borrow money from others there is NEVER any reserve requirement because the expectation is that you would pay off the principle rather than pay interest on money that you are not allowed to spend.

When I lend money to the bank (or anyone) I request an interest rate that reflects the probability of default. I do not put a reserve requirement on them. If you want to put terms on the money you lend a bank, then you put those terms in a contract. In this case you are a creditor to the bank and the bank is the borrower. No need for government laws/regulations here.

If I want the bank to facilitate transactions and provide a secure vault for savings/checking that I am not explicitly lending to the bank, then they must have 100% reserve and cannot lend this money. In this case the bank is a trustee for the actual owner of the money.

Banks realized that most people never touched the gold put in their trust, so they decided to issue more receipts. They would issue 10 or 100 receipts for every 1 oz of gold because so few people actually withdrew the actual gold held in trust. Greedy banks would issue so many receipts that people began to question whether the bank was playing fast and loose with *their* gold and the result was a run on the bank.

The fractional reserve scam was so profitable that the bankers got government to legalize “conservative” fractional reserve lending. No matter what way you slice it, the banks practicing fractional reserve banking are naked short actual gold/silver.

Once again, if reserves were as you attempted to define them (a percent not re-loaned out) then even if all of the banks loans failed depositors would get back 10% of their money. Obviously this is not the case as depositors in failed banks would lose 100% of their money because the bank lent out 10x the amount of gold actually deposited (creating inflation).

Lets make one more point about FDIC? If there is a 10% reserve requirement, and a massive 20% of the loans go 100% bad, then depositors would only be out ~15% of their deposit. They would not be “wiped out” and in need of an FDIC bailout!

FDIC is simply a promise to create high-powered money to cover the naked-short positions of banks. As a result individuals no longer concern themselves with whether the bank actually has *reserves* for money held in trust because they know reserves can be printed at will!

Prime_Is_Contained
I think you’re confusing reserves and capital.
Capital in banking is the surplus that covers credit risk. Reserves are the ratio of gold coins to people who believe they can spend a gold coin. In your example the bank is fully reserved (only the borrower believes that tomorrow he can withdraw a gold coin from the bank). The depositor cannont until the year is up. However, the loan (if it were the only parts of the banks balance sheet) is 0% capitalized (since if the borrower stiffs the bank, the bank will not have the depositor’s gold coin at the end of the year).

Fully reserved banking means that for each gold coin in the vault, there is only a single person who can rightfully say, I can withdraw or write a claim on a gold coin. Modern banking doesn’t employ that feature (because most people and firms almost never fully draw down their demand deposits). In modern banking typically 10 people believe they can spend a dollar for each dollar in the banking system’s vaults.

A fully reserved bank would still need capital (or non deposited/lent funds) to ensure that they could repay their creditors in the event of a misjudgement of credit risk (which is the banker’s sole purpose in a fully reserved bank system).

Dan,

There is a problem with the definitions you are using. We deposit money with a bank at an interest rate with two expectations:

1) The bank will responsibly lend the money we don’t immediately need access to in order to generate a return that we can get in the form of interest. You are referring to this as “time deposit” or “CD money.

2) We should be able to retrieve a portion of our money at will to use for whatever purpose we want, and the bank should keep it safe in the meantime.

This is how the reserve requirements comes about. If we didn’t want the bank to pay us interest, we would just put our money in a safe deposit box (to be more secure than our mattress at home.

Reserve ratios come about because we recognize that we don’t need ALL our money all at once. So we let the bank manage our “excess” capital, and they get a return, and we get a return in the form of interest. We recognize that with the law of averages with many people, we can let the bank be even more free with lending. When I deposit $100 I may only ever need $50 at a time. If I am the only customer, then the bank can only loan out $50, so that I can get the other $50 out.

If the bank also has another $100 from another guy, they can keep $25 “on reserve” from each of us and have the ability to put more of our capital to work, giving us an effectively higher interest rate.

That lets the bank go from a 50% reserve to a 25% reserve.
Now if there are ten people with $100 each, you can lend all but $10 from each of those people’s account, and now up to 2 people at a time will be able to take out half their money.

In reality, all ten will be putting $10 in an out constantly instead of $50 at once. Everybody knows this, and implicity agrees. BUT, when people think the bank reserves are insufficient, they break this implicit agreement and pull all their money out. When everyone does it at once, that’s a bank run.

If you are arguing for something different, then you are just arguing that banks should provide no other service than safety deposit boxes.

The difference between a safety deposit box and a 100% reserve checking account is the ability to write checks, perform online banking, and withdraw at any branch.

Still no one has attempted to answer my question:

With out committing fraud or printing money, how can two people both believe they have claim to the same dollar at the same time? How can a bank go belly up and depositors lose ALL of their money when only 10% of the loans go bad?

FWIW, I agree with you and totally understand what you are saying, VT Dan.

What some don’t seem to understand is that the demand deposits (fully liquid funds that you can withdraw at any time) are not loaned out, and will not earn interest under your definition, right? Also, one might even PAY the bank to secure this money and offer the checking and other services of which you speak. Am I correct?

What everyone forgets here is that inflation is vitally necessary for sustainable capitalism. If your monetary system can’t grow with your productive capacity you get deflation. Deflation puts a downward pressure on wages and profits. A downward pressure on wages causes human beings to hate the system. Human beings will change the system to allow for inflation to boost wages (even if not purchasing power). If human beings don’t feel like they have the opportunity to have a decent standard of living, when others around them do, they will attempt to “take” the standard of living of those around them out of a desire for “fairness”.

Moderate inflation, giving folks an annual “COLA”, is necessary. Over the last 8 years, wages have been stagnant and Obama happens when human beings feel that they are being treated unfairly.

Remember, human being’s perceptions are the key to all economic activity. And human being’s really aren’t much different than chimps when it comes to the social hierarchy.

Yes, these days not a pleasant topic for the loan-engaged.

even my congress critter wanted to feed me manure, turn out the lights and raise me like a little mushroom because I’m ..so cute?

So cute…
Yes, that must have been it, for sure.

I didn’t claim to be salmonella-proof just that you should wash the eggs with running water.

The beer must’ve killed a few brain cells.

I didn’t claim to be salmonella-proof just that you should wash the eggs with running water.

I know. I was just provoking yer. It seemed fun, at the time.

Are nominal and notional two different adjectives for the same value concept?

Yeah, same thing.

When I look at the entire CDS Meltdown I find myself wondering, how would this be any different than if any other insurance company wrote policies for… whatever, and everyone decided to drive their car off a cliff, or committed suicide ( the day -after- the exclusion clause expired ) ? At the SAME time?

What insurer has the financial strength to weather that kind of storm? No doubt, these were dumb bets and the guys that crafted their risk models need to be taken out and shot. But how could they have known that ALL housing markets from coast to coast would decide to crash at the same time? So much for geographic diversification?

Professor Bear in your original post just said “total value” do you know what this refers to? As FPSS points out Exposure under derivatives is the unwind price, whereas the Notional Amount is just the pegged amount of debt the deriviative is tied to (e.g., you swap 10m of floating debt to a 4.5% synthetic fixed rate - 10m would be the Notional Amount but Exposure (simplified) = what other providers would pay or have to be paid to take over the contract which is essentially the present value of the difference in interest rates between 4.5% and what the swap would price for today applied to the Notional Amount. Exposure or mark-to-market value does not become applicable except upon early termination or for collateral posting obligations. Also swap providers are hedged on the backside (i.e., a huge portion of derivative trades cancel out Exposure or risk on other trades). As a result, such aggregate numbers can be misleading.

The real elephant in the room is “counterparty risk”.

You don’t know if you are truly hedged or not. Particularly when the counterparty is a hedge fund or otherwise loosely regulated entity.

Also, the margin posted is too small.

A lot of these derivatives worked to amplify bets not mitigate them.

If a company failed, the max loss is what the bondholders + shareholders suffer. If you allow arbitrary entities to underwrite contracts against this company, it amplifies it. The max loss can be many many multiples of the original company.

Bingo on the increased risk. Whenever I try to explain this stuff to peple in the office who don’t understand it, I always point out that without CDSs there is limit on how much damage can be done to the economy when an actual company defaults on an actual bond because there is a limit to how much money the market will lend to any one company. It might be a lot, but it is limited. There is no effective limit on the number of people who may be wiped out because they took on the insurer side of a CDS. Now, of course, someone else is getting that money, but if you are worried about the person who took on the insurer side (say a pension fund) then there is a lot of trouble potentially out there.

And all sorts of other problems if you bought the insurance side of the CDS as a hedge and your couterparty doesn’t pay up. You thought you had converted that risky bond to the safety of a long term treasury note with nothing but interest rate and currency risk. Guess what?

polly,

Right, and any “arrangement” assumes that not each-and-every contract will come into play ( basically at the same TIME! )

An event along the order of The Great Chicago Fire would wipe out a number of insurers. So we can jump up and down and say “It’s the Housing Bubble you dummies!” but exposure of this kind ‘could’ have arose in any number of different forms?

“What insurer has the financial strength to weather that kind of storm? No doubt, these were dumb bets and the guys that crafted their risk models need to be taken out and shot. But how could they have known that ALL housing markets from coast to coast would decide to crash at the same time? So much for geographic diversification?”

Considering how out-of-whack housing prices were with incomes across the planet (not just our nation), they should have seen this coming. But the easy money was still rolling in, so they kept using stupid “models” that assumed “housing only goes up!” at a rate forever higher than incomes (which haven’t gone anywhere in a decade.) Brilliant on their part - and we get to pay for it.

Don’t a lot of these derivatives expire without and “event” taking place? Also, one party’s loss is another’s gain, right?

Yeah, derivatives are purely zero-sum.

Pondering The Mess,

Oh I absolutely agree, and I’m in no way defending AIG or any of the other players. I just got curious over the last few weeks as to what ‘could’ have been?

To a certain degree they were banking on “rational players” in a game playing scenario where the players ceased to be rational? How is that any different than everyone on I-5 from Bellingham, WA to San Ysidro, CA taking their hands off the wheel and flooring it?!

How is anyone to insure against totally irrational behavior?

Derivatives are zero-sum until one party doesn’t have the ability to pay up. Thus why the government bails out AIG. As long as they keep the bailouts up, they can ensure the zero-sum nature of the bets. The problem is, people placed bets that they could never cover if they were wrong and didn’t properly hedge those bets.

How does the zero sum stop when the counter party goes bankrupt? The broke party that owes stops paying and the one that should have been paid doesn’t get paid. Still zero sum.

“counterparty”, quants, CDS and the rest of this FIRE jargon sounds like a gov’t lawyer or the military “hiding the ball = truth” from the public. Reports from the MSM about as useless as the US Saigon, VietNam 5 o’clock Follies. SITREP follows;

3 KIA = Auntie Em, Lion and evil witch wasted by bankers light ARMS FIRE or quant projectiles.

1 WIA = Nikko Flying monkey Fund downed behind counterparty lines by kite flying Madoff Munchkins.
(Hopes to be rescued by Timmy and Special Ops Bailout Team.)

4 MIA = Dorothy, Glinda, the Great Oz and the I Trillion dollars last seen dragging pallets of shrink-wrapped $100’s back onto C-130’s and fighting with IRS at in or around belligerent Swiss banks.

“We have met the enemy and he is US” —Pogo

And the Ford Family might find themselves competing with a GMC that has been downsized, had it’s labor costs dramatically reduced, it’s debt & retirement burdens erased and run by top notch engineers & designers instead of financiers.

Ford could end up toast.

I take that back. Ford is toast. They might just pop-up a lot earlier and more burnt than planned.

…or 30 years ago building cars that could compete with the Japanese. (trivia question of the day: Who taught the Japanese how to build quality cars? Hint: TQC))

Now they are seriously considering shutting down Saturn, which is their only real hope of competing with the quality of imports, but keeping Pontiac.

As for the Volt, it’s a noble effort, but once again a day late and a dollar to high. The Honda Insight is going to eat their lunch.

3 strikes, yer out.

Chrysler needs to die as well.

Frankly, the only things we’ve lead the world in innovation for the masses has been… fraud.

Ecofeco, Dr. G. Edwards Deming taught the Japanese how to build quality cars!

Err, that is “W.” Edwards Deming. Long day.

You could do a lot worse than to buy a Ford right now.

I agree. Though they would’ve been a lot better off had they been more forward-thinking in the first place.

The most maddening part of the Big Three Debacle (to me, at least) is that there are clearly scores of smart, talented people at all three automakers, but their ideas were routinely watered-down, ignored, marginalized, or put out to pasture. GM is the most blatant example, but Ford and Chrysler suffered from the same poor decision-making.

Evidently Mulally has loosened the strictures on his engineers. I’ve been reading reviews in the auto press, they are impressed by the innovations coming out of Ford. e.g. they like the Duratec engine and Ford’s SYNC feature.

And I wouldn’t be female if I didn’t comment on some of the foxy paint colors on some of the inventory: Moss green, Cinnamon, the 09 Mustangs were Candy apple red.

(Don’t get me started…)

+1, GSfixer.

Would it have helped all those folks who “didn’t know” their payment would go up in 3-5 years? (Naw, they would just “refinance later.”

Mortgage interest tax deduction=I give you a dollar, you give me a quarter….

No thanks.

Yep, because “Housing only goes up!”

Jim A,

Very well said. Lots of DINKS rationalized their purchases based on some pretty flimsy logic. Remember though, a lot of this mindset is a hangover from the pre-1997 Tax Law that brought us the Roth IRA and Cap Gains Exemption.

Since they had to hold on to their home until age 55 to skirt the gains ( or buy ever bigger homes ) even dinks had incentives to stay put. The aggravating part was it was these very people that wouldn’t let you forget just what a great rate they had! LOL!

DinOR-They usually get this dazed,”I’m using my brain and am unaccustomed to it.” look when I give ‘em the “shop around for the highest interest rate,” bit. It’s as if nobody ever questions the idea that you should spend as much as possible on a house. Hey, at the end of the day, spending more is spending more.

People justify their wants with false logic, to make the deal work.

And a good thing too or our 75% consumer driven economy would collapse!

Somebody cleverer than me could explain how anything with high maintenance costs (like a pool, or an aircraft) has a lower “economic lifespan.”

One of my friends wife had him spend about 26 Grand updating their kitchen last year. The house was custom built in 1993 and it’s quite nice for a mini-McMansion. They both have professional careers and did have more money than good sense until recently.

One of their mischievous little teenage nieces grinned and whispered to me after the nickel tour “..and this is for the woman that tried to cook a 1/2 frozen turkey without removing it’s INNARDS two Thanksgivings ago ”

And as Jim points out, you would have to deduct the value of the thing you ripped out…

Interesting discussion but getting afield a bit from the original, which was to try and determine what a “fair market” price would be…so as to try and determine when the bubble has gone away. And I was merely offering for consideration how to calculate a pool (or other things) into that FMV price.

“In short, if you want to make money, you have to bring something to the table.”

Yes sir.

Interesting discussion but getting afield a bit from the original, which was to try and determine what a “fair market” price would be

Look, let’s not overanalyze this… in an upwardly trending market, you may be able to overcharge for improvements, even if you paid retail. It happened quite a bit during the last bubble. That was the “fair market” price because that was what people were paying. Now we’re in a downtrending market. We’re back to the 50-80 rule, where most home improvement projects return 50 - 80 percent of the value put in, barring some sweat equity if the workmanship is professional grade. In some cases, there may be no value added. In a market like this, you’re better off betting on the low side of FMV…

Yep, use as many %’s, formulas, theories you want, but in the real estate market, a rising tide raises all boats and in a falling market they sink as well, improvements be dammed. I’d go so far as to say that if you are worried about return on investment, it is much more important as to where you are in the cycle then what you actually do. I’ve done them for a living and for my own real estate, and my theory is to only make improvements I’d enjoy, not because of what I might get back later on. Don’t be stupid about it, but don’t think you are getting back 70%+ of any investment in a down market….

hire a guy we know who does remodeling work on the side for extra income

I did the same for an apartment remodel in 07. Bought all the materials myself and paid cash to a contractor “under the table” for the labor. Completely redone from sheetrock to windows to flooring, including all new bath and kitchen fixtures (with existing plumbing)… cost me about 20/sqft. Quotes from general contractors with insurance, W2 employees and following the proper permits/inspections were almost double.

Yeah, but lucky for you, in Boston the illegals are Irish, not Mexican. (Well, a decade ago, anyway.) And Irish people know how to build a house.

A few, but most of ‘em fly on a big charter plane.

Ding Ding Ding Ding!!!!! We have a winner finally.

We have a whiner and that is about it.

We do NOT have a winner. You are all still thinking that Obama debt is the same as Bush debt. I don’t feel like explaining it any more.

Anyway, I think the actual question was, “how big is your average Presidential contingent?” If you include family, aids, support, media, security, etc, how big is it?

ah, politics…

my post should have concluded with

“”

but, I guess it was read literally, as an xml tag.

Yep, it is hysterical reading some of the posts from these nimrods. I’ll bet they can’t get enough of that crazy idiot Glenn Beck either.

I just can’t figure out if they have a mental disease, are plain stupid, or were totally brainwashed by the media.

It is going to be a LONG 8 YEARS for them. LOL

Nice

I disagree completely. If you cannot see a major difference between Dems and Pukes on several major issues you need an eye exam badly. There is bad in both parties, but total BS calling them the same.

And you have zero credibility.

Perhaps our definition of meaningful is different. Sure I see big differences between them, but both sides play off of the population with the same goal, bigger government. Both parties are necessary to present the illusion of choice. There are differences, but they do not amount to a hill of beans at the end of the day as the result is always what the elite want.

Yes. No “preferential treatment” here. Move along now…

Just checked the MLS link Exeter gave me/us way back when which is a very good source of statistical info. If you ignore the MLS propaganda on the front page. Feb ‘07 to Feb. ‘09 for my vacation home county, volume up 3.6%, prices up 5.2%. It is a very small sample,and therefore subject to wide swings month to month, but supports what I have been seeing and posted above.

Insulated? Not a chance. I watched Saratoga and Warren counties get eviscerated back in the early 1990’s and the current bubble dwarfs that by how many magnitude? Back then prices fell 40 some odd percent. Don’t delude yourself into believing it’s different this time.

Look…the collapse just arrived in NY and VT. Just arrived. How so? Jan/Feb09 sales fell in most NY counties including Warren County. Show me one year in record keeping history where sales fell from Jan to Feb… It’s here and it’s in front of us, not behind us.

The wheels are coming of the Housing Lie in Saratoga County. Isn’t this the county that everyone said would never fall apart? Isn’t Sara County the center of all the mindless speculation? bbbbbbbbut AMD!!! bbbbut low taxes! bbbbbut….. but nothing.

At a minimum prices doubled in all upstate counties in the face of high unemployment, chronic underemployment, high property taxes and declining population. Were the prices paid years 1999-2007 real? Nope. They were set by a banks reckless willingness to lend, not by a group of buyers as is typical.

Upstate has a looooong way to fall and there is nothing to prevent it.

Connecticut (Conn!) has gay marriage now, and Ben & Jerry’s sold out (to Unilever–yecch). VT is so 1997.

Clearly calling your reps or senators is meaningless (look at the bailout bills that they received more negative calls about than any other bill and yet it passed anyway).

Ultimately I agree with “are they crazy”; however, simply blaming “the people” is too broad. “The people” includes people on this board. Ultimately, blaming “the people” is blaming “no one”.

You would have to blame everyone for the past 100 years who allowed the government to keep getting bigger, who stood by while they stole the gold, left the gold standard, subsidized housing, etc. You cannot hold be accountable for that which they do not know, but you can hold people accountable whom claim *to know* something. We lost this battle when the government took over the school system.

The only viable solution at this point is civil war. The power structure is too corrupt for any amount of calling / protesting to make a difference. The government only understands FORCE. Now that they control both sides and the media, our votes and opinions have VERY LITTLE FORCE left in them.

The more informed a person is the less likely he will be calling a rep or Senator, imo.

The relationship probably roughly resembles a bell curve. The least informed are not at all involved, somewhat informed are involved to varying degrees with the most informed (realizing it’s all a big joke and your opinion does matter) not at all involved again.

“does” = “does not”

A Scorpio or an XR4Ti? I once had an XR4Ti. A fun car. By today’s standards its a dog, but it was considered quick back then.

A Capri II actually. With the 2.8l V-6. Of course this was when polution controls were new and not very efficient. The thing also had an almost binary throttle. It was actually difficult to NOT accelerate. I dubed it “the flying tumor” in honor of its multiple primer-covered rust spots.

I grew up in Buffalo blizzards.

I have scotch, cribbage, candles and firewood.

I’ve got my guitar, ukulele, pedal steel, Dobro, autoharp, banjo, harmonicas and concertina in the bunker along with the necessities. Jam at my place as we sing through the apocalypse!

Just got back from a week in Napa. Put in a 200 sq ft garden at my brother’s place (and drank a bunch of fermented grape juice). I told him that I was worried about his “food insecurity” and he finally listened to something that I suggested. His kids are going to have a blast (as long as Armageddon doesn’t happen this summer).

Got some must visits and must not visits WRT wineries if anyone is interested…

MrBubble

SRS holders (FPSS, etc.): How do you like it?

I’ve got my guitar, ukulele, pedal steel, Dobro, autoharp, banjo, harmonicas and concertina in the bunker along with the necessities. Jam at my place as we sing through the apocalypse!

Now, I deliberated on this subject before purposely leaving ‘musical instruments’ out of the list of necessary Armageddon supplies. This is something I have some experience with. They’re great if the person who wants to play them can, in fact, play them.
And I sense through the ether that you, Mr. Bubble, can probably play these assorted instuments right.
But IF, as so often happens, the person who wants to play them cannot, in fact, play them with any degree of skill whatsoever….I mean, man…wayyyyyy worse than the Scriptures far as inciting fellow crises-sufferers towards a killing.

Got some must visits and must not visits WRT wineries if anyone is interested…

Well, of COURSE we’re interested. Sheesh, man.

I’ve got my guitar, ukulele, pedal steel, Dobro, autoharp, banjo, harmonicas and concertina in the bunker along with the necessities.

Jeebus, that’s enough instrumentation to outfit quite an Apocalypse Hootenanny.

(Are you gonna waste generator juice to fire up a pedal steel and amplifier, though? I mean, maybe you’re that well prepared, but it kinda seems like flaunting it right in the flesh-eatin’ zombies undead faces when the End Times are near.)

but it kinda seems like flaunting it right in the flesh-eatin’ zombies undead faces when the End Times are near.)

But, ET, perhaps it is not ‘flaunting’ so much as it is a method of calming zombies. Maybe zombies like pretty music at the End Times. In fact, based on my acquaintance with zombies, like from that one time in Las Vegas, I think it quite likely.
See, then the zombies will not only enjoy themselves but may also spare the musicians, or parts of the musicians. In which case, the use of precious generator juice is justified.

Very good catch, ET. I would need the generator to crank it to eleven. But to Oly’s point, instruments in the bunker would be awful if one cannot play them. Not to toot the ol’ horn, but she is right to believe that I can play them, with one exception: the pedal steel. It mocks me from the closet daily. So having that one not amplified would be merciful to other bunker huddlers. Then again, my lever screeching and vocal caterwauling might scare the zombies from the compound…

Re the wine tour: thought that you might be interested.

Great:
Schramsberg in the AM for the cave tour and bubbly. Expensive, but impressive, and they aren’t afraid to give a good pour from said expensive bottles. The J. Schram and the Reserve had faint hints of hydrogen sulfide, but were tasty. The cheaper blanc de blancs was great (the only bottle I had enjoyed previously) as was the rose.

Vinecliff had decent wine and a good, ribald guide and a beautiful setting. We all ate baguettes, foie gras, figs and olives and thick rinded goat cheese by the pond with a bottle while pretending to be rich and sophisticated. Unfortunately, you can’t shine a turd.

Louis Martini has great wine and I get the special barrel tour through a family connection. Nice! The Monto Rosso 03 and 04 are fantastic. They’ve just come out with a Malbec, but I need to drink it with some food to figure out how I feel about it. Meritage is good, the Los Ninos is solid and the $15 Martini that is selling like crazy from the 90 rating from Wine Spectator is a good buy.

William Hill — didn’t take the tour but enjoyed a bottle of red that had just been bottled. A bit “clumsy” (perhaps from bottle shock), but should be a keeper.

Domaine Carneros — The scene is two bottles of champagne (after a tasting of three — the La Reve ‘03 and the Rose), at a faux-France mansion in the “members only” section, the cheese, fruit and nut plate, the Saturday Times crossword and a new, cute, buxom lass who is inexplicably really into you. Manna from the gods. Just had the best week of my life. Touch of an “aldehyde” taste in the La Reve as it warmed, but I didn’t much care. Smiling too damned hard! And if you couldn’t guess, she is the member, not me. Duh.

Decent:

Sterling — tram ride to the top of the hill and a nice patio where we watched red-headed woodpeckers dive-bomb an insouciant squirrel. Passable booze.

Bad:
Cakebread Cellars — I could go on and on, but just awful.

Domaine Chandon — too tourist-y and bachelorette party-y for me. Apparently, I am a douchey snob. Ah, well.

Ugly:
Downtown Joe’s — In Napa, I asked the bartender if he could make an old-fashioned. No prob. The first one was wrong. I drank it and ordered another trying to catch him in the act, but got distracted just as he was making it. Drank it. Ordered the third and caught him dumping Frenet into Maker’s over ice and shooting a cherry b-ball style into it. He looked at me as if to say, “What?”. I said, “What the &*%& is that?” and he said that it didn’t matter because I was drinking them. Fighting words. My friends burst in at that moment to quell the situation. Sent an oxidized glass of red back. Avoid this place.

MrBubble

You’re mixing up cliches and movie monsters now. Never, in the entire history of zombies has one ever been soothed by anything other than brains or a shotgun to the head.

They aren’t King Kong and they don’t fall in love with damsels. Didn’t you learn that part of the bible?

I’m fine as long as it’s Zombies and not the Kurgin…

“I got a trunk full of M-16s, hand grenades, and ammo out the a$$; and I ain’t safe! I can’t protect myself!”

MrBubble please recommend a good cheap red. I did copy your list above.

Thanks in advance!

Hey In MT,

I’m am drinking that Louis M. Martini ‘01 Cab right now (the one that rated 90). It’s pretty good for the money. Good nose, high tannins. Found it for $15, but you can find it (allegedly) for $13. Not $8, but not bad. It’s working…

MrBubble

Sorry. ‘05. Don’t know why ‘01 was in my head.

Spending time with the kids — hibernating while it rallies.

Mikey, I sure do like the way you think. That amounts to just about a perfect evening.

Dash it all, people, sounds like six more weeks of snowbirds!

You know what they call the one honest man in a corrupt society, right?

SUCKER!

I have no problems separating suckers from their money as long as it is done in a legal overboard way.

They have the same open-market information as I did; they should not have bet.

Bulls make money; bears make money. Pigs get slaughtered.

And so it goes …

Well to some people, myself included, morality extends beyond what you can get away with and beyond what is “socially acceptable”. Others have no morality outside of what they think they can get away with.

I have no problem making money off of someone else’s bad (or idiotic) bet, but making a bet that you know is bad (because the counter party isn’t good for it) only because you know that the general population will be robbed to make your bet good… well… that crosses the line and is no different than BoA preemptively buying toxic assets so they can offload them at a profit to the government. S

Suck it up, big boy!

Comment by VTDan

“Well to some people, myself included, morality extends beyond what you can get away with and beyond what is “socially acceptable”. Others have no morality outside of what they think they can get away with.

I have no problem making money off of someone else’s bad (or idiotic) bet, but making a bet that you know is bad (because the counter party isn’t good for it) only because you know that the general population will be robbed to make your bet good… well… that crosses the line and is no different than BoA preemptively buying toxic assets so they can offload them at a profit to the government. S”

Dan,

If someone is obviously making an idiotic bet, then there is an information asymmetry between the two of you. Morally, you should make certain that your counter party has the same information as you, otherwise you are just stealing from him.