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America's Financial Mess

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Well, at a Tuesday meeting Congress and Regulators were outraged at run-amok capitalism.

Former Federal Reserve Vice Chairman Alice Rivlin, now a senior fellow at the Brookings Institution think tank, assured lawmakers at the hearing that recent cries about creeping socialism and the downfall of capitalism were overheated. "But market capitalism is a dangerous tool," she said. "Like a machine gun or chainsaw or nuclear reactor, it has to be inspected frequently to see that it is working properly and used with caution according to carefully thought out rules."

Egads :lol:

If a turd could speak, it would spout more truth than this idiot.

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I suppose things could be worse. We could be living in Argentina where Kirchner has just put forth a plan to nationalize several large private pension funds.

http://www.telegraph.co.uk/finance/finance...e-pensions.html

By doing this, Kirchner gets her greasy little socialist hands on the assets today and can then screw the pensioners at some later date out in the future. Bush and Bernanke are gone soon, but how long do you think it will be before Obama, Barney Frank and Madame Pelosi figure they can get away with something like this here? According to Frank, there are plenty of rich people out there they can tax. Of course, paying taxes is also patriotic. :(

I don't accept your "phraseology". Paying taxes is voluntary! :lol:

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I'm trying to figure out what advantages or disadvantages these bailouts will have when compared with normal Chapter 11 filings. As you well know, if the companies file they will continue to operate. Is there something I don't know about the insurance industry that would have caused AIG to stop writing policies if they were in Chapter 11? Even if this happened, it seems that competitors would pick up the business. Perhaps there's some greater level of customer confidence one could exepct to be associated with the government bail-outs vis a vis a Chapter 11 filing.

I'm also thinking about my original statement and trying to decide what's wrong with it. It makes me a bit uneasy as well.

AIGs life insurance, annuity, and P&C business was actually stable. It was their non-insurance business that was causing problems. AIG made the same mistake that GM did. They moved away from their core competency.

I suspect that their insurance business would have continued or would have been sold off quickly - being that it is in good shape. In any case, it is likely they will have to sell off a lot of their insurance business anyway to raise money.

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I used to watch Charlie Rose all the time. It's still very good for the science group discussions, but for politics, and in particular the bailout, it is crap. He's had Barney Frank on and even Paulson, all defending the bailout without any criticism or deep examination by Rose. Essentially, he presents it as him (and the audience) being the student, and the interviewees being the teachers.

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In case anyone is interested in what Paul Volcker has to say about the current financial crises, here is an interview with Charlie Rose.

Unfortunately, or probably predictably, he's all for regulating the economy overall, and thinks that even more regulations will get us out of this mess because he thinks it was a failure of regulations that got us into this mess. But I guess if one is the regulator, one is not going to say cancel my job and set the markets free. Regulating the markets set up force induced distortions in the economy and in trading as investors tried to find a way around the regulations -- which they have a right to do -- and rolling back regulations is the solution. All of this tampering with the economy and markets that he and others are recommending are just going to cause other distortions and later on they will call for even more regulations. It's a vicious cycle that needs to be broken with a rational morality -- i.e. the freedom to trade.

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After the unprecedented credit expansion occuring right now under Bernanke, we may in the future need another Volcker-style, Fed-induced recession to rid ourselves of the inexorable tremendous inflation.

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Here is an article regarding Alan Greenspan's take on the problem and how to resolve it. Since he doesn't mention deregulation, I think it can put to rest any idea that he is somehow an Objectivist who got into the government and kept things lined out.

WASHINGTON (Reuters) – Former U.S. Federal Reserve Chairman Alan Greenspan told Congress on Thursday he is "shocked" at the breakdown in U.S. credit markets and that he expects the unemployment rate to jump.

Later: At the heart of the breakdown of credit markets was the securitization system that stimulated appetite for loans made to borrowers with spotty credit histories, Greenspan said.

Sure, don't mention Fannie Mae and Freddie Mac or the Community Reinvestment Act and other regulations distorting the free market.

I suppose this whole mess does show what happens if one tried to use volatile commodities as a basis for exchange; when that market comes down, those backed securities become nearly worthless or at least so uncertain that no one wants them; which is why gold or some other difficult to find commodity needs to be used to back money.

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Here is an article regarding Alan Greenspan's take on the problem and how to resolve it. Since he doesn't mention deregulation, I think it can put to rest any idea that he is somehow an Objectivist who got into the government and kept things lined out.

WASHINGTON (Reuters) – Former U.S. Federal Reserve Chairman Alan Greenspan told Congress on Thursday he is "shocked" at the breakdown in U.S. credit markets and that he expects the unemployment rate to jump.

Later: At the heart of the breakdown of credit markets was the securitization system that stimulated appetite for loans made to borrowers with spotty credit histories, Greenspan said.

Sure, don't mention Fannie Mae and Freddie Mac or the Community Reinvestment Act and other regulations distorting the free market.

I suppose this whole mess does show what happens if one tried to use volatile commodities as a basis for exchange; when that market comes down, those backed securities become nearly worthless or at least so uncertain that no one wants them; which is why gold or some other difficult to find commodity needs to be used to back money.

Recently, I had someone tell me that there was no proof that the Government intervention caused the problem, or had anything to do with it. I chock it up to lack of knowledge, but they went on to say that there is no way to "prove" the Government is distorting anything.

That's a lot of blanking out.

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One reason there is so much uncertainty in today's market is that many financial institutions hold non-standardized derivatives. Being non-standardized, it is difficult to value them. Sometimes a company may have various positions that are supposed to offset each other. However, being non-standardized, there is no daily trading in each of the positions, so there's a lot of uncertainty about whether they actually do. When people talk about huge numbers (trillions of dollars) of derivatives, they typically talk about the gross figures. Nobody knows for sure what the net figure really is, once one unwinds all offsetting positions.

The problem with this uncertainty is that many suspect the problems may not be as bad as the gross numbers suggest. Yet, nobody wants to risk finding out. So, they'd prefer to throw money at things, and not hasten the process of discovery. When Bear Stearns was in trouble, the government did not want to unravel their books. So, the Federal reserve simply took $29 billion of Bear onto its own balance sheet. One good thing that Paulson and Bernanke did was not to repeat that process with Lehman. They allowed Lehman to go bankrupt, and unravel.

Two weeks ago, there was some nervousness about the settlement of CDS's related to Lehman. The linked article refers to the gross numbers:

There will be an auction of the settlements in New York this afternoon. It will be one of the largest ever to happen in the $55 trillion (£32.6 trillion) CDS market, with around $400bn in contract volumes estimated on Lehman's debt. The exact value is unknown because there is no exchange or system for reporting trades in credit-default swaps (bold added)
.

Now, the settlement is over, and early accounts indicate that the $400bn of gross resulted in a net of about $6 billion changing hands after everything was netted out.

Depository Trust & Clearing Corporation, processes large numbers of investment transactions. It said that only $5.2 billion had to change hands for all the traders to close out their positions, a much smaller amount than had been predicted a week ago.

This is good news. Hopefully, this will inspire Paulson and Bernanke to be less fearful.

Edited by softwareNerd

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One reason there is so much uncertainty in today's market is that many financial institutions hold non-standardized derivatives. Being non-standardized, it is difficult to value them.

Correct me if I am wrong, but you seem to be saying no one wanted to actually look at the root of the financial problem of several financial institutions, and yet they were saying it had to be an unprecedented crises. Typical Washington talk..crisese, crises, crises....regulate, regulate, regulate. And yet, when everything is settled, it was big but not unsolvable. I still don't understand why they had to rush in with bail-outs instead of looking closely at the books to see what the exact problem was.

QUOTE (New York Times)Depository Trust & Clearing Corporation, processes large numbers of investment transactions. It said that only $5.2 billion had to change hands for all the traders to close out their positions, a much smaller amount than had been predicted a week ago.

In other words, the books were in the red by $5.2 billion instead of some ungodly number like $4 trillion. And they were able to resolve it without bailing them out and without nationalizing them.

These seem like very large numbers, but I remember years ago MCI had a loss of something like $800 million, and it didn't create any sort of financial crises talk, it just went out of business or was bought out (can't remember which). That would be like a billion dollars today, more or less, so Lehman wasn't too much worse off than MCI, once everything was looked into.

You in the Federal government can go back to panic mode now :pimp:

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I still don't understand why they had to rush in with bail-outs instead of looking closely at the books to see what the exact problem was.
The problem is that one cannot merely look at the books to figure out the value. Examining the books can only give one a (wide) range of estimated values, because the values depend on other factors that have not yet taken place. Some super rich investors (like Buffet and Soros) will tell you that they stay away from complex derivatives because there is no way to value them with any degree of certainty.

We use derivative instruments to a much lesser extent ... largely because we really don't understand how they work.

Buffett's view can be read here.

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At about ten o'clock this morning, I heard Greenspan on the radio (he was participating in some sort of hearing--I caught portions of it while driving) giving his explanation for why the economy is in decline. Essentially, he stated that there was a flaw in the free market model that he had been using and which had "worked well for forty years."

So now it becomes clear that this is his official 'swearing off' of Objectivist free market principles. For those of us who suspected that Greenspan had jumped ship from the Objectivist thinking, we can now be free of any doubt.

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I still don't understand why they had to rush in with bail-outs instead of looking closely at the books to see what the exact problem was.

Because Congress knows it's to blame and doesn't want to admit it. In particular, the Democrats don't want this soiling up "their" election. This is why the investigation into Fannie and Freddie are scheduled for after.

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How can Greenspan say the things that he's saying? The most logical thing is to label him as a complete traitor, but I still don't understand WHY.

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How can Greenspan say the things that he's saying? The most logical thing is to label him as a complete traitor, but I still don't understand WHY.

I think Miss Rand has the answer in an essay we are studying in my DFW OPAR Study Group. In "The Question of Scholarships" within The Voice of Reason (questions posted), she goes into what types of government jobs one can accept as a capitalist, and gives a warning in the last paragraph.

The ultimate danger in all these issues is psychological: the danger of letting yourself be bribed, the danger of a gradual, imperceptible, subconscious deterioration leading to compromise, evasion, resignation, submission. In today's circumstances, a man is morally in the clear only so long as he remains intellectually incorruptible. Ultimately, these problems are a test -- a hard test -- of your own integrity. You are its only guardian. Act accordingly.

Or as someone else put it a long time ago: Absolute power corrupts absolutely.

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Or as someone else put it a long time ago: Absolute power corrupts absolutely.

Greenspan became one of the elite members of the Washington power class a long time ago and he abandoned his principles at the same time. He's even married to a big media type, Andrea Mitchel, the left-of center NBC reporter. Greenspan is an accepted member of the Washington political establishment, so it is more than a little ironic to watch some of the more reptilian pols like Henry Waxman attacking the 82 year old yesterday as he tried to defend his reputation on Capitol Hill.

Some quotes from his testimony: “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” he told the House Committee on Oversight and Government Reform.

Well that makes sense, we should have trusted the self interest of regulators to protect the shareholders. :confused:

It gets worse: “You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others,” said Representative Henry A. Waxman of California, chairman of the committee. “Do you feel that your ideology pushed you to make decisions that you wish you had not made?”

Mr. Greenspan conceded: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.”

Mr. Waxman noted that the Fed chairman had been one of the nation’s leading voices for deregulation, displaying past statements in which Mr. Greenspan had argued that government regulators were no better than markets at imposing discipline.

“Were you wrong?” Mr. Waxman asked.

“Partially,” the former Fed chairman reluctantly answered, before trying to parse his concession as thinly as possible.

So the Barney Franks and Chris Dodds of the world advised Greenspan to provide for greater regulation of financial institutions and he steadfastly refused because of his "ideology". Now he's even agreeing with Waxman's fantasy-land version of events. These guys are all unbelievable. They just make this shit up and nobody has the balls to call them on it. I think I'm going to stop paying attention, the whole thing is simply too nauseating.

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We're doing an Ayn Rand unit in one of my philosophy classes, and I can't wait to hear the professor or other people say next week, "Even Alan Greenspan, who always talked about how much of an influence Rand's ideas had on him, admitted, after 40 years, that there is a flaw."

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We're doing an Ayn Rand unit in one of my philosophy classes, and I can't wait to hear the professor or other people say next week, "Even Alan Greenspan, who always talked about how much of an influence Rand's ideas had on him, admitted, after 40 years, that there is a flaw."

Don't let them stop there. Force them to cite Greenspan's exact words and see if he is explicit about what this flaw is. If he is not, they are simply appealing to authority.

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This passage below from the New York Times article on Greenspan's testimony is particularly absurd. I find it interesting the way the NY Times financial reporters seem to be leading the charge for historical revisionism on the crisis. They are doing their best to obfuscate the issues and paper over the government's role.

From the NYT article:

Many Republican lawmakers on the oversight committee tried to blame the mortgage meltdown on the unchecked growth of Fannie Mae and Freddie Mac, the giant government-sponsored mortgage-finance companies that were placed in a government conservatorship last month. Republicans have argued that Democratic lawmakers blocked measures to reform the companies.

But Mr. Greenspan, who was first appointed by President Ronald Reagan, placed far more blame on the Wall Street companies that bundled subprime mortgages into pools and sold them as mortgage-backed securities. Global demand for the securities was so high, he said, that Wall Street companies pressured lenders to lower their standards and produce more “paper.”

“The evidence strongly suggests that without the excess demand from securitizers, subprime mortgage originations (undeniably the original source of the crisis) would have been far smaller and defaults accordingly far lower,” he said.

http://dealbook.blogs.nytimes.com/2008/10/...-on-regulation/

There's no mention of the fact that the GSE are the ones that CREATED and fostered the development of the entire secondary market for mortgage backed securities. There's also no mention of the fact that many of the CDOs traded in the secondary markets had implicit government guarantees, causing the ratings agencies (given oligopoly standing by govt. regs) to screw up their assessments of the risks associated with these securities. Nope, the government has no blame here. It was all caused by deregulation. :confused:

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Buffett's view can be read here.

That was an interesting article, and further explains why we are in the mess we are in now. Once the housing market started to fall, it triggered a lot of financial action against those holding these derivatives. But I think it should also be pointed out that both Soros and Buffett stayed away from the Internet because they didn't understand it, and yet we've got a great Internet from early pioneers -- some who made great fortunes and some who lost great fortunes. Besides, operating on a 20 year contract regarding the derivatives structure is not a long time when one considers that some of the great industries of the late 1800's and early 1900's engaged in contracts with a stated time period of 100 years.

Derivatives are risky, since they are based on future conditions that no one can predict ahead of time, but I think their biggest mistake was them being based upon mortgages and the myth that housing prices would continue to go up indefinitely. That did happen for 15 years or more, and even longer (before the modern bubble), but as I have said before, it was like money based upon volatile commodities. And when one considers that under capitalism, building techniques are constantly improving and efficiencies of building increase in the long run, some caution should have been involved just based on the capitalistic premise that supply could easily meet demand, everything else being equal. Of course, with the Community Reinvestment Act, and Freddie and Fannie buying up everything on the secondary market, it gave the false impression that the party would never end.

Under capitalism, there could be derivatives based on any commodity, and investors could make their judgments based on future projections, but as an earlier article mentioned, with the government changing things all of the time, it cannot be predicted with any certainty. Mutual funds will be the next to be hard hit, because people are taking their money out below a certain loss. Of course, they should have sold out a year ago, and buy back in now, but a friend of mine said she lost enough to buy a house, and that is a lot of money these days, so she bailed. And part of her reasoning is the nationalization of major banks and the bail-out, which will make it much more difficult to assess if a company is good or bad even for the professionals.

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Randex is flooded today with stories on Greenspan coming to terms with his supposed mistaken adoration of Rand. If you're like me, you may want to take a little time to register and comment on these articles and point out how incorrect they are.

http://seekingalpha.com/article/101691-fin...-u-s-government

http://www.dallasnews.com/sharedcontent/dw...n1.285ac96.html

http://www.sfgate.com/cgi-bin/article.cgi?.../BUI513N8QM.DTL

http://online.wsj.com/article/SB1224809345...ss_opinion_main

http://www.huffingtonpost.com/lee-stranaha...u_b_137418.html

http://www.theglobeandmail.com/servlet/sto...NStory/Business

http://www.theglobeandmail.com/servlet/sto...y/International

Alternatively, the last article, while not perfect, actually gets it right and places the blame on Greenspand and not Rand , so a supportive comment might be nice.

http://tpmcafe.talkingpointsmemo.com/2008/..._world_is/#more

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Under the title "Greenspan has no Free Market Philosophy" The Ayn Rand Center for Individual Rights just had a press release against Alan Greenspan -- I get the notices before they post them to their website (an advantage subscribers have).

<SPAN style="FONT-SIZE: 10pt; FONT-FAMILY: Verdana; mso-bidi-font-family: Verdana">But according to Dr.

Under the title "Greenspan has no Free Market Philosophy" The Ayn Rand Center for Individual Rights just had a press release against Alan Greenspan -- I get the notices before they post them to their website (an advantage subscribers have).

<SPAN style="FONT-SIZE: 10pt; FONT-FAMILY: Verdana; mso-bidi-font-family: Verdana">But according to Dr.

Edited by Thomas M. Miovas Jr.

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