it wasnt the airplane, beauty killed the beast

patient renter argued that flippers and people buying more house than they could afford caused the financial crisis...

i argued that in a healthy financial - economic system even several million defaults wouldnt crash the us and the world economic and financial systems

for that to happen the loans had to be securitized, tanched and swapped, with leverage sprinkled liberally across the process at every opportunity

i appreciate his point that people buying what they could not afford and or going into debt over their heads was the first domino or the striking of the match

but securitization, leverage and derivatives were the tinder dry forest

i recall on the day the tarp bailout was passed, the 700 billion was enough to buy outright every defaulted mortgage with almost half a trillion left over assuming average home price of 225k

today with all the cascading events there might be couple trillion in res RE defaults, just guessing

BUT

the fed has laid off more than 10 trillion in mark to model toxic securities by letting banks and other financial institutions bringing, in some cases, garbage to the fed window and get AAA treasuries etc in exchange

leverage, securitization, and derivatives took a manageable crisis like what we had in the late 80s during the S&L crisis, and turned it into a financial system meltdown

many institutions took the senior tranches of the collateralized debt obligations so that they could get interest rates over prevailing market levels

this involved leverage

furthermore some creative quant types fabricated instruments with greater leverage and diversity including synthetic CDOs and CDOs squared

again this levered up profits when the investors "won"

but the leverage also multiplied losses

there are other examples...CDSs enabled institutions to "write checks with their mouths that their bodies couldnt cash"...so to speak

i generally accept your argument that the theoretically,derivatives are a zero sum game but when a major player like aig, an insurer (writer of protection ) failed, then huge numbers of securities “underwritten by the failing firm lost their AAA rating

zero sum game or not, i have to argue that the gross dollar amount of outstanding derivatives contracts, which was over 500 trillion prior to the crisis, does matter in that it is an indication of the complexity of the web of interconnectedness between all players and the amounts of money that have been cross wagered

theoretically after all the chips pass back and forth across the table the total... of winner and looser deals... will equal out but not every individual nor institution wrote an equal number of winner or looser contracts so some individuals and institutions stood to collapse as the crisis developed

additionally there was counterparty risk...everybody was afraid that the music would stop and they wouldnt have a chair

so as the system strained it began to seize up and institutions began to grab at liquidity available to them and refuse credit to all comers

i think derivatives contributed substantially to the system meltdown

from your example above the following question...when is a 100% loss of a 1$ investment not a 1$ loss

answer when the securitized investment has been "insured" by a credit default swap

how? ... not only do you suffer the loss in principle, but you have been paying premiums to an individual or company which is unable to compensate you for your loss because they have written, by a factor of many times their net worth more policies than they can cover in losses...so your premium bought nothing

further more it was not an uncommon practice for the holder of a securitized portfolio to take out a CDO on the counterparty that they bought the primary CDO from to cover the initial investment

adding insult to injury in the derivatives market individuals and institutions could take out "bets" ie enter into CDS with counter parties who had no insurable interest in the underlying security

it would be as if you and i could buy and sell life insurance on people we didnt know and were neither our employees nor members of our family...it was a casino

free markets arent free

to a friend named...sportsfan

from previous thread you said

"Meanwhile (though not mentioned on that blog) that was the first year since 1933 that Americans could privately own gold.

Allowing private ownership uncut the whole "manipulation" theme."

----

are you saying that allowing private ownership and speculation of a commodity prevents market manipulation

how about oil 16 months ago
how about silver during the hunt brothers corner
how about real estate values in the last decade

permitting private ownership is not a bar to market manipulation

CBs and their primary dealers are manipulating markets buying and selling "paper" commodities they dont have

more than a year ago i got into a heated debate with a trader about whether one could let a futures contract expire and force a physical delivery of a PM

6 months later as physical gold become difficult to buy while the spot market remained flat...many people tried to do just this and the the "ruling "was handed down that cash equivalent to the commodity had to be accepted in settling the futures contract

meanwhile in towns across america physical PMs were selling at a 10 to 15% premium over spot

gold is being manipulated

web search these tittles and see for yourself

"Is the Comex Doing Fractional Reserve Delivery of Gold?"

or this

"Commodity exchanges can dump gold debts on ETFs | Gold Anti-Trust Action Committee"

deliveries are being force-settled with paper not the commodity

iq test for joe 6

as posted over at calculated risk blog

"From the WaPo: As Subprime Lending Crisis Unfolded, Watchdog Fed Didn't Bother Barking

... Under a policy quietly formalized in 1998, the Fed refused to police lenders' compliance with federal laws protecting borrowers, despite repeated urging by consumer advocates across the country and even by other government agencies."

----

after reading the lead story and the thread i have to laugh (or cry)

"The Fed and Subprime Lending: The Watchdog that Didn't Bark"

yeah right

more like 'the fed... the watchdog that turned out to be a lap dog"

this entire fiasco is an IQ test for the american people, who so far seem to not comprehend beyond the level of blaming illegals for buying mcmansions

when the real crime took place on wall street and k street

who's dangerous to the country

around the blogs several were speculating whether or not fox news personalities were beating the drum against obama hoping to motivate mass popular uprising or possibly even insurrection or violence

then a poster said "obama is dangerous to this country and people', or 'dangerous to the republic" or is a" communist or socialist"

that is the very kind of statement that fox people want repeated and agreed to

eisenhower called out the guard to escort black students to the segregated public school house and some thought he was dangerous to the country

kennedy agreed to remove us missiles in turkey pointed at russia and refused to invade
cuba...some thought he was dangerous to the country

johnson committed almost 700 thousand troupes to vietnam and spent the treasury dry with guns and butter...some though he was dangerous to the country

nixon instituted price controls and wanted to drop nukes on vietnam a russian client state which could have ignited ww3...some thought nixon was dangerous to the country

ford made a dieing declaration contained in his biography that the government hid evidence of the kennedy assassination and of course ford was a leader in that regard (hiding the evidence)...some think ford was dangerous to the country

carter tried to be more progressive than even his own party, and was seen as weak because he wanted to negotiate instead of fight and wear a sweater while funding alternative energy ...some thought carter was dangerous to the country

reagan ran against carter pushing deregulation and decrying the national debt which was at 750 billion when reagan took office and more than doubled by the time reagan left having built a 500 ship navy etc...some thought he was dangerous to the country

george bush was a cia director and probably a spook much of his life and some people thought it was dangerous to have an ex spy as president

clinton was a young inexperienced leader (and an experienced playboy) who recognized gay rights and tried to negotiate deals between arabs and Israelis... some thought clinton was dangerous to the country

some believe bush 2 did not respond sufficiently to warnings in his daily briefing and from prominent sources that an attack was imminent and then launched a war of choice against a tyrant that had nothing to do with the 911 attack...some thought bush 2 was dangerous to the country

and on and on

fight the political fight all you want.disagree with this president all you want (my feelings about obama are mixed some good some bad)

but leave the crazy talk about the president to fox news and the wing nuts, because hatred and fear and name calling fester and with enough hatred and fear violence will erupt

im old and seen too much of it so everybody please keep it constructive

whos standing on the UE line next to you

regarding jobs and hiring i had this argument with patientrenter 4 days ago

patient renter
remember a few days ago i posted this comment
"i know a young lady
who just graduated last may
from a venerable school in oregon
8th out of a class of 410, phi beta kappa
with a degree in environmental science
who has been looking for work for 5 months
works two temp part time jobs for minimum wage
and was just turned down after an interview for a job that pays 9.50 per hour
there were over 90 applicants, some with post baccalaureate degrees
shes gone thru this drill a couple dozen times so far
so to those who say they will wash dishes if they have to
i think you are going to meet a lot of capable, hard working people with advanced degrees standing in line with you for that job"

and patentrenter you wrote, kinda harshly i thought

""a degree in environmental science"
Sounds like an interesting hobby, with only a moderate chance of becoming a reliable source of a good income. I would never have chosen envir. science if I wanted to maximize my chances of a secure good income. You don't get the right to a secure good income doing whatever you want. I wish her luck, but people do have to live with their choices....."
and i responded
"sounds like a hobby..." ?
Environmental science includes broad scientific areas such as ecology, environmental chemistry, environmental biology, and geology. It also includes lesser known areas of study such as sustainable natural resource use, climate change, soil and water conservation, and pollution mitigation.
companies and agencies like exxon mobil, the epa, ADM , nasa, weyerhaeuser... employ environmental scientists
but as is the case with many other scientific and engineering degrees, the economy has hit many hard
------
and patient renter you responded with
Interesting, my X is a chemist who went into envir science. I respect her technical abilities and work ethic, but there is no doubt that many of the people in the field are fluffy and expect a paycheck for supporting their favorite political cause. (I support much more focus on our environment, but I know waste when I see it.)
(find this exchange at http://www.hoocoodanode.org/node/7792)
----
so i just wanted to set the record straight, that your claim environmental science was a "fluffy" major and a "hobby" for people often times to just support their politics, is just not an accurate judgment as supported by this article below

hat tip barry ritholtz over at bigpicture who referenced this article

of 75 college majors researched at payscale.com environmental science was 24th with a median starting salary of 43k and a median career income of 78k
http://www.payscale.com/best-colleges/degrees.asp
that leaves about 50 college majors below environmental science
my major is near the bottom criminal justice - police science
...patientrenter, care to share your major?