Please explain current economic situation in U. S. and world?

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1. John W said:

   Alan Greenspan believed that bankers would regulate themselves conscientiously and hence did not need additional regulatory controls so he fought hard to entrench any transaction called a swap as an unregulated transaction. This opened the door for the concept of the Default Credit Swap.

   Essentially, a Default Credit Swap is a swap of a cash flow for underwriting a security from default. Of course, they were careful not to use the word underwrite or insurance otherwise the transaction would be regulated and subject to stringent reporting and the securement of reserves in case the default occurred.

   During the Clinton years, Bankers were encouraged to find ways for less qualified individuals to obtain mortgages. Normally, a bank would be reluctant to sign a sub-prime mortgage since the paper had less resale value as a security simply because of the higher probability of default hence had to be sold at below listed value. However with Credit Default Swaps, the banks could have a large financial institution guarantee the value of the security in the event of a default thereby transforming the security from a risky junk security to a AAA investment where the base value was guaranteed by a trusted and well known financial institution hence it became profitable to write sub-prime mortgages as the securities could be sold as secured investments.

   Now, Credit Default Swaps were unregulated by law so unlike insurance, there was no requirement to carefully track the possession of the risks nor was there a requirement to set aside any funds to pay for the portions of the securities that defaulted. The Credit Default Swaps where sold many times without the requirement for a central registry so the only way to determine who held the liability was by following each and every transaction.

   A lot of sub-prime mortgages were written in order to create a pool to write CDO securities with, 40% of mortgages in the US written in 2007 were sub-prime (compared with 4% during the same time period in Canada due to extensive regulation) and why not, individual bankers realized they would receive huge bonuses each quarter by writing these dubious securities which became marketable once a Credit Default Swap was purchased for it. Well, as the first set of mortgages starting to foreclose and there weren't that many that did default (less than 5% of the mortgages defaulted), the industry realized that someone indeed was contractually liable for the defaults but who? There was no central registry so they had to follow a chain of transactions and the revenue stream flow to determine the liability. Knowing that there was a liability, all the companies needed to rewrite them balance sheets to reflect the liability but they could not because of the difficulty in determining who was liable as it had to be done on a swap by swap basis. Initially, the banks suddenly became very conservative simply because they knew they had to have liquid assets on hand to cover some defaults but didn't know how much then as they failed to identify their liability by certain reporting deadlines, they had to write off huge amounts of assets regardless of whether or not they had any liabilities with them and even whether or not there were any actual defaults in the securities.

   Most of the mortgages are still good but because of the risk of default and the unregulated nature of the CDS market, we have a credit meltdown.

   Note Alan Greenspan has "almost" publicly apologized for insisting that these swaps be entrenched in law as unregulated.

   It's unfair to blame the situation on the Bush republicans as it occurred on their watch or on the Clinton democrats for believing all Americans deserved a chance at a home (Greenspan dates back to the Reagan administration). The issue is one of paradigm, the belief in a lack of regulation.

   As an Engineer, I know that post WWII West Germany was managed by the US Army Corp of Engineers by implementing Control System Theory to the economy. This is because Control System Theory textbooks dating back to 1936 would typically have an example problem where a simplified typical country's economy was diagramed as a control system block diagram and the student asked to determine the various transforms and to comment on the effects of deregulation. From an engineering point of view, deregulation of the economy leads to an unstable system subject to exponential growth and catastrophic collapse as resources prove to not be infinite. Unfortunately the engineering math is right and that of the economists were wrong.

   June 19th, 2009 at 9:36 pm
2. I AM AMERICA said:

   I’m gonna give you three key words and what they’re associated with

   Federal Reserve – inflation
   Nixon – Gold standard
   Fractional Reserve banking – housing bubble

   The federal reserve inflates the dollar by creating more of it out of thin air, decreasing the purchasing power of the dollar.

   In 1971 Nixon took the dollar off the gold standard, making the dollar as worthless as the paper it is printed on

   The housing bubble was caused by bad loans given out to people who could not afford the houses they were living in. The banks operate under a fractional reserve policy, meaning they can give out more money than they own. When this money was given out to people who could not make due on the payment, the banks were forced to seize the homes, and declare bankruptcy because they could not make due themselves.

   The congress than approved the bail out these banks with tax payers dollars.

   June 19th, 2009 at 9:36 pm

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