I have to tend to believe that when there are so many unknowns and people believing there is an unending crisis, they begin to lose their minds. Politicians and those in control of passing laws, creating new approaches to resolve the economic crisis, and regulators from financial entities, begin to create things willy-nilly to find a solution as quickly as possible. These approaches, however, can be rushed and wind up making situations worse or just completely dumbfound the public.
Two recent examples of the lunacy regarding our markets are 1. the new creation of McG’s [sic] for the mortgage-backed securities much like what the GSE’s, Fannie & Freddie, dealt with, and 2. the Chinese government admitting that the US and Chinese governments are creating more bubbles to resolve the original bubbles.
I thought the point of this financial ‘Crisis’ was to find the mistakes and learn from them – not repeat them!? When people perceive a crisis they either pull through with flying colors and act valiantly in the face of pressure, or they crumble and act irrational. I think we are seeing the latter of the two.
McG’s would act as a government backed regulator, that would take the place of Fannie and Freddie, but their debt will not be guaranteed by the government, another similarity of the GSEs. The reason Fannie and Freddie crashed was due to it’s over-leveraged position and no government guarantee on their debt/credit risk. There are arguments that the leveraging itself did the damage and that the government can be usurped to avoid the risk in the future if caps are put on the amount of debt and risk a company can carry. Some other notes about McG’s: Interest and Credit would be split between bond holders and the McG’s. Private investors would make profit from these McG’s, but taxpayers, who would establish the McG’s would receive nothing in return.
However, the full story on the notion of McG’s is best explained through a video clip from CNBC. It’s a shame that more people don’t watch CNBC, but I assume a person has to have the stomach to watch markets, numbers, and finance. Personally, getting my masters in Finance has been enough when it comes to listening to financial topics for hours on end.
There have been other concerns raised regarding this new idea from the MBA as well as some suggestions from Market Ticker:
This is idiotic. Let’s count the ways:
-A “strong regulator” eh? You mean like the FHFA? Fannie and Freddie had a so-called “strong regulator” that nonetheless allowed them to lever up at 80:1 (or 200:1 depending on how you looked at their books) which was clearly outrageous on its face and led to their demise.
-That same “strong regulatory framework” had Fannie and Freddie buying other-than-actual-prime paper. It detonated. Any questions?
-Fannie and Freddie turned into revolving-door agencies with the government, winding up as political tools on both sides of the aisle.
Simply put, credit risk is controlled by imposing leverage limits on buyers. This is done by requiring down payments. A 20% down payment requirement limits leverage to 5:1, and unlike a political process it requires no regulation – you simply make it unlawful to give out mortgage money without 20% in cash on the barrel. Presto: credit risk problem solved.
The 100-year-old set of standards:
-20% down payments, in cash, are required
-28% “front end” (all housing expenses) maximum ratio
-36% “back end” (all debt service including housing) maximum ratio
China has also confirmed what many of us have believed for quite some time. Our government and many others are creating more bubbles to try and fix the old ones.
In a phenomenal demonstration of frankness and true economic assessment, the head of the China Investment Council, Lou Jiwei, who controls China’s $298 billion sovereign wealth fund, admits the ponzi nature of today’s markets:
Both China and America are addressing bubbles by creating more bubbles and we’re just taking advantage of that. So we can’t lose.
Indeed, they can’t lose thanks to the criminal silence on behalf of Mr. Jiwei’s US financial counterparties. It doesn’t get any simpler than that folks. Keep in mind Madoff was thrown in jail for a few hundred years for much less: what’s $55 billion when you are dealing with a $20 trillion+ global equity market Ponzi scheme. And yet both China and the US continue their struggle to perpetuate a Ponzi, with the full implicit backing of all financial, regulatory and legal authorities. The system is now officially broken, even ignoring the conspiratorial ramblings of fringe bloggers.
Haven’t our financial markets been set-up much like ponzi schemes for a while now? The government intervention and involvement in our economy has made it ‘fake’ for some time now, and the actions of our current administration is certainly making it much worse.
This is just a simple lesson in irrational economics. Then again, we couldn’t expect much else from the far left – people like Krugman who believe a third stimulus is needed (yea that’s the ticket!) or Van Jones who believes that a new green economy should take the place of our current capitalist structure for social justice purposes. Care to take a lesson in some basic supply and demand equations?