The Troy Messenger

Posted on October 1 at 9:43 a.m. (Suggest removal)

Thanks.

I read a good article this morning that addressed the huge amount of instruments from third world countries that the United States and European countries were holding in the early 1980's. Had there been a 'Mark-to-market' rule back then, we would have had a crisis much larger than the current situation. That rule was not in effect then, and the situation unraveled on its own in due time as world markets strengthened.

I believe we get out of this and become more conservative financially for a while- until things get so good for so long that we all start relaxing and making dumb decisions again.

On Crisis will affect jobs if left unchecked

Posted on September 30 at 10:02 a.m. (Suggest removal)

The real problem with this "bail-out" is that so few people in America understand the underlying situation with mortgage-backed securities and their impact on our banking system.

The problem commercial banks are facing is that the mortgage-backed securities they are holding were forced to be written down to market values because of accounting standards. As stated above, 93% of the mortgages that make these securites are still performing (compared to 97% before), but due to uncertainty, the prices of these securities (from those few that will buy them at bargain-bin prices on some days) have been cut in half.

This is similar to getting a quote on selling your new $50K SUV on the day that gas prices hit $5/gallon. Nobody wants it and those that do will try to lowball you with a $5k offer. However, it is still a fine vehicle and when gas prices subside it will be worth much more. However, your bank doesn't force you to write your car value down and collect on your loan when you can't cover the difference everytime an event happens outside of your control.
The commercial banks are required to recognize that difference in their book cost and the going market value at given times. When that change happens they write the difference (in percieved value) off in a loss and deplete the capital that they must have to issue loans.

The government simply wants to buy these securities (at these rediculously low levels), which will allow the government to collect the payments from the 93% of mortgages that are still paying and maybe give some flexibility that will help some of the problematic 7% become collectible. The banks will restore their capital by liquidating these securities and be able to function properly (outside of the burden placed upon them by the accounting standard) and the government can collect far more value from the investments than the initial cost ($700B).

The government did decide during the Clinton administration to reduce credit standards to allow more people to own houses (even those with very poor credit backgrounds that brought zero equity into the purchase). In my opinion, this action opened home ownership up to millions of new people (which Bush did pat himself on the back for) and helped build the housing bubble that started to breed speculation, rising prices, etc. that exasperated the situation before the bottom fell out and the American consumer culture (no savings, too much debt) started getting hit with rising fuel and food costs.

On Crisis will affect jobs if left unchecked