It is extremely misleading to suggest that this crisis was caused by John Q. Public (although JQP is certainly being asked to pay for it.) The vast majority of the the debt is the $1+ Quadrillion in derivatives transactions. JQP wouldn't know a derivative if if bit him on the ass. Governments should agree to euthanize these guys and much of the problem would be solved.

Is this possibly a meta irony, where the purported ironic comparitor is itself a source of irony ?

The fundamental logistical failure of addressing famine in Ireland in the 1840s was lack of any inhibition on the export of ceral crops from Ireland. And the largest exporter of Irish produced grain ? The Catholic Church !

A.virosa

Sigh. The Irish situation is a duplicate of the US one, already much-discussed here. During the 2000-2007 housing bubble, both the US and Ireland (I mean the good people of both countries) borrowed a lot of money against their inflating housing prices. The new financial instruments (which HK calls generic "derivatives") made it easier than ever to convert real estate "paper-equity" into cash. One of those derivatives was insurance on securitized mortgage backed loans. You could even buy stock in companies that sold insurance on securitized mortgage backed loans. Like AIG. Level piled upon level of speculation there, and it all collapsed in 2008 when the markets simply could not take any more, and all the loaned out money on housing that wasn't worth it, came due to be repaid. In both the US and Ireland, since the capital markets around the world are all connected too well now for any to be isolated.

2004 was right in the middle of this. How could 43% of American families (or Irish families if you like, because it was all the same there) spend more than they earned each year? No problem in 2004 at the height of this rising housing bubble. It wasn't going all on credit cards, but coming out of houses being used like ATM machines, as second and third mortgages became available. There even existed plastic cards that gave you money from a loan against your house (a home equity line of credit-- try to get one of THOSE now). Nobody cared about this, before the housing equity values (on paper) were going up faster than the home loan borrowers were spending the money; it was sort of like spending money you were making on your stock account in your portfolio. Except that everyody knows such rises in stock value are imaginary numbers until you lock in the earnings by actually selling the stock. In housing speculation people weren't actually selling their houses even though they were speculating with them in just the same way as with stock-- they were just watching their paper value rise, and borrowing against THAT, and spending it.

When it all came crashing down in 2008, people owed more on their houses than they were worth. In Ireland, too. HK thinks the banks got all that money, but he's wrong. The people who borrowed against the housing market, which means the home-owners, got most of that money. Letting banking systems collapse now that they own the titles to all the real estate left behind (the "ash" of this bubble), is not going to fix this problem. The blame for all this is everywhere. A lot of it is with homeowners who had a great time with the money they "made" speculating against their own home prices as they rocketted up.

If you can let your banking system collapse, which means that your industry is not far behind, then your economy goes down and everybody is out of work. Not just 10% but 25% or more. They tried that 1929-1932 in the U.S., and it didn't work so well. Tight-money made the depression worse. Bernanke, a student of the depression, is therefore now trying the opposite, which is to put all the housing credit default on the government credit card. So far it has kept the US economy from imploding.

Now it's Ireland's turn. They (like the U.S.) have a total government debt of about 100% of their yearly GDP. But this next year, if they bail out all the housing market lenders (and yes, most of them are banks, who will foreclose on the houses) that will go up to 133% of GDP. They will have spent 33% of a year's GDP in a SINGLE YEAR, bailing themselves out. The US did almost that last year, but it put them only up to 94% GDP. Ireland's debt position is worse.

But they don't really have any choice. If they allow the housing sector, mortgage lenders and banks to take the default on all that credit, there won't be any more banking in Ireland. Which means no more Irish economy, no more Irish industry, and no more Irish miracle. So they're going to have to do what the U.S. did, or else have a Great Depression of 1929. Were it not for the suffering that would cause, I'd wish that they actually would do that, just to teach HK and LaRouche a lession that they seem to have failed to learn from 1929-32.

I doubt that's the half of it.

Looking from a different angle, if you were a group of powerful bankers who had enormous political power at your fingertips, what kind of laws would you get your lackeys to pass to enrich yourself? Those laws would have to be based on human psychology.

You'd want to make it possible for people to load themselves up on credit, to the hilt. Then you'd want their home to hang in the balance - keeping one's home is a big motivator (these lines of credit weren't legal when I was a kid.) Then you'd want them to shoulder the maximum amount of credit for as long as possible to bleed them over a lifetime.

When this first kicked off it was obvious that shysters had been going into poor areas in the US and arranging dodgy loans to poor people that didn't have a hope in hell of ever repaying the loans, after the initial ultra low interest rates had finished. That what had happened was the biggest transfer of assets from African Americans to Corporate America since the end of slavery. The loan arrangers all got their fees and bonuses and the rest got shafted.

In the UK we had that daft bitch Angela Knight, chief executive of the British Bankers' Association, arguing that they were clever people and would just get a round any regulations. One should send them all a photograph of Blackfriars Bridge as a Xmas card.

You still think this is about housing?

Why do that? The only course of action that will actually work is to put the system through the equivalent of a Chapter 11 bankruptcy. Then sovereign governments will need to create new credit which will be channeled very specifically into productive activity. The alternatives are the kind of collapse you describe, or a series of bailouts culminating in a collapse much bigger than what you describe.

See also: Iceland Better Off Than Ireland Because They Let Big Private Banks Fail, says President

Yes, I and most economists. Let your eyes wander over this chart of Dublin housing prices 1970 to 2005:



Do you see anything that looks like a housing bubble? Hmmm?

Here's a pretty good review of what happened to Ireland. You'll like this quote:



Doesn't that make it rather clear?


Hershel, FDR already tried what you suggest, with the WPA and all the alphabet agencies created in 1933. Basically that didn't work. It was a bit better than Hoover's tight money policies (basically "let the private banks fail" which allowed the Great depression up till then, from late 1929- early 1933). But all that happened was that FDRs policies kept things from getting any worse. It is also not true that WW II ended the great depression-- during the war the standard of living stayed at great depression values, but nobody cared because they expected it (since it was a war). They put up with rationing and taxes they would not have in 1934. Finally, the US emerged from WW II as the only major western power with a working infrastructure, and that was not courtesy of FDR, but courtesy of the Atlantic and Pacific oceans. THEN we emerged from the great depression, with personal income and joblessness reaching 1928 levels for the first time in 1947.

That's not what the story says. Ireland didn't let its banking system fail. It divided it into a foreign-investment sector and a domestic-investmnt sector, and it let the foreign-invested banks fail, basically selectively screwing foreign investors in Iceland. You recommend the US should do this? What do you think China will say about it? And how will LaRouche feel about the U.S. screwing China's investors? Come off it, HK-- Iceland's "solution" (if you can call it that) is not open to the U.S.

Absolutely. You have successfully demonstrated that the housing market was a bubble, but not that it was the bubble. In fact, there are bubbles everywhere:

That one is not the bubble, either. The bubble, or what history will call the Greenspan bubble, is an order of magnitude larger. Housing, soybeans, and all the other stuff are just part of the froth.

When residential investment goes from 5% of your GDP to 12% in just 8 years, as happened in Ireland, that's not "froth." You won't find anything else remotely like it.

Soybeans. How much of the US GDP went into soybeans? Did our investment increase that much in any other sector you can think of, from 1998 to 2006? I'll give you the answer: no. So single thing sapped as much investment money, by turning it into capital and then cash, as the housing market. Nothing else was that big.

You can try to deflect attention away from the housing bubble all you like, and it's not going to work. There was a housing bubble in the first 6 years of this century. It ate $7 trillion, which we spent. Now our houses are worth half as much as they were in 2006. That didn't happen with soybeans. It may be the soybeans are not worth nearly what they once were, but they're not $13 trillion worth of our economy.

Unless you count US derivatives holdings, which at $223.4 Trillion are actually worth (on paper) about 1500% of our GDP. Now, there's a bubble.

But why would you want to "count" these? This monetary value is like counting the value of term life or (even better) accidental death insurance payout benefit, before the insured person dies. You can't DO that, since most such policies will lapse without ever being paid, and that's the end of them. They aren't debts. The money value of them (if any) is only a tiny fraction of their "face-value."

Almost all the "derivatives" above are "swaps". They function like insurance policies on money deals, that will never be paid. In most cases, it's hard to say even which side will be paid in the future from them-- all we know is that both sides are at risk, and most of this money will never change hands. Just like the payout money for accidental death.

As an economist, I hereby give my endorsement to roughly Milton' description of what happened. This isn't to say that the financial sector, derivatives and all wasn't itself also screwed up and a cause much of the trouble. It's not a single-explanation answer.

You'd get slightly more credibility by calling yourself a pop-up toaster …

Jon

Gosh, that all sounds pretty sensible. But if that $223.4 Trillion in derivatives poses no problem, why is the bailout money going to derivatives traders instead of those bad homeowners that supposedly caused the problem? In fact, the recent disclosures by the fed (compelled by the congress) reveal that the fed bailed out over 100 hedge funds and other off-shore funds. The bailout figures disclosed by the fed run around $16 Trillion. I was unable to find statistics on the present dollar amount of delinquent mortgages, but I suspect one could buy all of them for much less than that.

That's like asking why ya gotta pay yer gambling debts first.

Kneecaps, Crowbar.
Crowbar, Kneecaps.

Jon

You could, but the numbers are meaningless, because the $14 trillion is in LOANS, mostly short term (a few months). Most has been paid back already. Remember the initial $700 billion TARP treasury program will eventually cost $30 to $60 billion, depending on who you believe. The cost of the much larger Fed (Federal Reserve) loan bailout of everybody will be a tiny fraction of that $14 trillion. I don't know what it will be. I don't think you do, and I don't think even the Fed does. The Fed, remember, does not get your tax dollars, but supports itself with interest (anything it makes over a certain amount, it actually pays to the government to DECREASE your taxes). If the Fed really loses out on all the loans for the past two years, you'll know it when the currency starts inflating. According to the consumer price index, that hasn't happened, at least so far.

http://www.pressdemocrat.com/article/20101...21072?p=1&tc=pg

Housing: note that $1.25 TRILLION of the Fed bailout went to buy home mortgage securities from Fannie Mae and Freddie Mac, all of which kept homes from being foreclosed-upon (alas, none of that helped MY home loan). Is that the sort of thing you had in mind? It didn't pay off the mortgages, but it kept up their sagging repayment status. Perhaps all those people should go out on the street. I dunno.

The Fed lent money to everybody who looked like a good credit risk. $16 billion to GE and $2 billion to Harley-Davidson, both companies which were in danger of not making payroll and closing their doors. Yeah, I know LaRouche doesn't care about a motorcycle company. And he may or may not care about MacDonalds and Caterpillar. But the people who work there, do.

Yes, I see whining about 100 hedge funds. And the California Teacher's Retirement Fund (some California teachers remind me of infrastructure, and not in a good way). Your hedge fund for your filthy rich yachting pleasure is my retirement fund that needs to be there to keep me from having to live on cat food when I'm old. So which kind are we talking about? Is this just hedge funds owned by filthy rich bastards that I wish would die, or is any of it where my money is? And how much of the total ARE these 100 "hedge funds"?

You should understand that the $14 trillion in loans is not the issue when you see people complaining about the interest rates on the loans. They are jealous that they didn't get low interest money. Perhaps some banks even took zero-interest money and bought T-bills . We don't know how much of that went on. We do know that Citigroup, Merrlll Lynch, and Morgan Stanley got $6 trillion in quicky-loans between just the three of them (what-- you think they KEPT it??), whereas your average mainstreet business got nothing, and (if you weren't a Fannie or Freddie mortgage), your mortgage didn't get affected either.

Look I'm not claiming the Fed is perfect. But even I know it's easier to loan large amounts of money to hundreds of large banks and large companies, and a lot harder to loan it to hundreds of thousands of smaller businesses, or directly to millions of mortgage payers. I suspect that the money that went to Fannie and Freddie is some of the worst loans the Fed made, and will never see again, and that DID go to housing. Do you want the Fed to make loans to companies and banks that will pay it back, or not?

The whole thing is another Ponzi scheme, because the TARP loans were repaid with zero-percent loans from the Fed. Which loans will also be rolled over ad infinitum.



No shit, Sherlock.

Yeah I know, like the old joke about a kid telling everyone that his dad "plays piano in a whorehouse" because he could never tell'em his dad is an economist. For what it's worth, quite a number of economists (though generally not the kind you see on TV) were warning about the fact that shit was messed up before it happened. At a point or two, Bernanke was actually one of them.

The cream of the jest being, of course, that they are the same thing.

Jon

And tonight there is a news flash.

"Your battles inspired me - not the obvious material battles but those that were fought and won behind your forehead." - Joyce

I can't possibly outdo that, so.....