Insane Douchebag Has Economic Theory:

The Core RPGC Main Forum
1

Someone please explain to me what saying “Happy Holidays” has to do with our economic meltdown. I mean, I tried comprehending what this troglodyte wrote, and it just seems like word salad to me. Here’s my favorite quote:

“It has been my view that the steady secularizing and insistent effort at dereligioning America has been dangerous. That danger flashed red in the fall into subprime personal behavior by borrowers and bankers, who after all are just people. Northerners and atheists who vilify Southern evangelicals are throwing out nurturers of useful virtue with the bathwater of obnoxious political opinions.”

Ah, yes. Our economy is fucked up because America is “dereligioning” (not even a word), not because investment bankers and various other assholes got greedy.

2

No the problem is that the banks lent money to lots of stupid people who could not afford all they were lent. I’m certain this includes lots of religious zealots as well as atheists.

3

That’s not the entirety of the problem, Sin. While the banks did lend money that they shouldn’t have, they also sold the loans with a guarantee. So when everyone defaulted on the loans, the banks were forced to default on their guarantees therefore fucking up everything.

4
5

Rinn wins.

6

Despite the confusing diagram, I may actually comprehend this whole mess now. Win.

7

A picture is worth a thousand words, as they say. But to complete this “naturmort”, the government bailout stage should be followed by the corporate socialism stage.

8

Here’s my understanding of the situation on a more technical level. Feel free to correct me where I’m wrong.

To buy residential property, masses of people took out non-recourse debts, secured against the property they were buying. That means people could default on their loans, and the banks could only collect the property. They couldn’t “reach into” the lendees’ assets on a default. Based on most of the last 20 years, banks thought residential property was a safe investment. On a <i>nation-wide</i> scale, property rarely decreases in price too much or for too long. That’s what “diversification” was all about: having security interests in so many pieces of property in so many places, that all the risks were canceled by the rules of probability.

What the banks did not anticipate (or perhaps refused to see) was that on a <i>nation-wide</i> scale, demand for houses was far higher than it “should” have been. Blame the tax code, which creates huge incentives for buying residential property (e.g., no tax on profits from sale of a home whose value has appreciated, or the home-mortgage-interest deduction from gross income). Blame overeager economists, businessmen, lawyers and politicians, and of course <i>banks</i>, who convinced ordinary people that home-owning was the way to go. The banks didn’t realize they were doing themselves in. So, for a while, people bought more residential property than they needed (or could afford), because they had inflated expectations of gain from doing so.

Within a few years, as the economy weakened and people sobered up, they realized 1) owning residential property wasn’t yielding them the gains they’d hoped for, and as a result, 2) they couldn’t <i>afford</i> to pay off the mortgages (loans) on their property. So they did the logical thing: they tried to sell their houses. This would have worked in most eras. High supply means low prices, which means an influx of buyers from elsewhere where prices are higher. But remember, this was happening nation-wide. There were no low-supply buyers elsewhere to rush in and exploit the excess supply. What happens when people can’t pay their mortgages and can’t sell their property? They default on their loans, of course.

The disaster’s now showing pretty clearly. The banks seize the residential property from defaulting lendees. The banks had planned on that property appreciating in value, so it’d be worth a lot more today than it was 5 years ago. Instead, it’s worth <i>significantly less</i>. If these were <i>recourse</i> debts, the banks could reach into the defaulters’ bank accounts and assets to get the rest of what the defaulters owed them. But because these were non-recourse debts, the banks were stuck with property worth very little. Even worse, the banks couldn’t <i>sell</i> the property because nobody wanted it. So the banks couldn’t even liquidate the devalued property.

Meanwhile, seeing that the investment banks are in a bad situation, people start withdrawing their money very quickly. This was a logical decision, because clearly a catastrophe was looming on the horizon. But of course it exacerbated the problem: investors were now demanding their money from the banks, who couldn’t spare money to give, and couldn’t convert their assets to money because nobody wanted the assets. Remember seeing the expression on the Morgan Stanley CEO’s face? Remember how he kept shouting that the market was behaving irrationally and it threatened to pointlessly destroy investment banks? This is what he was talking about. Only, the market was <i>quite</i> rational to be withdrawing all of its investments. It’s just that doing so came at the expense of investment banks. Fortunately for that CEO, Morgan Stanley was one of the lucky two that survived.

So that’s what happened. Three investment banks ran out of money from all the withdrawals, and went bankrupt or were bought out. The other two barely scraped by, and they’ve given up their ability to take risks (see: all of the above) in exchange for the safety of government backing. In reaction to the financial crisis, we’re going to see a ton of safe behavior from everyone. What does that mean? Lots and lots of government regulation against risk-taking. Basically, one giant leap toward socialism. And frankly, I can’t blame people for wanting some safety and slow, old-fashioned progress. It’s just a shame that it had to come to this, when <i>moderate</i> risk-taking could keep our economy moving at a fairly rapid rate, without triggering a long, slow-as-molasses recovery period like this.

9

He didn’t spell out all of his steps, but I think his argument goes like this:

Religion teaches responsibility, restraint, and remorse.
The three R’s help protect someone from greed. This financial crisis, ultimately, can be boiled down to love of money (the root of all evil).
Not saying “Merry Christmas” is indicative of the secularization of America and the decreasing role of religion.
Since America is putting less emphasis on religion, and religion helps to instill values which fights the greed that was the heart of this problem, less religion in America led to the economic problem.

Now, you can attack any one of those prongs. However, that’s what his argument is saying. He was still saying the problem was because people got greedy. However, the greed was the result of a lack of religion.

10

And because of (supposedly immoral) Northerners and atheists and the secularization (whole other issue) of the U.S. The greatest problem of the article is that he (a supposedly religious guy) doesn’t sound too compassionate, thus discrediting his own argument some.

Anyway, I place more blame on the banks offering more loans than they could give than to the people taking advantage of them. They were supposed to have economists knowing their stuff. And ditto for agencies issuing AAA (supposedly as non-risky as you can get after T-notes and bills) papers that turned to junk overnight.

11

That’s true. When I was speaking of investment bankers, I was referring to is what many in Goldman Sachs et all did. They were taking great financial risks on money that wasn’t their own. They reaped the rewards from the risk, but they didn’t get penalized if the risk didn’t pay off.

12

I agree completely. Xwing’s comment essentially describes the diagram that Rinn linked, which is surprisingly accurate. The bottom line is that you had people that kept borrowing money they couldn’t pay back and lenders that kept lending them the money because they were short-sighted. What bugs me is that in everything that eveyrone keeps talking about in the media is that no one mentions the responsibility of the people that took out money they couldn’t pay back. This would probably be an unpopular move anyway.

13

Xwing is pretty much bang on. The only thing I’d disagree with is his final point - this isn’t exactly a giant leap towards socialism, it’s simply the addition of restrictions. Which is what the government is supposed to do to keep the economy healthy - booms are bad. Booms always, always lead to busts, and the government is supposed (or at least, this should be one of it’s goals) to prevent these booms from happening in order to prevent the busts that follow. Steady growth can be attained without the sharp dips.

Of course, governments don’t do this because they’ve a huge conflict of interest involved - they want to keep the economy stead on one hand, but on the other they really want to get reelected. So they let the booms run rampant to reap the good press that follows, confident that even when it does go bust, they’ll only be out for a couple of terms at most. That’s how it always happens.

Edit: Yeah that diagram is pretty awesome Rinn.

14

Sticking a socialism tag on the U.S. government and other governments around the world intervention in the functioning of the markets to an extent not seen in many years is not very accurate, indeed.
This is the collapse of a model of capitalism – sometimes called the “Washington consensus” or neo-liberalism.
Neo-Keynesianism (on steroids) is in vogue again.
Chavez almost got it: http://ca.youtube.com/watch?v=FGDtEKkJDr4

15

And on top of that there was a market based on CDOs that were deemed secure by companies with world-class reputation. It’ll be interesting to see what happens with the rating agencies because what happens when you can’t trust someone whose job depends on trust? Arthur Andersen back then with Enron got wiped even though they were finally proclaimed to be not guilty.

Anyway, your average Joe should know that paying 80% of his salary for mortgage payments isn’t viable, but on the other hand banks have plenty of economic counsel and they were still indiscriminatingly pressing people to get higher loans. If the situation backfired on them, their risk and reward assessment was wrong. Loans are their primary line of business though while Joe often gets his financial advice from his bank.

When I first applied for a credit card, I wasn’t eligible to get one. Instead I got a debit card and one week later I was offered a 50000eu line of credit. The bank wouldn’t give me a CC with an initial limit of 700 or 1000eu but they’d give me fifty thousand. Who is the idiot in this scenario, the bank or me for not getting the money and fleeing to a country with favorable exchange rates?

edit: And yeah, socialism this isn’t.

16

The bank is not spending the money. The people are.

17

A “leap toward socialism” is not the same as “being socialist.” The government has recently bought huge shares of major, national corporations, and will be buying more. It intends to restrict risky investment strategies that have been allowed for a couple decades. The market is less free (to take risks), the government has gained direct control over some businesses (AIG, to a degree Goldman Sachs & Morgan Stanley). The overall level of market efficiency will be limited due to restrictions that prevent money from being allocated in creative (and risky) ways. This creativity to “cut transaction costs” occurs most when people 1) have the least restrictions on their creativity; 2) are motivated by the greatest possibility of profit; and 3) a profit-indifferent government does not directly control major entities in the market. That’s the free market. When I say “more socialistic,” I mean, “more restrictive on the free market for its own safety.”

Not that I’m invested in the semantics of the word “socialism.” Call it what you’d like; it’s the substance of the above paragraph that I find depressing. Every step the government is taking, I agree, is utterly sensible. But it’s a shame that misinformation caused excessive risk-taking, which in turn made <i>this</i> necessary. Knocking the pendulum too far one way makes it swing the other way.

18

I wouldn’t even go so far as to call this a leap towards socialism. The point is that without government restriction, this is always going to happen. Every single time. Governments are supposed to not let that happen, but it’s also in their interest to let it happen, in order to make them more popular. Oh well.

19

The bank is authorising the people to spend the money :wink:

edit: Or what Cavel said. It’s hard to kill someone shouting “BAM!” etc.

20

Who then go and spend the money.

Gun don’t kill people, people kill people.