"America's financial system was shaken to its core on Sunday."

Not the first line you want to read in the top story in every major newspaper on the first day of the week. There it is, though. Today was one of the most bleak days ever in Wall Street's history, and Monday looks like it's gonna suck. The headlines will surely be easy to find; I'm publishing this post mostly just to create an open thread for the BB community to discuss whatever unfolds, and where it all leads. Snip from today's lead item in the WSJ:

The American financial system was shaken to its core on Sunday. Lehman Brothers Holdings Inc. faced the prospect of liquidation, and Merrill Lynch & Co. agreed to be sold to Bank of America Corp. The U.S. government, which bailed out Fannie Mae and Freddie Mac a week ago and orchestrated the sale of Bear Stearns Cos. to J.P. Morgan Chase & Co. in March, played much tougher with Lehman. It refused to provide a financial backstop to potential buyers. Without such support, Barclays PLC and Bank of America, the two most interested buyers, walked away. Late Sunday night, Lehman said it intends to file for protection under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York.
Hang on to your bindles, friends.

Here's more on insurer AIG's related meltdown, and here's the article from which the preceding graf was snipped: Crisis on Wall Street as Lehman Totters, Merrill Is Sold, AIG Seeks to Raise Cash (Wall Street Journal). Greenspan today characterized this as a "once-in-a-century" crisis. Referring to smaller regional institutions most vulnerable to consolidation -- commercial banks, not the troubled investment banks at the center of this news cycle -- one particularly pessimistic investor quoted by CNBC predicts "a thousand banks will close" in the coming months. Krugman in the NYT: "Will the U.S. financial system collapse today, or maybe over the next few days? I don’t think so – but I’m nowhere near certain." I'm also following Floyd Norris' liveblogging on Monday.

BB commenter Seg says:

For anyone wanting a primer on how the mortgage crises started, I highly recommend listening to the whole hour of This American Life: #355: The Giant Pool of Money. It's the best reporting I have ever heard on anything, let alone the housing crises. While it doesn't go beyond events after April 08, it will bring you mostly up to speed.

Image: Ape Lad's prescient Laugh Out Loud Cats, a sweet illustration not actually created with any of this in mind.


  1. We are in uncharted territory. Merrill, WaMu, Wachovia, and Morgan Stanley are also thought to be in various stages of the wobbles.

    Dow circuitbreakers kick in when the Dow is down 1200 points or about 10%.

    When government willfully refuses to regulate, then you can expect stuff like this will eventually happen.

  2. This is what happens when the government slowly removes all the safeguards put in place after the depression to insure that it would never happen again. Surprise, we’re headed towards it happening again.

  3. I was astonished recently to read that US mortgage holders who can’t meet their payments can walk away from the debt. It’s twenty years since I dropped out of my college Economics degree course :) but this seems like a fairly fundamental weakness. The manufacture and trading of toxic CDOs (trade-able aggregates of debt, mostly mortgage debt) which have now turned out to be impossible to value when push comes to shove, and hence worthless, seems to be the common factor in Bear Stearns, Lehman, Sally/Freddy and Merrill Lynch. How much of that sudden collapse in value is due to the ability of the actual debtor (the mortgagee) to walk away from their obligation? (Discuss!)

  4. I honestly don’t know what to do about the investments in my 401k. If I try to move now, it’ll occur after close Monday. Are we looking at a week long drain or a huge drop followed by a plateau?

    Days like this make me wish it was all in a box under my mattress.

  5. Well, he reason they can walk away is that the property itself is collateral. The collateral is the guaranty for the loan after all.

  6. Sheesh, I’m going back to hiding money under the mattress.

    The international markets are not going to be happy either. Am listening to CNBC Europe and reports suggest that UBS is getting ready to write off an additional $5B in bad debts.

    How is this going to affect regular people? Economic slowdown on a macroeconomic level, obviously, but what will people like you and me have to contend with – the ones with no bank investments, no major debt, jobs outside the financial sector? That’s what I’m worried about most.

  7. How much of that sudden collapse in value is due to the ability of the actual debtor (the mortgagee) to walk away from their obligation? (Discuss!)

    100% of it all.

    It’s sickening. It’s all part of not only deregulation (thank you Reagan!), but also this pervasive mentality nowadays achieving one’s “dreams” is a sustainable goal in and of itself. It’s the mass lie that has lead to people barely out of college holding massive credit card debt and it extends here because nothing personifies the American dream more than owning a home.

    Wake up call folks: America allows you to achieve any dream you want. It’s great! But the second you dip into a world of unbacked credit you damage other people’s lives. I don’t see an easy way out to any of this in any way because ultimately it’s money based on credit based on fantasy.

  8. For anyone wanting a primer on how the mortgage crises started, I highly recommend listening to the whole hour of This American Life:

    #355: The Giant Pool of Money

    It’s the best reporting I have ever heard on anything, let alone the housing crises. While it doesn’t go beyond events after April 08, it will bring you mostly up to speed.

  9. But, but, weren’t we all supposed to be able to privatize our social security and buy into the stock market? You mean it’s all just a house of cards?

    Ahhh, it’s the Bush economic plan at work. Phew. Glad I’m safe with my 401k.

  10. So can anyone explain what this means for those of us that have money in our savings bank accounts? Should we leave it in our bank or take it all out and stash it somewhere?

    If I recall, in the Great Depression banks went under and regular people lost all their savings since the banks went bankrupt.

  11. If your money is in a savings account, is under $100k, and is in an FDI insured bank, your money is perfectly safe.

  12. @#13 POSTED BY BONNIE:
    Depends on what bank you have money in. Unlike the Great Depression we have Google and online news outlets to get info from. Do a search for whatever bank you have savings in and then decide what you should do from there.

    Honestly, I’m starting to look for banks that are a bit more stable now.

  13. @BONNIE: if you have more than $100,000 in savings, I recommend you take all of it out of the bank immediately, stuff it in your bindle, and hop the next boxcar to HoboCon(TM) in Hoboken. Meet me there at the stew booth, where I will provide further instructions.

  14. #15 Ceronomus:
    Is money in a checking account under $100K also safe in a bank considering the lastest news? So are banks like Wells Fargo that aren’t FDI insured safe?

  15. @#7 Ceronomous:
    Just because you only have collateral for part of the loan doesn’t necessarily mean that you can’t pursue the borrower for the remaining amount — that’s the way it works in most of the rest of the world. There’s a considerable degree of moral hazard in non-recourse mortgages — buy a house with a 100% mortgage and if its price goes up you’ve made money, but if it goes down you can just walk away.

  16. @Xeni: Ha! I WISH I had more than $100,000 in savings!!! I don’t have that much (not even close) but I would like to keep the meager amount I have safe. So any of you who can shed some light on those of us scared of reliving moments from “It’s A Wonderful Life,” that would be grand.

    But for the record, I’d meet ya at a stew booth with just $20 on me, Xeni! ;-)

  17. I feel like I’ve been here before. I worked in Merrill 85 to 92. The era of “greed is good” and the subsequent junk bond driven correction. I well remember all the young traders who hated their jobs but planned to do it for 5 years to buy the big house and the Porsche. That industry seems to be populated by people with little sense of history little imagination of the future and a willingness to take big bets that pay off in days, weeks and months, not decades. I lived through the long boom and web 1.0 madness as well. So this correction doesn’t surprise me at all.

    Companies going bust and being bought is a mechanism for writing off the loss and the unprofitable parts of the business so they can all start again. In a few years, the profitable parts will build up the war chest again so that what’s left can start indulging in some new high risk, high reward market. And the losers in the whole business are the people who need rational long term investment. Which means the pension funds, you and me.

    If you want the real headf*ck, go and read some Robert A Wilson on economics. Money is the Schrodinger’s cat of economics. It’s created by magick. And some times the Invisible Hand can wave it’s magick wand and make it disappear.

  18. Bonnie: in all seriousness, crisis or no crisis, I would not place my money in any bank that is not FDIC-backed.

    And one website folks are talking about right now is http://bankrate.com, which basically rates the “health” of commercial banks (i.e., the sort of institutions with which you or I might have a personal checking or savings account.)

    See you at the stew booth.

  19. Hey, what’s the doom and gloom? There’s enough time moaning afterwards, right now all the news channels are running pure stock-market pr0n. Where has that good old American enthusiasm for disasters gone?

  20. Hey! Where’s Zuzu!? He could see this coming and he’s safe in a bunker somewhere. I knew we should’ve listened to him!

  21. @#19 Bonnie:
    Wells Fargo is definitely FDIC insured. It says so right at the bottom of their homepage:

    Deposit and loan products offered by Wells Fargo Bank, N.A., Member FDIC

    I don’t know of any American bank that is not FDIC insured.

    Checking accounts and savings accounts together for any individual are insured for up to $100K at any single bank. I am not exactly sure how joint accounts work.

  22. And Zed, there are lots of local banks in the US taht are not FDIC insured. HEck, remember the S&L scandal? Those places were NOT FDIC insured….

  23. #20 Mike

    You don’t seem to understand. The property isn’t collateral for PART of the loan, it is collateral for ALL of the loan.

  24. @20 Ceronomous:

    The collateral may be intended to cover all of the loan, but if its value falls below the amount of the loan, then it’s clearly no longer collateral for all of the loan. In the rest of the world, and indeed in most business-to-business loans in the US, the lender can (in the event of a default) pursue the borrower’s other assets and funds for any shortfall in the same way as they would for any other unsecured loan. Most US mortgages work differently to secured loans anywhere else, for reasons which no doubt made sense at the time.

  25. Now if this isn’t a reason to pull the lever for the Republican ticket, what is? 4 more years sounds just like what we need.

  26. From AP – A global consortium of banks, working with government officials in New York, announced late Sunday a $70 billion pool of funds to lend to troubled financial companies. The aim, according to participants who spoke to The Associated Press, was to prevent a worldwide panic on stock and other financial exchanges.

    Ten banks — Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley and UBS — each agreed to provide $7 billion “to help enhance liquidity and mitigate the unprecedented volatility and other challenges affecting global equity and debt markets.”

    Some good news. Smart move by the banks. If the market fails, they stand to lose as much as we do.

  27. Just to say that Credit Unions are insured up to 100,000. by the NCUA which is like the FDIC for CUs. (But will probably not show up on the above websites).

    The NCUA says “Your savings federally insured to at least $100,000 and backed by the full faith and credit of the United States Government : National Credit Union Administration a U.S. Government Agency.”

    Honestly, I don’t know why anyone would put their money in a bank.

  28. I can’t believe the misinformation and doom and gloom here.

    Like Julian Bond, I was working in the stockbroking (and forex and bonds and M&A) industry from 1985 until the early 90’s (’94 in my case). I’ve seen it all before. Several times.

    I remember the October 1987 crash especially well. Frankly anyone who lost their shirt then was being an idiot. Just like the current mortgage problem it was obvious from years in advance that it was all going to melt down, the only uncertainty was when. Personally I called it reasonably well and sold all my stocks in September 1987. Even better, the company I was working for as a matter of principle did not have a trading position but acted purely as an agent for their clients which not only prevented any conflict of interest with the clients but also meant that they had no exposure to the crash and in fact did very well due to the increased trading volumes.

    I don’t feel at all sorry for Merrill Lynch or Lehmans. Those guys are big boys, playing in what should be the freest market there is. They know exactly how to adjust their risk to the level they are comfortable with and they simply got greedy and blew it.

    I totally disagree with those who call for government regulation or bailing out. The government doesn’t know how to do any better. Just look at the government-owned and run Fannie Mae and Freddy Mac for an even bigger mess. And government guarantees simply provide an incentive for managers to take even bigger risks to try to get bigger returns in the knowledge that if it all turns to custard they’ll be bailed out. It’s *precisely* the wrong thing to do.

    As I said .. the people running these companies know precisely how to tune their risk/reward profile. Or at least I did when I was working for some of them in the 80’s, and I doubt that knowledge has gone away.

    You decrease risk by:

    – putting some of your money into low or zero risk investments (government stock is the traditional “risk-free” benchmark investment).

    – diversifying between investments with uncorrelated risk.

    – arbitrage

    – using options or other derivatives such as futures contracts to offset part of your position in a risky investment

    You increase risk by:

    – borrowing the money to buy risky assets

    – putting all your eggs in one basket

    – engaging in practices such as dynamic hedging that in a perfect market can in theory reduce risk, but that explode in your face when faced with a market with insufficient volume, too large spreads or — worst of all — a forced halt to trading.

  29. I feel sick. We might need a chaser.

    Not an image chaser, but just good optimism style news. Wasn’t a kitten rescued from a tree somewhere today? Baby saved by boy scout? Anything?

  30. I’m a bit surprised it’s taken this long for turmoil to strike Wall Street. Yet, the same could have been said in regards to sky-rocketing gas prices. I can imagine Bush-Wack with his arrogant shrug stating “uhh, I’m outer here and skedaddling back to my oil ranch… this ain’t my problem.” (As he glares at his imaginary watch, mumbling his finger counts — of days left in office). Blowhard.

  31. @18 CanCult: LHC FTW!

    Quick, everyone panic and pull out your money so it turns into a real depression!


    Didn’t somebody predict some major US bank closures a few months ago? I can’t remember where I heard it. BBC maybe?

    I’m assuming that none of this is surprising to the people in the financial sector.

  32. The fact that it’s insured does not mean it will be worth anything by the end of the year. Sorry to be gloomy, but one solution is for the FED to print more money, and that devalues your savings rather significantly. It’s been happening all year, which is a large part of why Canadian dollars are actually worth something now.

    Not that this administration is known for moving the goalposts or anything.

  33. This is like the movie Demolition Man, except instead of all restaurants becoming Taco Bell, all banks are becoming Bank of America.

    I’m not sure which I would prefer.

  34. @Seg #10 Beside the excellent This American Life episode, I found these two BBC broadcasts enlightening.

    Failure at the Central Bank: An inside look at the global credit crisis from the viewpoint of some of the big players.

    On world commodity prices: How the same investment firms that brought us the sub-prime mortgage crisis are now making a killing on the commodity markets, and what effect this is having on the little guys.

  35. I see that completly unregulated markets thing is really working out for you guys.

    And by extension F*CKING everybody else too.

    I would ask you to consider who you elect a little more carefully next time, but hey you didn’t get to elect the incumbent idiot that last 2 goes so why will it be any different next time out?

    I wish you all luck in the US but really, these things NEED regulation.


    I’m with the others hoping our student loans disappear.

    Great! Then what happens to the people and institutions that loaned that money to students and who won’t get it back?

    I think you young ones really need to start to realize something: What this all has to do with is personal responsibility. If you can’t pay for something, don’t “buy” it on credit.

    And in laymans terms for people who still don’t get it: These banks are failing because they either bought into—or made loans to—people and entities that never had funds or means to pay back these loans. Their never was any money there to begin with; just lies and loans and more lies on top of that and now… Lives destroyed and no clear path out.

  37. Great! Then what happens to the people and institutions that loaned that money to students and who won’t get it back?

    They’ll get fries with that, served by someone with a B.A. is comparative literature or romantic art criticism or something equally obscure. The real secret is getting a degree that has a prayer of paying for itself.

    If everyone didn’t go to college over the last 20 years or so there would have been a lot more people unhappy about the decimation of American manufacturing. And besides, If we’re gonna have a draft, we’re gonna need us some seriously desperate people.

    You see incompetence, I see a huge lever.

  38. I remember many of the people who lived during the great depression later buried their money in jars in their yards. Perhaps that is the safest bet now? Of course with the dollar collapsing maybe its best to bury some silver and Yuan instead…

  39. “The United States’ financial chieftains had arrived at the tower in Lower Manhattan with a mandate to agree to a rescue operation for Lehman Brothers Holdings Inc. and to moves to protect Merrill from failure after investor confidence in both banks collapsed last week.

    The sheer volume of chauffeur-driven limousines required to ferry more than 100 bankers, officials and their advisors to the crisis talks had jammed up traffic around the block.

    But inside the building, rivalries and recriminations quickly killed off a proposal from regulators to create a vehicle financed by Wall Street that would buy up the toxic mortgage-backed assets of Lehman and create a potential safety valve for Merrill.”


  40. This is nothing. Next year will be much worse. Everything from the stock market to oil is being propped up until after the election. Plus another round of ARM resets next year.
    The recovery will take at least a decade.
    And this is not just limited to the US.

  41. Nothing like a bunch of armchair financial analysts to tell what’s going to happen to the markets even when the experts do not really know.

    As bad as it may look, it may actually be better in the long term. The market needs a carthetic moment (though this may not be it). This will drive oil prices downward and the dollar will gain strength as these problems domino into Europe.

    I’m hoping that their will be a bank failure the weekend before the election so people may think twice if they want to vote for a beauty queen or somebody who pursues a sensible economic policy.

  42. Here is where I get to be upset.

    I have been working in some capacity or another since age 16. Building my 401k for the past 4 years. Like many of my peers, I went to college as an attempt to be a good upstanding citizen, taking out 50k in student loans and working my butt off. Fast forward to present day, I have 30k loans left, a 401k that’s soon to experience problems, a quickly degrading car, and I live in a craptastic apartment. How are things going to get better? They aren’t, apparently.

  43. @55 Unless you’re planning to retire right now, why worry about what the stock market’s doing right now? You give a damn what it’s going to be like in several decades, not what it’s going to be doing this year.

    Cackling like a madman and buying stock like it’s going out of style would actually probably work out to your advantage right now. You’ll probably enjoy the result in 2040.

  44. A friend of mine told me yesterday that she hasn’t made a payment on her mortgage for 7 months and that the bank is allowing them to do a “quick sell.”

    Basically they can sell their home for as little as 80% of market value and walk away clean. They bought their home for $300k and it is currently valued at $240k. That means they can walk away selling that house for more than $100k LESS than what they paid for it, an no worse for wear (their credit is already ruined).

    I wonder why banks are collapsing…

  45. 5:58 AM EDT Monday, Sep 15
    NEW YORK (AP) — When Wall Street woke up Monday morning, two more of its storied firms had fallen.

    Lehman Brothers, burdened by $60 billion in soured real-estate holdings, said it is filing for Chapter 11 bankruptcy after attempts to rescue the 158-year-old firm failed.

    People snapped pictures with cameras and their phones. Observers pressed up against a police barricade drew the ire of one man who emerged from the building and shouted: “Are you enjoying watching this? You think this is funny?”

    “Tragedy is when I cut my finger. Comedy is when you walk into an open sewer and die.”
    with a secret handshake to Mel Brooks

  46. So, who’s responsible for the economy mess?

    Three groups of people.

    1> Oil Speculators – They drove the price of oil up, artificially, by buying and selling futures rapid fire on margin. This is why your gas is $4 a gallon at the pump. There is no actual shortage.

    2> Morgage Defaulters – They, being MORONS, took out low starting rate adjustable morgages. I, who got a morgage at the start of the morgage fiasco, got a FIXED rate morgage at 6%… Oh look, it’s still at 6%, I can still make my payments, and I still have a HOUSE. Adjustable rate morgages are for suckers, always have been, always will be.

    3> Sub-Prime Lenders – They sucked hundreds of thousands of morons into getting adjustable morgages by offering 1-2% APRs and lying about the likelyhood of rate increases. Ooops, suddenly, 2 weeks later, your morgage is running 18.9%. And now they’re getting their just deserts, because they tried to churn and burn the housing market. Doesn’t work that way.

    So, yes, right now the economy is in a poorly way.
    DON’T SELL YOUR STOCK. You don’t have a real lose until you do.
    Let the winds of change clear this 100 year old plus chaff from the system. Let the Dinosaurs fall away, and let the system come back into balance, and the economy will right itself.

    And stop short selling Oil futures.

  47. Seems to me like this is a pretty good time to invest. I’m still young and in the middle of my career. I’m going to be working for another ten to twenty (ugh) years at least.

    It would seem that, with the market lower and lower, putting our extra money into the market can pay back big benefits when it rebounds. If it doesn’t rebound, well, we’re all in the same boat anyway – America becomes a third world nation and it doesn’t matter what money we have because its all worthless whether its in our mattress (which doesn’t survive the huge inflation to come) or in the stocks of companies (which also doesn’t survive if there is a full on crash).

    In the mean time, I plan on investing my extra money into very wide spread index funds across the whole market. Take a look at http://www.npr.org/templates/story/story.php?storyId=6203264 for the spread of Vanguard index funds.

    The way I figure it, with investments in large index funds, the WHOLE MARKET needs to just fall apart for me to actually lose money. If that happens, Earth as a whole just sucks and my little slice of money doesn’t matter whether I have it or not.

    On the other hand, consider the bargain. We get a lot more shares for a lot less money now than we do normally. Why not invest in it with any surplus we have?

    Of course, this doesn’t mean doing what the jackasses did during the bubble burst. Don’t take out a loan to pay back money. Don’t put your house up. Obviously the main concerns are keeping a paying job, paying our cost of living, and riding through.

    The best thing to do with that 401k? Keep it there and keep investing. It’s called Dollar Cost Averaging. Just make sure its invested properly (see the NPR article I linked).

    Anyway, thats my thought and my strategy.

  48. @55:

    After 1929 it took more than 30 years for stocks to regain the pre-depression values. In stock-markets, as in real estate, there are more directions than just up.

  49. Hey folks, some now unemployed Lehman Brothers folks are now selling swag on eBay. Like this programmer (“just a programmer… I didnt make the mess!”) who is selling a:
    Lehman Brothers Employee swag-Operating Principles Cube


    In the description:
    “I wish management listened to the same things on this cube! Then my good friends…talented people wouldn’t be out of a job. Anyway how you like it and enjoy it…”

  50. @61 Then they doubled in value in the decade after that. (roughly 1955-1965)
    I can see being irked if you were near retirement, but if you’re just now entering the workforce what’s your worry?

  51. @62 Jflex…. That’s Irony right?

    You need a Big Oil and Gas Stooge with a major in communications & journalism.

  52. #20 Ceronomous / #33 Mike Scott: That’s something I’ve never realised about the US system. You can just walk away?, even if the property is worth nothing. As is widely the case?

    I’d like to know when, why and to who that made sense. It seems to discourage personal responsibility. And I have to agree with Jack (#48) – people my age, and alot of older folk too, just stack credit debt on credit debt. From day-to-day purchasing to mortgages and second mortgages and on and on. It’s fine while the market is up, unemployment is down – in fact we’re all encouraged to buy into it in one way or another.

    But when you get a deregulated system moving like a freight train, a bunch of irresponsible fools at the wheel… well, haven’t we seen this all before? Again and again? Perhaps not on this scale? It’s not cool to see history being totally neglected – I’m obviously not an economist, so I’m curious to understand how easily could some or all of this have been lessened? Besides the blatantly obvious reasons (taking on bad debt).

  53. Best case szenario:

    If you retired in 1965 you were born in 1900 and may have had some money to invest in stocks as a 29 year old. Whatever money you invested was basically gone. A doubling after 35 years is like investing with a 2% interest rate – which is actually near zero, since you have to account for inflation.

    Oh, and don’t tell me that another 10 years later or so you would have had another doubling and thus almost 4% – because back in 1965 a US citizen born in 1900 could reasonable expect to live another 5 years on average, not more.

    Anyone who was in their 40ies or 50ies in 1930 (and hardly about to retire) got out even worse.

    Surprise: you can lose money in stock markets.

  54. We all made that bed, we all enjoyed the ride now the time has come to pay the cab. We are hundreds of millions of fools that believed that perpetual growth based on nothing real, just numbers shifted left and right, was sustainable.

    REALITY calls : are you there?


  55. We moved everything last year into guaranteed funds. That and some other moves leaves us up about 10%, while everything else is down around 15%. What I tell people is this; if your 401K has different investment opportunities then move your money into a lower risk fund and wait. At the very least everyone should have been putting new monies into the lower risk funds starting last Nov. or early this year. Whether your fund offers different investment options or not don’t stop contributing, especially if your employer matches contributions. New contributions will purchase shares at the reduced price, creating opportunity for growth.

    The normal advice is to wait it out, but these are not normal times. Moving monies into more secure funds now will create opportunities later. Yes, many of you are younger and share prices will rebound, but why not take advantage of this downturn? This is an opportunity for small investors to quickly increase the number of shares they own.

  56. my 401k is entirely in overseas funds, mainly European. It may be taking a beating today but I make up for it on the exchange rates alone.

    I like what Mshea said, leave it all where it is. If it disintegrates it won’t matter who lost what. We’ll all be sunk at that point.

    I just wonder how many of these financial wizards decided to fly to their Montana compounds lasnight?

  57. @Anonymous, #6: You should probably leave your 401k money where it is. When you’re feeling less scared about it, you should pick some baskets for the long term, and then leave the money there for years.

    I spent a number of years in the 90s working for financial traders, and one of the big lessons I learned was that there is no possible way I as an amateur can trade frequently and beat the pros. They spend all day on it, they have years of experience, and they spend big money each year on technology and information.

    If you’re moving your money around in response to the daily news, you’re just giving a good chunk of it to the pros. Which will make you anxious, and even more likely to trade. Don’t fall into the trap. I check my allocations (and balances) once a year, but haven’t changed them in five.

  58. William’s advice is spot on under normal circumstances, but this is anything but normal. No one believes small investors should chase the news. But when markets make huge, obvious corrections, protect your assets (especially new contributions), continue contributions, and wait to move back into more aggressive funds.

    When the bubble burst we increased our contributions to gain shares at the lower price. However, we did not change allocations in 02, but this time is different. Unfortunately, the time to make changes in your allocations was last year, most are stuck now and will have to ride this out.

  59. I would also recommend that you invest in a savings account in another country. I am living in Iceland and my checking account is getting 14 interest (Kaupthing). is between my savings back in Canada and my account here I think I am going to weather what ever happen to the US and it’s impact on the rest of the world.


    We all made that bed, we all enjoyed the ride now the time has come to pay the cab.

    No, we didn’t. I know tons of people who have never had their hand in this field and pointing to 401K and other investments as being part of the mess is a canard point at best. The small amount of funds an average schlub like me invests in a 401K is not the cause of this mess.

    The mess is a housing frenzy that implied (1) you don’t own, then you are a sucker and (2) anyone can own even if they have no money.

    Literally, American’s were conned of their dreams and whatever meager earnings they made. And in the end brokers sales commissions won’t come back to these failed companies. The damage has been done and the best thing to do is to REREGULATE THISS STUFF. Enough is enough.

    And in the short term if you meet an investment banker at a bar or something, find out if he had anything to do with unsecured mortgages. If he says yes, buy him a nice cold beer and a big glass mug and smash it in his face.

  61. Thank God we’re not in a recession. Imagine how bad the news would have been if we were!


    But this is exactly why I’ve got 100% of my 401k in global equities. They’ll take a hit from all this, but not as bad as domestic investments. I hope.

  62. @75, I’m with you. Personal responsibility is important, but what about the responsibility of the banks NOT TO LEND MONEY TO PEOPLE WHO COULDN’T PAY IT BACK?

    I mean, who’s more at fault – the defaulter who can’t make the 18.9 percent mortgage payments because he only makes $15/hr, or the scumbag mortgage broker who sold him the ARM, lied about his income on the forms, and failed to explain that those $600/month payments would go up to $3000 in two years?

    Look at it this way: Say I invent a drug that makes your penis two times longer. Lots of people would want that, right? But unfortunately, this drug has a serious side effect, that about 20 percent of people taking it will become paraplegics. Say I set up a storefront “doctor’s office” and hawk it to every single male passing by, glossing over the side effects, even that I know I’ll be crippling one out of five. What am I? I’m a despicable snake oil-selling quack with no regard for other humans. But wait a minute, I hand every customer a closely-printed document outlining the side effects and warning him to take at his own risk. Doesn’t that make it OK?

    No. It’s not just the customer’s responsibility to ensure the safety of the things he buys, it’s also my responsibility as a human being not to sell things that maim people.

    The banks knew that a lot of the subprime customers would default. They didn’t care because they thought, “Hey, we’ll get the houses, and housing prices NEVER EVER EVER go down! Win win!” The only problem is that the housing market tanked and they started getting stuck with unsellable houses at the same time as the unpaid loans.

  63. @#79 Kay, did you miss when I clearly said:
    “Literally, American’s were conned of their dreams and whatever meager earnings they made.”

    I actually have never looked at personal responsibility as the main cause. The issue is a system that was designed to con the average home buyer into selling their lives for a debt.

    May the people who caused this mess truly rot in hell.

  64. BruceHoult, if you’re going to “correct” the rest of us, you ought to get your own facts right.

    You said, “look at the government-owned and run Fannie Mae and Freddy Mac for an even bigger mess.” Wrong. It was private management that wrecked Fannie and Freddie — Fannie had been private since 1968, and Freddie was created a few years later as a private entity from the get-go.

    They were described as “Government Sponsored Entities”, but the “sponsorship” consisted only of an implicit guarantee that if the private management got the firms into trouble, the government would step in to sort it out, as it eventually did (and as it did with Bear, Strearns). The main effect of that guarantee being, as you did correctly note, to let the private management take all sorts of ill-advised risks. But it’s not as if go-go Wall Street financiers need much encouragement in that regard — witness Bear, witness Lehman, witness Merrill Lynch (which wouldn’t have sold if they weren’t in trouble).

    No one’s shedding a whole lot of tears for Lehman. But the disruption on Wall Street is already having real-world effects even before the latest round, and not just in the housing market. A lot of would-be college students in Massachusetts aren’t right now because the state agency that was going to issue their student loans can’t get funding.

    The financiers had, in effect, a lucrative public trust. Society let them make all that money in return for setting up structures to serve the rest of the economy. No one’s shedding a tear for them. We’re worried about us.

  65. I don’t understand how these banks are run either. I put a full-price, cash offer on a house approved for a short sale (it was still a great bargain) and never even got the courtesy of having my offer TURNED DOWN by Bank of America. The seller’s agent couldn’t believe it, you think they’d be happy for any sales they could get at this point! I can’t imagine what greater use they’ll find for the property now.

    Oh well, I’m closing on a different one in a few days– suck that, BOA.

  66. Kay is right. Not only did some see this coming as early as 2006, but some institutions were reducing their own exposure to these packaged mortgages, while still selling them to other large investers.

  67. When government willfully refuses to regulate, then you can expect stuff like this will eventually happen.

    Amen #1.


    And half of Americans want more of the same for four more years.

    As an American who is proud of the principles laid down by the founding fathers, I am mad as hell at the ideologues and predators ruining our economy and our culture. But all they have to do is mention partial birth abortions and they get voted right back in.

    I propose two American states: America, which will uphold the foundation laid by its founders; and Merica, where all the predatory capitalists can pick away at the willfully ignorant, superstitious underclass as long and as hard as they please.

  68. @75

    Hello Jack,

    take a few steps back and look beyond your 401k and the immediate mortgage crisis. All this happened because the assets of America are concentrated in less and less hands. That concentration is accelerating and if people ever feared a black hole that should be when only very few will own everything. That is the result of perpetual economic growth, invented to perpetuate economic domination of the few. The citizen of the rich countries, us, were included in those “few” and we reaped the benefits of it, albeit only on the margins, granted. But, as concentration increases, more and more will be rejected until it all breaks down.

    We have been riding bubbles for a long time.

    The mortgage scam existed because the owners of those assets just had no place to invest but in fictitious undertakings : we have stopped to invest. It was a desperate move, one that was so bound to fail that anybody with an ounce of judgment and clarity of mind could see coming. It was forecast months in advance. Why then did they go ahead with it ? They had no choice so they tried their old trick of escaping by running faster forward, toward nothing.

    It is not over and it will get much worse, if not during this crisis the during the next.


  69. To anyone worried about their life’s savings going down the tube, don’t worry. After all, if it’s FDIC insured, then there’s no need to worry about your $100k, right?

    Except, how many savings accounts can the FDIC replenish before having to go to the Fed to borrow money to keep up with the guarantee?

    Despite the fact, I’m keeping all $1000 of my life’s work in the bank. I think of it as doing my part to keep breadlines at bay.

  70. I can’t read this thread anymore. Too much sad.

    Can’t E.T. show himself to the world right about now so we can all have something to hope for?

  71. Don’t know what to say to all this, I mean I could type 5 pages of ranting, but I don’t have the time, nor the inclanation. Hopefully some good comes from all this turmoil, and the system will purge itself into a more stable position.

    People should take a look at Lehman Brothers (LEH) on the NYSE though. *Giggles*

    And at this point the DJ Industrial is down 218 points.

  72. I’m sharpening my skinning knife and drafting my route to HoboCon now. You’ll recognize me. I’ll be manning the squirrel melt kiosk.

  73. Jack,

    that OK, maybe not what you were lead to hope for but our grand-parents and grand-grand-parents lived and raised families through that nearly a century ago (then 100 families owned 80% of the assets) and I still can see them smiling on their sepia photos.
    You are alive aren’t you ? And so are those who you love ?
    For myself, as long as I can dream of Xenophilia…


  74. William @72 makes a lot of sense to me. If you’ve allocated your investments properly for your risk tolerance, you shouldn’t be messing around with them when there’s blood in the streets. But it’s easy in a bull market for a person to think they have more risk tolerance than they really do, so I’m sympathetic to people discovering what their real tolerance is.

    The open secret to long-term success in investing is to buy when everyone is selling, and sell when everyone is buying.

    Foetusnail @73, Sir John Templeton (1912-2008) said “‘It’s different this time’ are the four most expensive words in the English language.”

    “The initial fall had brought a prodigious number of sellers to the market; one man’s selling alarms another; and makes him sell, and thus the stock has run down insensibly, till all the people are put in a Fright; and such has been the panic Fear, that it brought great confusion along with it.” — re the South Sea bubble of the 1720s, quoted by Edward Chancellor in Devil Take the Hindmost.

  75. It should be noted that the FDIC is just as distressed as the collective group of banks it would insure; some billions covering hundreds of billions of deposits. Odds are the Fed will extend a line to it, inflating the currency so we all have cash in the bank. The consequences of that would involve lots of withdrawing to spend the money before the inflation got worse and worse. So there’s a spiral there as well. Gold and silver are worth having in some quantity. The best investment is in land/seeds/non-perishable food/gardening knowledge.

  76. Perhaps it is time to start learning Mandarin so that we can speak the language of our future owners and overlords?

  77. You’re absolutely right Carl, that’s why we made our changes in August, October, and November. We’re up about 10% now and preserving those numerical gains as much as possible, while the DJIA is down about 15%. When we change our allocations, we stand to come out of this with our dollar value intact, minus this devaluation and inflation, ugh, and at least 20% more shares than we sold. We did not do this in ’02, though sometimes I wish we had.

    And yes this is different, investment houses that survived the Great Depression are going down. Lehman is the largest bankruptcy in history, and the smart money is jumping ship.

  78. I have a mortgage. 5.25% 30 yr fixed on a 1000sq-ft 3-2 ranch built after WW2. Thats IT. That’s all the debt I have.

    I spent the last 20 years of my life working to have a home, a vehicle, and NO DEBT.

    ya wanna know why I am seething mad pissed off?

    Cause all these ASSHOLES spent buttloads on credit buying big cars and fancy houses, and now? I have to pay for it.

    Screw them. I want mobs. MOBS in the streets torching empty McMansions.

    #59 your top 3 economy busters left out the 4th.

    Our Government shipping TRILLIONS to a craphole in the sand on the other side of the world. No seriously. Why the heck are we STILL sending money to Iraq? At what point does someone wake the heck up and got “duhhhh our country is collapsing, MAYBE, just MAYBE we should spend some of this money on schools, infrastructure, etc. at home”

    holding my breath

  79. People, please! This is simply the “invisible hand” of the “Free Market” “adjusting” itself.
    American freedom and liberty were founded on greed profiting from stupid. How else are a small number of rich people going to get slightly richer, if not by conning the con’able? These rich people have children to feed! Doesn’t anyone care about the children?!

  80. USAA is not FDIC insured, which I just discovered. Good thing my wife and I just moved all our money there… oh well. I was tired of living under a roof anyway. Time to go find a bindle that doesn’t clash with my jacket.

  81. If Apelad makes HoboCon 2008 shirts I will for sure buy one! (that idea is a ray of sunshine on a gloomy financial day.)

  82. #107 – Remember, the free market (and the abuse there of) is what brought us the FIRST Great Depression.

    #108 Keith? Time to move your money…

  83. USAA bank deposits are FDIC insured, as is the case with most other banks:


    If you do a Google on

    usaa bank insured

    you’ll see a short snippet on the first result saying “Investment/insurance: Not FDIC insured”, which may cause some concern to someone reading fast. But that page is referring to other investment products USAA offers, not their bank accounts. USAA’s bank accounts are FDIC insured to the usual amounts.

  84. I’ve been following this since last August, when the fun began. I work for a financial company (fortunately, we don’t earn our money off other folks’ investments!) and have been staggered by the sheer amount of hubris and greed that our country’s been running on.

    No single institution is to blame. No single social stratus is to blame. Lenders and borrowers alike have been shortsighted and stupid. This is us dealing with the mess we have made – all of us. I only hope the hard times are short and severe, and aren’t dragged out over decades by a misguided attempt to ease the pain.

    And this isn’t all bad. Keep your fingers crossed: If we handle this right, we might relearn things like fiscal responsibility, frugality, and delayed gratification. Recessions and depressions weed out the dead wood and the useless fat in an economy. It’s going to be hard, and my heart goes out to everyone who loses their job or their home, but this is not the apocalypse.

    Also, let’s remember in hard times that the best way to survive is to band together and help each other get back on our feet. Charity is already in short supply, when it’s needed more than ever.

  85. Well, so far the Dow is hovering around -300 or so… not too far off par for the course these days?

    Dumb question, is there anything to the conservative claim that “banks made dumb mortgage loans because they were compelled to by equal-opportunity-ish legislation”, or is it just greed?

  86. Why isn’t anyone mentioning a deeper root cause to this systemic problem?

    The Federal Reserve.

    When congress gave up their Constitutional Duty to be the sole source for coining money, they sold out the general American public to the wealthy private bankers and corporations.

    Just look at who has influence in the Fed:

    Go down the list on that page and look at the huge banking families and large corporations.
    To think they are not trying to “guide” things more in their favor is naive.

    Until those in power in D.C. wake up, become honest, follow their oath of office (read: obey the constitution), fix the bad laws, and return the right to coin money back to Congress we’re screwed.

    Even if they did these things whose to say they don’t just get back in bed with bankers and corporations?

    If we get out of this and things return to normal again some day, the same bubble/burst cycle will continue. The Fed will inflate the money supply wildly, bad investment will be encouraged because the Federal Government will promise to back the deal because they can just get the Fed to print money out of thin air.

    This cycle will repeat.

  87. “Dumb question, is there anything to the conservative claim that “banks made dumb mortgage loans because they were compelled to by equal-opportunity-ish legislation”, or is it just greed?”

    It may be more appealing for some folks to blame the current financial meltdowns on poor minorities than on greed and stupidity of financial institutions. But it doesn’t hold up under scrutiny.

    The main equal opportunity legislation in loans was enacted back in the 1970s (the Community Reinvestment Act), long predating the current mortgage mess. Moreover, lots of financial institutions got involved in these mortgages that weren’t subject to CRA enforcement. If it was really just a matter of the government forcing some institutions to play along, they wouldn’t have touched these loans.

    The claim also adds insult to injury when you realize that lots of minority borrowers were steered to subprime loans (which yielded higher commissions for the brokers) when they could have qualified for prime ones less likely to blow up in their faces. So this claim isn’t just wrong, it’s blame-the-victim wrong.

    More on this at the American Prospect.

    1. Due to the high astroturf potential, I’m disallowing links to partisan websites and blogs for this thread. Links to creditable news organizations are, of course, welcome.

  88. Somebody is having some fun.

    Lehman has traded over 350 000 000 shares so far.

    Not bad for a penny stock.

    Everyone can just relax… world growth is far more dispersed than it was in the 1930’s and hence the risk of a world wide depression is reduced (let us recall that Africa, most of Asia outside of China and large chunks of the rest of the world was being run by paternalist colonial administration at that time).

    To add to the punditry, we’re going to see a prolonged recession in the services/finance/home builder sector somewhat counterbalanced by increase in manufacturing (the US is still the worlds largest manufacturer believe it or not), and the resource economy.

    The best way to play this is to buy dividend stocks and to have a nice globally diversified allocation. The markets will be going sideways for the next few years so you might as well get paid to own these shares and having exposure to the rest of the world is a good thing.

    As Peter Munk said “Always give away some of the upside to protect from the downside”

  89. Ah, the Anti-Federal Reserve commentors are finally coming out. No matter that it has nothing to do with this and actually is a key component to slowing this crisis as opposed to increasing the speed at which everything fails.

    It is nice to see that, while we drive ourselves into the ground people can point in the wrong direction and scream “WITCH!”

  90. For everyone who was considering moving their assets to a FDIC-insured bank, I should direct you to this International Herard Tribune article where unnamed sources from within the administration warned that there may not be enough money in the fund to cover your accounts:

    Administration officials acknowledged this week that more bank failures were inevitable, and the main protection for depositors — the Federal Deposit Insurance Corporation — is likely to exhaust the reserves it has built over the years from bank insurance premiums.

    Of course, panicking about this and taking all your money out will only make the whole thing worse. Stay the course!

  91. Ahh the fed’s not blame..

    too much.

    Or maybe it is


    Another thing to consider is how gold has mimicked the dog in the night. To Whit:

    Holms: I draw your attention to the strange fact of the price of gold today.

    Bernake: It did nothing

    Holmes: Yes that is the strange thing.

    “Gold forums were electrified overnight and expectations were for an opening where gold was up from $50 to $100 ”


    As it stands it’s up about $18. On news far more shocking than what happened in March. Obviously what ever is happening a meltdown is not in the cards.

  92. I don’t really want to get all political and start some kind of liberal-vs-conservative flame war, but. . .

    Rushkoff pointed out recently that Bush was promoting his “ownership society” in the 2004 election (meaning home ownership), so basically Bush was cheerleader for the whole sub-prime scheme.

    And now McCain’s chief financial advisor (Phil Gramm) passed a bill deregulating the banking industry in 1999 which made much of this possible, and was a lobbyist for the banking industry after leaving the senate. This is the same Phil Gramm who called the US a “nation of whiners.”

    But of course the GOP’s new talking point is that this is all the DEMs fault as they have the majority in the house and senate (although they DON’T have a majority in the senate, but that won’t stop the GOP from making the claim, and of course this crisis has been building for several years, not just since 2006).

  93. @Ceronomus: Amen.

    I know the gold bugs and the black helicopter crowd will be coming out of the woodwork shortly. But the Federal Reserve didn’t get us into this; free-market fundamentalists and crony capitalists did.

    If this were all a big conspiracy to boost the rich, they wouldn’t have let the investors in Fannie, Freddy, and Lehman take the big hits they just did.

  94. @Iopha: They won’t let the FDIC go bust. If the FDIC ends up a little short, they’ll get a government loan and raise their premiums for a while. If they end up a lot short, we’ll just bail ’em out entirely. That’s what happened with the FSLIC during the S&L crisis, and it worked well enough they’ll surely do it again.

  95. @William: Don’t forget the crowd that think that the Federal Income Tax is illegal for any number of crackpot reasons.

    The internet has brought us many great things, but it also allows folks who haven’t a clue get together with OTHER people who are lacking the same clue and form a support group to make themselves feel as though they are correct.

  96. Some of my stocks are UP today:




    I’m guessing that stock brokers are buying lots of Kleenex Tissue and Depends undergarments.

  97. Ceronomus and William, thanks for reminding me to be on the lookout for the nut brigades. One of my students is a self-described survivalist who gets a scary gleam in his eye when he talks about the coming anarchy. He actually seems to look forward to the opportunity to head to his bunker.


    “To add to the punditry, we’re going to see a prolonged recession in the services/finance/home builder sector somewhat counterbalanced by increase in manufacturing (the US is still the worlds largest manufacturer believe it or not), and the resource economy.”

    That is still true and I truly wish to all of us luck : I like to be rich. Unfortunately the manufacturing power of the USA is seriously challenged by China. It also depends very heavily on the interior market and this is what is collapsing.
    The manufacturing power of the USA at the eve or WWII was 45% of that of the world. After the war it had proportionally increased a whole lot because of the destruction in Europe (I don’t have numbers on that). In 2006, accordingly to UN numbers, it is around 27% (around 29% of the 10 biggest manufacturing powers)… it decline by 2% since 1990 relative to the 10 big ones and more relative to the world as a hole.

  99. @ 131

    This is the ironic thing, thanks to the collapsing dollar and the expansion of the middle class in China (and numerous other nations) the US is now globally competitive.

    Take a company like Caterpillar, which is able to sell more machines at a lesser price, and is overbooked due to the worldwide resource/infrastructure boom. The thing is, China generally makes what Wal-mart and other mass liquidators sell. If you’re manufacturing out of that sector you’re going to do ok.

  100. “Due to the high astroturf potential, I’m disallowing links to partisan websites and blogs for this thread. Links to creditable news organizations are, of course, welcome.”

    Fair enough. I think the Federal Reserve should be sufficiently creditable. Here’s a speech from the president of one of the Federal Reserve branch banks that backs up what I was saying in my cite-disabled post upthread.

    In particular, here’s where she notes that CRA-regulated institutions made *fewer* subprime loans than the unregulated ones:

    “Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans [jump to footnote] According to the 2006 HMDA data, 19 percent of the conventional first lien mortgage loans originated by depository institutions were higher-priced, compared to 23 percent by bank subsidiaries, 38 percent by other bank affiliates, and more than 40 percent by independent mortgage companies [for whom CRA does not apply].”

    She also makes note of the stark difference between what gets offered to whites and what gets offered to minorities:

    “[D]ata collected under the Home Mortgage Disclosure Act show that minorities are more likely to receive higher-priced loans than non-Hispanic whites [jump to footnote] For home-purchase loans in 2006, the gross mean incidence of higher-priced lending was 53.7 percent for blacks and 17.7 percent for non-Hispanic whites, a difference of 36.0 percentage points.”

    This disparity cannot easily be hand-waved away; see for instance this paper, by an analyst for the Federal Reserve and two Wharton professors (who I trust are also sufficiently creditable). It notes:

    “Even after inclusion of the full set of explanatory variables in the tract-level regressions, however, the percent of African American homeowners is strongly, positively correlated with subprime share of neighborhood loans…”

  101. *1- dont panic, you are just living during a historical perid
    *2- remember that as long as there is movement you can with research make money investing
    *3- if paper cash has gone bad own stock or property that is in demand, think mineral wealth, mining shares, oil, energy, food
    *4- what is currently happening is deflationary
    *5- expect a rescue from the fed to be hyperinflationary as dollars are returned to our local pool by foreigners wo want out of the US$
    *6- expect hyperinflation as the feds pay off FDIC and other insurances
    *7- Precious metals in hand will be valuable although non interest producing way to preserve wealth in hyperinflation especially during the recovery period when most of the world currencies will not be trusted
    *8- bone up on economic lessons learned during the Weimar Replubic and post Soviet Russia
    *9- DO NOT follow a bonehead Austrian corporal with a small mustache who promises to fix your national problems!

  102. 107-
    I agree with you. I don’t know why there’s not mobs already out there… oh, wait… there were a few who spoke up at the RNC, and they are still in jail on no bail? Protest does not pay.

  103. I refer the honourable readership to my comment in the melamined milk thread – “Greedy, unscrupulous people gaming the system to make some extra profits, my goodness what a surprise. Sigh.”

    Happily all my money is in diesel powered nuns, so I’m safe.

  104. #135

    I had a roommate who swore that the only good investments were bottled water and ammo. ;)

    But your point #4 is a very important one. By funding the war with nothing but inflation, we’ve run our economy into dangerous waters. This will resolve itself (with help) but it is going to take time and effort.

    I think that the days of “skittles and beer” are over for a while.

  105. cont from #135
    *10- if you are over $100,000 in the bank and don’t want to invest in tangibles at least open a treasury direct account so you will at least be able to withdraw the dollar amount whan you need your cash

  106. #138, While I am generaly pro-gun rights I am strangely not a gun-nut, ammo has always seemed like a strange form of barter currency for survivalists, after WW-II it was cigarettes, chocolate, and nylon stockings which formed the basis for a barter economy, but a good water filter might be a good idea depending how well financed your water utility is.

    Unfortunately some ruling nut almost always goes the route of a big war in the end to “save the nation” from really bad economic times. that leaves lots of free surplus ammo laying around on the ground for free, along with the surplus flowering of youth wasted before its time.

  107. #141
    Oh, he didn’t mean ammo for BARTER, he meant for hunting food and defense of your stockpile of water. ;)

  108. ill lich “Now might be a good time for me to publish my Cookbook of “Hobo Stew” recipes.”
    Do you use fresh hobo? That canned stuff is only 70% people.

  109. The government (via the Federal Reserve) made money cheap, so people borrowed lots of it. Then the Federal Reserve made money expensive and the loan markets froze.

    The government (via Fannie and Freddie) owns 50% of mortgages and its anti-competitive, artificially low rates (backed by implicit government promises) forced private mortgage lenders to take riskier loans. Not that the private lenders are without guilt or greed.

    The government is printing money to fund its trillion dollar Iraq War out of thin air, causing massive inflation. Americans have a 0% savings rate because that actually makes sense when saved cash will be losing its value to inflation.

    However, I am optimistic. A cheap dollar makes the US competitive in the global market again. Lenders and borrowers will get a healthy dose of caution. The government will pass some token regulations (for better or worse) and maybe some “sunshine” disclosure laws. Let us hope they also end this immoral, inflationary Iraq War.

    btw, I got out of stocks months ago. I’ll probably start dollar-cost-averaging back into stocks early next year.

  110. “And Zed, there are lots of local banks in the US taht are not FDIC insured. HEck, remember the S&L scandal? Those places were NOT FDIC insured….”

    The S&L’s were insured by the FSLIC which no longer exists, but was entirely analogous to the FDIC for savings and loan banks. The S&L’s that survived the 80’s (including, I believe, Washington Mutual) are now FDIC insured. Basically the FDIC took over for the FSLIC.

  111. Hi. I’m a UK reader and it seems to me that in both the US and the UK the financial regulators don’t actually regulate -which to me would involve taking preventative measures when things look like they could get out of hand (i.e. a good few years ago). It was obvious to even I (at that time a relatively ignorant pleb) that things were going seriously wrong somewhere a couple of years back. The regulators aren’t regulators, they’re glorified cleaning staff who mop up after the jocks have vomited from too many keg-stands…

    I’ve recently started work at the independent regulator for the UK which mainly deals with the interactions between consumers and banks rather than banks and banks. We already have some sort of basement dungeon filled with files from Bear Sterns and Northern Rock a short while ago. We’ve been working hard trying to just clear the decks to begin dealing with that little lot, so imagine our chargrin at this shit hitting the fan! I think if we weren’t all such public spirited folk we’d be hoping for flood or fire to make the paperwork dissappear.

    We earn a merest dabbeth of a fractioneth of a percentageth of what the lowest paid bankers in these firms earn. They had all the fun squandering other peoples money and we get the hard work and earache when it goes wrong. Maybe their bonuses from the last year or two should be reclaimed into a pot for us poor souls left to clear up after the party? Although they’ve probably spent it all on bolivian marching powder and hookers…

  112. I don’t believe this was brought up? What about social security? What about those of us in college who still need to get loans to pay for it? I’m a disabled college student, that’s why I ask.

    The only good I see is that my views have been proven right in the worst ways. It happened when I bought that hybrid back in ’04, and now it’s happening again.

    I’m hoping we’ll get another FDR into office that’ll add a bit of reforms to make sure this doesn’t happen again! Bah, hate when history repeats itself!

  113. i called the FDIC this AM to find out how they intend to bail out my bank, washington mutual, in the event others also go belly up at the same time. oh, no prob: the federal reserve would print money.

    so, my question is (since i was not happy with the answer): should i move my savings out of wamu? it’s an online account and i’m hours away from an actual brick and mortar bank.

  114. The best discussion I had on this subject was with my uncle a little while back. He had recently retired as a banker at 74 after 40+ years in the same community.

    He worked mostly on construction and business loans. He knew his community, its ups and downs and was a good judge of character. He spent time getting to know the people who came to him for a loan. Learning what their business plan was, their ties to the community, their knowledge and commitment. He made his bosses rich, the local community did well, and he did okay for himself.

    He could have worked longer but it just wasn’t fun for him anymore. There was more and more pressure to make more loan deals but without the focus on the long term. The whole system of loans being packaged as investment vehicles made it easier for his employers to put the pressure on the number of loans being made, rather than the quality. After all, the loans just became a commodity where the risk can be shifted to someone else.

    He is a great guy to go out with to the hardware store or coffee shop. We couldn’t seem to go anywhere without someone stepping up to say “hello” and shake hands. It sometimes seemed like everyone in the county had got their business started with his help. This was especially true of the new immigrants who needed help starting small businesses. They never forgot what he did for them. I know this sounds like something from “Its A Wonderful Life” but its the real deal.

    Welcome to Pottersville.

  115. Ceronymous – I think that the days of “skittles and beer” are over for a while.

    But but but, What about mentos and diet coke?

    Your roommate was a smart guy.

  116. This is different alright: 500 pts down with the Asian markets closed today; biggest single day drop since 2001; the DJIA is less than 200 pts from its 52 wk low, which was only 2 months ago; Lehman files largest bankruptcy in history, leaving only two of Wall Streets independent investment banks; hundreds of billions pumped into the markets in the last week; NY State rewriting the rules to allow AIG to borrow from its subsidiaries, plus they’re in need of another 40 billion; 10 US banks securing 70 billion; the US government takes over roughly one-half of all mortgages when securing Freddie and Fannie; billions more in write downs coming soon. Most of this has occurred in the last 2 weeks.

  117. I just listened to that public radio podcast with Ira Glass. It was a fascinating look at a decade of greed and blind-eye regulators.

    The idea that you could bundle together hundreds of loans that were given without any investigation, then sell shares of them, repackaged as AAA investments – well, it seems crazy now. What did people think back then?

    The best part of the podcast is you can hear the tone of incredulity in the bankers’ voices… they’re young graduates, who have never known economic hardship, thrown into a system that threw money back at them.

  118. I wonder what Wall Street will be used for after it’s slides into obscurity. Art galleries? A living history museum? Homless shelters?

    Time will tell.

  119. Dear citizens of the United States,

    Oh gosh. You know, I’m not much on speeches, but, it’s so gratifying to leave you wallowing in the mess you’ve made. You’re screwed, thank you, bye.

    Ray Patterson

    p.s. To everyone talking about the “need to regulate”; it only seems that way because you’re only looking at half of the equation. The other half is, to put it bluntly, called the Federal Reserve monopoly on fiat money supply (and the subsequent fractional-reserve banking system, which leads to the business cycle).

    Remember that the Federal Reserve System was both the cause of and “solution to” the Great Depression.

    I hate to use that tired metaphor, but this is still the tip of the iceberg. (But not surprising that news gets worse as we head towards October. Though, as others have mentioned, the system is being artificially propped up by bailouts and nationalization to get through the Presidential election season.)

    Others who said it will take at least a decade to get out of this hole are most likely correct. (Or at least, I’ve come to that same conclusion independently sometime ago and see no evidence to support otherwise as yet.) The Federal Reserve continues to widen and deepen that hole with further expansion of the money supply. Anyone saying, “it’s not that bad” or “it might not be this bad in the near future” either has an agenda or is playing Pollyanna.

    To “strike the root”, we need a solid monetary policy that allows people to conduct trade without price signal distortions from a central authority — i.e. the central bank which has served the political interests of governments, such as subsidizing 6 years of war with inflation. One way to do this is to introduce currency competition.

    p.p.s. Thanks for thinking of me, Alowishus!!! :D Sorry I got to this thread so late.

    This is why people put all their money in gold bars, isn’t it?


    Also, William is dead wrong. It’s a “simple” matter of positive economic analysis to see that 6 years of war spending on military keynesianism immediately after an existing recession will ultimately implode. Implicitly claiming that business cycles don’t have corrective phases is like trying to stay awake forever so you don’t have to face-off with Freddy Krueger. Impossible.

    I mean, fuck, like we didn’t learn this lesson hard enough with the Vietnam War (and Nixon’s price controls)?

  120. Thanks Coldspell.

    However, I am optimistic. A cheap dollar makes the US competitive in the global market again.

    I’m not so optimistic. The isolationist / trade unionist bloc + the nationalist / jingoist / “America right or wrong” bloc could very well drive us back to a manufacturing economy, which means competing with developing industrialized nations such as China and Russia. We’d be making goods, instead of designing goods.

    The idea of the USA relying on a knowledge economy has been badmouthed as a “service economy” and in the past decade or so that slur has come to refer to this “speculative economy“… based on the transfer of wealth that derives from the aforementioned artificially cheap credit.

    Thomas L. Friedman has good points about how “we went wrong ever since 9/11” (e.g. nationalism, militarism) and that one salient point would be to develop Energy Technology (e.g. better solar thermal, hot dry rock geothermal, and nuclear fission energy sources), and then turn around and sell it to every other dirty energy industrialized nation such as China and India. But he also argues that “big business” wants to be guaranteed profit — basically by government assurance and interference (i.e. corporatism… as if we didn’t have enough Haliburtons and AT&Ts).

  121. The idea that you could bundle together hundreds of loans that were given without any investigation, then sell shares of them, repackaged as AAA investments – well, it seems crazy now. What did people think back then?

    Credit derivatives, yeah. People collectively ignored the asset bubble in housing — that “foam, not a bubble” Greenspan caused / used to talk about when he was chairman of the Fed. Of course, the asset bubble is caused by artificially low interest rates, especially from the irrational American zeitgeist that “everyone should be a homeowner”.

  122. I’m hoping we’ll get another FDR into office that’ll add a bit of reforms to make sure this doesn’t happen again! Bah, hate when history repeats itself!

    Probably more like Jimmy Carter, who appointed Paul Volcker as chairman of the Federal Reserve to choke out inflation as the root cause of stagflation, in addition to running the smallest Federal government since World War 2 and still managing to create the Department of Energy and the Department of Education.

    And people loathed the Carter administration, for making all of the correct tough rational choices instead of giving people easy placating answers.

    I can easily see Obama being another Carter. Combined with a kind of anti-Bill Clinton PR smear in the style of Dave Chappelle’s spoof of Deep Impact: “Meteor is black President’s fault”.

  123. Huh, the day after major investment bankers are called together for a conference with their regulator – on a Sunday no less, the price of oil drops to $91/bbl- the largest drop in a generation.

    No, it must be a total coincidence.

  124. I’m always really late to these things. It’s going to take a while to sort through this whole mess and figure out the proper valuation on these securitized mortgage holdings. Hopefully, we don’t get a pipeload of bad legislation in response that hides the information being generated in these corrections. As a more free market type, it gets so frustrating seeing this cycle:
    1: Republican talks up markets
    2: Republican legislates opposite of his talk
    3: legislation causes foreseeable disaster
    4: market is blamed

  125. I mean, seriously, what’s so free market about medicare, faith-based initiatives, and a trillion dollar war?

  126. @Ceronomus: Name-calling and ridicule do not constitute a valid argument. That’s all you have done so far in this thread.

  127. Supernate, if I may –

    1: Republican talks up markets
    1a: Profit!
    2: Republican legislates opposite of his talk
    2a: Annual Bonus Profit!
    3: legislation causes foreseeable disaster
    3a: Golden Parachute Profit!
    4: market is blamed
    4a: return to 1

  128. One thing’s for certain: The neocons who got us into this mess definitely read (and reread and memorized) 1984.

    Suck you nation’s energy and wealth away with meaningless wars and the populous—poor, tired, and half starving—suddenly become much easier to control. It’s been happening for years.

  129. Admittedly, I haven’t had the time to read through all these comments.

    But I don’t suppose people have been talking about ways individuals can protect or prepare themselves for what may come? Or perhaps what we should expect in the coming months?

    I’m asking as someone who knows relatively little of economics, though at this point I’m wondering more about ‘What now?’ instead of ‘Why?’. I also don’t hold any stocks, though the situation is looking dire enough to consider less obvious, far-reaching repercussions.

  130. @88 “I propose two American states: America, which will uphold the foundation laid by its founders; and Merica, where all the predatory capitalists can pick away at the willfully ignorant, superstitious underclass as long and as hard as they please.”

    Actually, I think you’ll find that the founders set up a system much closer to your ‘Merica than they did the one you’re hoping to live in. Looks through the list of them, and note that half of ’em were slaveholders, the other half northeastern “big business” owners, with Ben Franklin thrown in for variety.

    Speculation and crashes were very much a part of the early US history. Check Andrew Jackson’s tenure, for one big example.

  131. @zzjing

    Hardly. However, how does one “argue” or “discuss” with a person who is spouting nothing but paranoid misinformation. To hit that level of misinformation the person must either be intentionally misinformed or posturing a knowledge that they simply do not have.

    Tell me, how exactly does one “argue” with that other than to point out that they are incorrect or lying.

    I suppose I could go into a in depth explanation of why they are so far from the truth as to be breaking with obvious reality, but really….they aren’t going to believe it, so why bother.

    I treat them with the same respect as I do the people who claim that 9/11 was planned by the US Government, that the Federal Tax Code is illegal, and others of their ilk… which is to say none at all.

    People who argue about things of which they have zero understanding do not deserve our patience and understanding.

  132. No one pays taxes except citizens.

    Corporations don’t pay taxes and shouldn’t be collecting taxes for the government. All taxes come out of our pockets one way or the other. I vote for a tiered tax table without exemptions. The only way to get out of paying is if you are disabled, have no earned income, or capital gains. No taxes on SS, and no one collects SS who does not need it. This all means no corporate taxes, no property taxes, no state taxes, no inventory taxes, no estate taxes, no gift taxes, no usage fees, no license fees, no municipal franchise fees, no taxes on fuels, no sales tax or sin tax. No taxes period except individual income tax. The entire tax code on one piece of 8.5 x 14 paper

    Think of how much money we would save if corporations were not collecting taxes, fighting taxes, cheating on taxes, or hiring tax accountants and lawyers. Imagine a multi-billion Dollar industry phased out in a matter of ten years.

  133. This “Global Money Pool” report glosses over the growth in money supply, and we know that with fractional lending practices, the banks further multiplied the money they received many times over. All this multiplying lead to a bubble as prices got bid up when there was more money chasing the housing supply. This situation fed upon itself as the excitement about housing prices increasing motivated many people to speculate and others to get in over their heads as the belief was that the housing market would increase in value forever. Few seemed to realize that it was going up because of loose and plentiful credit and fractional banking, not because of a real increase in true market demand for housing. That’s a classic bubble. Then pricing deflates (so called deflation) when the speculators and the people who over extended can’t stay in the game and make the payments. Then the buyers dry up (as they see prices falling and don’t want to overpay) and the prices drop below the bid up bubble prices. Then the credit disappears. It’s been repeated over and over again through the centuries. Most people never understand what happened. Then everyone forgets so the scam can be repeated again. It’s hard for me to believe that the Secretary of the Treasurer and the head of the Federal Reserve and the heads of the big banks don’t know what their doing and it’s amazing to to imagine that they don’t know how it will end. It always ends with the little guy getting hurt and big consolidation among banks. The big guys survive after buying up all the assets of the failing people and failing banks for dimes on the dollar. They emerge wealthy beyond their wildest dreams and looking smart for buying low.

    This kind of practice was also common among the big investment banking firms that are failing now who were as much as 30:1 leveraged (Lehman Bros, Merrill Lynch, etc.). Shame, shame, shame on those frauds. They were greedy crooks. The people at the top of these firms should be jailed and middle management put on probation and fined heavily.

    Yup, it boils down to the fact that The Federal Reserve Board made credit and money available out of thin air in excessive amounts to benefit the Federal Government and the greedy Banksters. The Founding Fathers of the United States well understood the dangers of a Central Private Bank and felt it would be one of the most dangerous things to our country. Fractional Reserve Banking isn’t new – it used to be called usury and was considered a Sin way back in the day. Today we accept it as normal because every country in the world participates. Funny how when everybody is doing it, it makes it okay. That is until something goes wrong and we want to start pointing fingers.

Comments are closed.