Correction: They knew they would be reselling the mortgage, therefore were not concerned that the customers would have trouble making the payments when they increased, even if the customers didn't lose their jobs in the meantime.

Actually, it's completely logical and rational behavior in an insufficiently regulated market such as the one in which such mortgages were given.

Actually, it means exactly that.

FAR more likely, if everyone made better wages, they would have borrowed even more money for nicer homes that they couldn't afford after payment went up on their ARM's.

Higher wages would not have reduced the demand for mortgage backed securities, and thus would not have reduced the need to lure customers into mortgages in any manner they could so that there would be a steady supply of new mortgages to resell.

Higher wages typically only mean that American families can go into debt purchasing nicer stuff. It requires lifestyle changes, not increased wages, to stop living on credit. Higher wages actually make it easier to live on credit, since living on credit costs more than paying as you go.

Huh? It's never logical to give a loan to somebody you think might have trouble paying it and expect that you can reduce risk by charging them even more than normal risk applicants!

No, it means that it appears like they were major factors, when the real causes had set things into motion before they ever had any affect.

Like people did in the 50s and 60s? :rolleyes:

Once again, I never said that they would. I said that if everyone has a good job, no one needs to accept a bad loan. If very few people have bad jobs, very few bad loans can be made, despite any effort the bank makes in that direction, and no matter how big the demand for MBSes.

So Americans today are significantly dumber than Americans of the past, when they did make more money and didn't go deep in debt?

They only needed to worry about the borrower's ability to make payments until the mortgage was bundled and sold to others, at which point it became someone else's problem. The bank would have already made their profit by then.


:confused::confused::confused: Banks don't charge higher interest rates to reduce risk. Why would you think that?

I hate to break it to you, but jobs being shipped overseas is not the underlying problem. It is only another symptom, a symptom that, in this case, didn't even play a major role.

Have you checked a calendar lately? I think you'll find that we are not living in the 50's or the 60's. Pining for the good ol' days won't solve today's problems.

No one needed to accept bad loans even without good jobs. A lack of good jobs didn't cause the demand for adjustable rate mortgages, stated income mortgages, NINA mortgages. That was caused by a demand for mortgage backed securities. Better jobs would have only resulted in larger mortgages, not affordable mortgages.


BS. People with good jobs still took out mortgages that ultimately resulted in payments larger than they could afford to pay. It is woefully naïve to believe that higher wages would have prevented the problem. Focusing on that, instead of the actual causes, does nothing but help enable the same problems to occur again, only on an even larger scale.

With respect to financial intelligence, yes, that is generally true, as evidenced by the higher consumer debt to income ratios of today compared with the 50's and 60's to which you keep referring.

Yes, and the reason they needed to worry about it at all was so that they could resell it. Not worrying about it would have sent up red flags to investors.
Maybe the fact that they always give that as the reason for any higher rate they offer to one person versus others.

Simply stating it as fact doesn't make it so.

Sigh. Those who refuse to learn from history are condemned to repeat it. There are major differences between those days and now. If we don't learn from them, we'll get to repeat these days again, shortly after we've recovered from them.
BS. Simply stating it as fact doesn't make it so, and I've given you evidence of a time when that did not happen. History matters.
BS. Some people with good jobs took bad mortgages. Most did not, and those who did represented a small percentage of the bad mortgages.
So debt has nothing to do with income? That's absurd. Poor people are always in greater debt than rich people, especially when credit is eased.

In 1960, the average family paid approximately twice their annual salary for a modest house. Same in 1970 when I paid $29,500 for a house while making $14,000/year. I sold it in 1975 for $44,500 when I was making about $16.5K. By 1980, that multiple had climbed to 4 and in 1990 it was 5, but I didn't bite; I paid $262K for the home I'm in now when our family earnings were about $120K. In 2006 in California where the bubble burst first, that multiple was reported as 8! In order for workers to have been paid enough to manage that, their productivity would have had to be 3 or 4 times higher than it actually was. There's a lot more to this than worker's wages.

J. Christopher, I don't remember you being around these economic threads earlier this year? There were several people identifying as "financial household conservatives", whatever their political beliefs. NovaScotian, Aehurst, myself and others. We just don't buy stuff with money that we don't have, period. I'm not in the USA, but it's much the same in the UK and Northern and Eastern Europe. People have been screwed in different ways, for example earning in forints and taking loans in Swiss francs was a really bad idea. The French, OTOH, seem to have a gene for saving and prudence, probably on the same chromosome to the one that lets them eat advanced cheeses and patés without getting obese; and I think the other Mediterraneans are much the same. The Japanese save like mad, despite their love of gizmos. In other words, disastrous personal extravagance seems to some extent to map onto penetration by the "Anglo-Saxon" version of capitalism. Now, CWT will say that people have put themselves in hock to keep afloat in an era wherein (as even "The Economist" admits) the pie has been redivided in favour of the bosses, and I think that covers some of the ground, but not all of it. A second factor is banking practices: some countries have simply not had an indigenous banking crisis, because their banks didn't do the derivative stuff, or push people to borrow beyond their means. Not least because more people in such countries rent their dwellings, even the middle classes.

Norway and Canada being very good examples. There were no bank bailouts in Canada or Norway.

Nope. They weren't worried at all. The investors weren't worried either, since they hedged their investments in the MBO's with credit default swaps. Unfortunately, without sufficient regulation, they institutions offering the CDS's were not required to set aside sufficient assets to pay out benefits if necessary.

Charging higher interest rate due to higher risk does not lower the risk. I've never seen any claims that it does prior to yours.

Oh, the irony!

That's what I said.

What you have repeatedly failed to offer evidence of is that shipping jobs overseas was a major contributory factor in the crisis of today. OTOH, I've explained why the evidence suggests that not to be the case, but you repeatedly overlook that fact in order to keep standing on your soapbox.

I never said any such thing. Please read my posts before you reply. :rolleyes:

You are incorrectly tying wages to one's status as rich or poor. Higher wages allow one to qualify for more debt, a qualification commonly taken advantage of in the USA today. I know more people making low wages than high wages who live their lives with no credit.

Agreed to this point.

Actually, it is their income that would need to be higher. In the US, income does not tend to increase with productivity like it used to. That changed in the mid 1970's; productivity began increasing at a much faster rate than income.

How does the level of banking regulation in those countries compare to the level in the US? Our financial institutions behaved the way they did in large part because they were legally allowed to do so.

Insufficient regulation and greed in our financial industry allowed them to build up a house of cards in which they could fool themselves into believing that high risk derivative investments were not really high risk at all and, instead, were actually low risk investments offering unusually high returns compared to other low risk investments. When the house of cards collapsed and reality set in, the options for the nation were, unfortunately, bailouts for the banking system or a second Great Depression.

In countries like Spain, Italy and France, much tighter. There was also the factor that the banking system in e.g. Italy was "primitive", that is, it did its core business on a national basis without any involvement in Wall Street shenanigans. Such primitivism we should have more of.

In Spain, Banco Santandér (one of the two biggest) had long ago made a decision to stick to retail banking; consequently it was fine, except for exposure to Madoff, and went round buying up bust British banks. Tee hee! Unfortunately the smaller Spanish savings banks are being hit badly by the puncturing of a construction-boom bubble by the global meltdown, but that's not the same thing or really their fault.

Scandis got burned a decade ago, we've been here before, and are still the most successful model for a bank bailout. My own, Swedish, bank has what it calls its "church tower" principle; each branch is autonomous, only doing business as far as it can see from its church tower, that is, locally, and there is no central investment unit full of whizz-kids in red suspenders. On the other hand an investment arm of the Norwegian biggie talked several municipal authorities in the sticks into investing in American municipal bond derivatives. The bonds were safe enough in themselves, but there was some weird stuff no one understood in the boonies or anywhere else, and the vehicles made a capital call on the municipalities. It was then found that such derivatives were illegal in Norway, and had been sold fraudulently, the investment subsidiary is now being wound up amid lots of litigation. The municipalities will probably be held harmless. We also have a TV reality programme whereby experts do financial makeovers on retards who overspent by millions without even noticing; we are not such good savers as the French and Japanese, and apart from our better bank regulation I might say we belong to the Anglo-Saxon culture.

That implies we can't get both at once, which remains to be seen.

Sorry, I didn't mean to imply exclusive or with my statement. Both options simultaneously is possible.

Fortunately, it thus far appears that (in the US) the bailouts are working at least to the extent that we aren't facing Great Depression II. However, things can happen very quickly, and we won't be sure until we're well into recovery.

Banks in Canada are required to hold more reserve than in the US. Fortunately, their exposure to the funny paper market was less than 15% of their assets and one bank just wrote off it's bad paper. They are also prevented from merging to form huge entities. The Canadian population is thin on the ground (33 million in a huge country) so the only way to maintain competition is to limit size. Finally, there are only 7 nationwide banks here; relatively easy to watch over.

A substantial chunk of my retirement savings are in dividend-paying bank stocks and while they took a hit in value, they all continued to pay regular dividends and are all climbing steadily back up to their previous values (of 2 years ago).

I would like to point out that 'recovery' will mean many things to many different people. It is not like there is going to be a moment in time where economist announce that the recession is over.

The media machine would like that though. I notice already here in the US that 'recovery over' and 'things are look'in so up' type of media are suddenly everywhere. Good reports from all government agencies and if there is a loss it is LESS than expected and So it is all good.

It is amazing though that economists now know exactly when the ressesion will end but in the last 12 Years, NoBody Saw It Coming.

Typically, the generally accepted dates of entering and exiting economic recessions are those provided by NBER. To clarify what I posted previously, those dates are only known in hindsight, not in real time.

Yep, What we have here is a typical case of predicting the future without the past.

The indicative trends can sometimes be seen before the actual recession or recovery occurs. For example, if the rate at which real GDP is shrinking decreases, that is a sign that the recession could be bottoming out, though not yet recovering.

JC you have made many good points but how can you go along with the claim that someone can predict the end of recession when no one saw the recession coming?

Many, many economists (& others) saw this recession coming and publicly said so.

I didn't predict the end. I said that there are economic indicators that can give insights w/r/t current trends.