Economic Collapse - Boiled Down. Part 3: Credit Default Swaps

Hawt Action ^ | 1-08-2009 | John De Guzman

[nyconse]

Many months ago, I posted Writer's Strike - Boiled Down. Looking back, I see a series there, where I boil down complicated situations for you all to sip and digest with ease. This Boiled Down post is a multi-part bonanza, studying our Economic Collapse. Part 3? Credit Default Swaps - Boiled Down. Stay with the series to get all the way to the Fed's action to help.

Part 1 of this series, Economic Collapse - Boiled Down. Part 1: Housing, focused on the housing market and how a surplus of investors pushed standards lower for home mortgage approval. It was so reckless and daring, it could be considered criminal. Once the housing market started slipping, it set in motion a string of events that were compounded by non-existent (but much needed) government regulation. Part 2, Economic Collapse - Boiled Down. Part 2: Leverage, explained how financial service companies "over-leveraged" themselves, borrowing too much money given the capital they had. For every dollar some companies had, they were borrowing 20 to 30 dollars against it! That's fine when the market is going well, but once it collapses, like it did, being over-leveraged can, quite simply, lead to bankruptcy.

Part 3 will cover a financial tool called the Credit Default Swap, a term practically unknown three months ago. Now, millions include the term in their prayers. If I prayed, I'd be one of those people. That’s why I have a blog and you come to learn things. So, read on. And learn.

[nyconse]

This is an excellent discussion of the causes of the economic meltdown from mortgages to leverage to credit default swaps. It's a long read, but very worthwhile because it explains the economic collapse simply but thoroughly-very well sourced as well. I hope you find it interesting. Below are the links to the first and second parts of the series.

Part 1

http://hawtaction.com/2008/10/economic-collapse-boiled-down-part-1-housing.html

Part 2

http://hawtaction.com/2008/11/economic-collapse-boiled-down-part-2-leverage.html

[nyconse]

oops!

http://hawtaction.com/2008/10/economic-collapse-boiled-down-part-1-housing.html

http://hawtaction.com/2008/11/economic-collapse-boiled-down-part-2-leverage.html

[taxcontrol]

There is an old rule in using “leverage” in the markets - “Leverage works both ways”. Sadly many seem to have forgotten that rule.

[nyconse]

True, this is the best explanation I have seen to date about the financial collapse...very readable too.

[FreepShop1]

I love how David Faber’s “House of Cards” last night didn’t mention a single word about Barney Frank or Chris Dodd, but showed 3 video clips of Bush.

[Eagles6]

http://www.freerepublic.com/focus/f-news/2184917/posts

[geologist]

Interesting

Where is the part about a financial run made September 11,2008; in which $550,000,000,000.00(billion dollars) were withdrawn in an hour, before the accounts were closed to further action by the FED. etc.

This is the cause of a instant near collapse of our economy ... isn't it?
Have they traced and announced the sources of the run on the banks?

Astonishing stuff!

[FReepaholic]

Interesting. I bookmarked the site for later. However, he doesn't mention the CRA at all. I did a word search of his site for CRA or Community Reinvestment Act and got nothing.

Perusing the site I see he's an O-bot so no wonder he left that out.

[nyconse]

I was going to point out that the one error in this article does not zero in on the Fannie and Freddie mess. They are lumped into all the mortgages and should not be. There is no doubt, that lowering the standards for these mortgages lead to lowering standards of prime mortgages because once investors saw the money involved, it was irresistible. This is a general explanation to show how the crisis is linked. Fannie and Freddie are lumped into all the mortgages...the Clinton and later Bush policy of promoting sub-prime mortgages is not addressed...it shows how the mortgage mess spread into all area of investment and into the world.

[nyconse]

Also, mortgages with reduced standards were already in existence when they began to use such standards on low income people (Fannie and Freddie)...which came fist the chicken or the egg? Who knows.

[nyconse]

should read ‘first’-sorry.

[Freedom_Is_Not_Free]

Bump for later read. Looks like an informative series. Looking forward to learning from it.

That said, leverage does indeed cut both ways as a lot of people found out in 1930. All I heard during the housing bubble, even here, was how I was “throwing my money away” by renting when I could have been investing in a house and making a killing. After all, housing never goes down, right?

Leverage is a great tool for wealth creation, but you can’t go into it mindlessly. Any fool who was paying attention and did the most basic study knew that once housing was well above incomes and rents, prices would have to come down.

Look forward to reading this series. Thanks.

[indcons]

B
U
M
P

[nyconse]

Thanks!

[nyconse]

As a person who act mindlessly...moderate to high risk investment supposedly diversified, bought a home (not crazy-regular loan) and used a 401K never considering if it might go down...I say you were smarter than I was...good for you.

[nyconse]

I have no answer, but hope further investigation will provide an answer.

[nyconse]

I missed part 4 Commercial paper market...so here is the link

http://hawtaction.com/2009/02/economic-collapse-boiled-down-part-4-commercial-paper.html#more

[USNA74]

ping

[nyconse]

thanks!

[Freedom_Is_Not_Free]

My father was a good teacher. That helps.

One of the great sins of the housing bubble was the conspiracy by the government and the media to prop it up. They told lies they knew were lies. They said houses only go up in value. Anybody who lived through the Texas depression or the Alaska depression — even the small collapse in house prices in 1991-96, knew that was a lie. Yet they screamed “buy now or never”.

They lied to prop up the housing market and get people to spend money. This is why I condemn them all to hell and want heads to roll, literally. Or at least to see these professional liars go to jail.

We all need to learn to be cynical of these liars. They lied in every recession to get us to spend more money to force GDP numbers artificially up (as in, people were not spending money they saved, but on credit, money they hadn’t even earned yet — from future earnings.)

I don’t mean to insult when I say “mindlessly”. A lot of people were not taught to be cynical or were just too darn busy with 2-hour commutes and rushing the kids to soccer, karate and music. People didn’t have time to study, the way I had the time to study. And the professional government/media liars kept spouting the party line.

What a tragedy. I’m sorry to hear you were caught in it. I’m sorry these professional liars have wrecked havoc on our economy. It is going to take a long time to fix. But I think it will be fixed.

Some think we are not going to come out of this and that China will end up with the world’s biggest economy. If we don’t turn into a socialist nation, we will come out of it and prosper. We have creative, hard working, risk takers who will invent and innovate and pull us out of it. Of course, they are being retarded by Porkulus, which is stealing their future hard work with a complete waste of money on socialist give-aways.

If we become a socialist nation, then all bets are off. We collapse.