A book about our current financial crisis.

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You really should get a hold of and read -The Big Short- by Michael Lewis. He details the rise of bond trading and the creation of derivatives in the bond market based on unbelievably unsound loans and derivatives which enabled the short selling of mortgage based bonds.

Let me make an analogy. Suppose the automobile companies were not only able to sell cars but to take out insurance policies on the life of the drivers of the cars they sold. How safe do you think the cars would be? That is precisely what the securities industry and the investment bankers did with property loans to people who were not able to repay the loans. The loans were then repackaged into derivative securities called tranches which the investment bankers then bought and issued new stock and additional bonds on the basis of these "toxic" securities.

This has been going on since the 90's (starting during the Clinton days and the dot com bubble) but become critically bad due to lack of proper regulation and control during the late and highly lamented George W. Bush administration. This is the one time time government should have stepped in and put a stop or at least severely limited trade in these bogus bonds. Now we are suffering the consequences of bad practice and even worse, bad policy.

Get the book and you will learn how it come about and further more how little the financeers give a damn. Greed may be good, as Gordon Gekko says, but fraud is never good. The U.S. was pushed into an economic bubble situation based on the overinflated prices in the housing market which was exacerbated by the "easy money" mortgages issued by the banks and the finance houses that built derivatives based on these bad loans.

There is nothing wrong with bonds issued to parties that can produce and pay back the money. Loans to industry have been one of the factors that have enabled the industrial sector to grow and prosper. Credit is absolutely necessary for economic growth and prosperity, but credit has to be founded on sound principles and policy. Money should be loaned only to parties that are highly likely to repay the loans and at reasonable rates of interest. There is also nothing wrong with releasing some of the buying power of sound equity in real estate properties. Creating phony baloney "equties" by lending money to people unable to repay on property who prices were expected to rise indefinitely created one of the worst crises since the tulip bulb bubble in Holland during the 17th century. It took the Dutch nearly thirty years to repair the damage of that debacle.

ruveyn

YouTube - Burning Down The House: What Caused Our Economic Crisis? Bombshell http://bit.ly/3aoj7Y

The exponential rise in housing prices is symptomatic of a classic economic bubble. It happened in Holland in the 17th century, it happened in France in the late 18 th century. It happened with the Florida Land Boom, It happened with the stockmarket in the roaring twenties when stock could be had on short margins. It happened with the dot.com boom. It happened with the housing market when mortgages could be obtained with the stroke of a pen regardless of the ability to repay. All these "bubbles" have the aspect of a self inflating balloon and the insane belief that value and price can appear out of nowhere and continue to grow infinitely. And so it seems until the bubble bursts. John Maynard Keynes pointed out that markets can behave insanely far long than feeble players can last before they are wiped out. Maynard Keynes talked about markets being driven by "exuberant spirit" which is another name for the insane belief in infinite growth. So the problem is, at root, a psychological problem and has appeared in many lands, in many times (as the previous examples show). There seems to be a crazy aspect to investment which becomes speculation when the insanity takes hold. Free markets, when they are sound are the strongest engine of growth and prosperity, but they become the causes of ruination when allowed to expand and grow in a cancerous fashion. That is the moment for government to do its regulatory thing, to put a stop to insanity which translates to economic fraud and ruin. Governments can prevent sound economic growth, but they can also prevent ruin from bubble-itis. Unfortunately they never intervene (or hardly ever) to the right degree at the right time because they are motivated politically, not rationally.

ruveyn

I thought that it was only "liberals" and "socialists" who saw a problem with fraud.

Fraud is what allows successful people to enrich themselves.

One can be successful without fraud.

ruveyn

Perhaps in a small way, but no-one is truly going to reach a pinnacle of success without fraud.

Poverty is for honest people.

Nobodies reach success through fraud.

Name one.

I'm very interested in reading this, actually.

Goldman Sachs are in trouble for this at the moment, too. The financial authorities are accusing them of selling securities they knew would default to clients and buying credit default swaps on them - so they bet against the assets they sold to clients, basically.

This is the book that also talks about Micheal Burry, isn't it? He's an Aspie hedge fund manager who predicted the subprime mortgage collapse and made almost a billion dollars profit (about $100 million for himself and over $700 million for his investors). He did nothing wrong because he never sold the bonds to anyone, only bought the swaps.

I probably won't be very popular for this comment, but I want to be a hedge fund manager when I'm older. I love studying the financial markets and devices, and I want to be rich (as is obvious from my title and avatar on here). It's pretty much researching, analysing, and predicting - perfect for me IMO.

Ah, the Great Tulip Crash... what a rare and silly moment in history.

http://en.wikipedia.org/wiki/Tulip_mania


M.

The Tulip Bulb Boom is symptomatic of every bubble that has occurred. It is quite common. From the Florida Land Boom to the Dot Com craze the the Housing Bubble.

That is the problem. It is common and each generation fails to learn the lessons of the prior generation about economic bubbles or booms

ruveyn