Thoughts on the global financial crisis

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I was asked by Joker to add my 2 cents on this in another thread, so I’m making a separate thread in order to avoid derailing the existing one. Please keep in mind that I will be simplifying at some points and that some of these things are outside my field of expertise. I think the ideal way to do this is to start by explaining how things are interconnected.
To start in the U.S, banks made bad loans to customers, which they sold to investment banks, the investment banks bundled the loans into so called “collateralized debt obligations” the houses that were purchased with the loans were the collateral in this case. This works as long as the value of houses kept going up, because the banks would take ownership of the houses in the case of the debtor not being able to pay the mortgage and sell the house which would result in a positive transaction for the bank. However, when housing prices collapse it means that the bank is now stuck with a series of losses on loans where the collateral does not cover the balance of the loan.

The fundamental problem in the US was that a mortgage is tied to a house, not the person who took out the mortgage in order to buy said house. The benefit of this is that the U.S workforce is extremely mobile the downside is that a person can walk away from their debt, resulting in a loss on a bank’s balance sheet. In essence if someone borrows $250.000 to buy a house, the value of the house drops by 50% to $125.000 and the person walks away the bank is left with a loss of $125.000. As I said earlier, this only works as long as housing value doesn’t drop.
The problem here was that the banks had made a lot of loans to bad payers that were likely to only be able to pay their loans as long as they had the “teaser” rates for the first period (which varied between banks). Instead of doing as banks had done for many years prior, namely make loans to “safe payers” IE people who could and were likely to pay their loans and be happy with the interest payments, the banks sold the loans to investment banks, meaning that whether or not the debtor would pay became of pretty much no importance to those types of banks.
To summarize, the problem was that at the time of the financial crisis, the entire US economy was a Ponzi-scheme that was dependent on housing prices never going down, but they did. When housing prices dropped, the following was the result:

The payment on CDOs stopped, thus they became worthless as investments, which resulted in the investment banks that had them on the books had to bank massive losses. Further, they had insured themselves against this through companies like AIG with credit default swaps, meaning that if the securities dropped, the companies such as AIG had to pay out. However, AIG among others had sold much more insurance than their cash could cover for, meaning that once the CDOs went down, they couldn’t pay out to their customers and so the disaster hit every part of the chain.
The result was a liquidity crisis, which entails that pension plans, the entire public sector and large parts of the private sector are unable to borrow money to pay their obligations and fund operations. Very few companies and public sector entities pay their way with cash balances, they keep enough as current assets (assets that can be converted to cash in a short period of time) to pay their current liabilities and then fund their operations with borrowed money.

In order to prevent this freezing of liquid assets, the governments of the world printed money in order to add capital to the markets in a Keynesian move, which resulted in public debt going up. However, this move was needed as the devastation that would have taken place without it would have been much greater. People’s life savings gone due to banks going bankrupt, companies going under and thus more people losing their jobs, the public sector unable to pay its employees and thus even more jobs gone.

The aftermath

After the whole CDO Ponzi-scheme went tits up, the result was that the market was suddenly aware of risk again and started looking at debt across the globe and decided that certain countries had amassed debt through reckless voter and government behavior over the last 10 years or so of a bull market.

I say reckless voter behavior, because the voters regularly voted for the candidates and parties that offered the voter more benefits and an increased standard of living, regardless of if the country had the economy to do this. My fundamental view on democracy is that ultimately the voters are responsible for the actions of their representatives. So by voting for unsustainable debt based growth, they put it on the “grandchildren account”. Furthermore, a lot of what money was spent on, such as increased salaries and pensions for public sector workers are non-profit generating expenditures.
For instance, if a country were to borrow let’s say $2.000.000.000 to build a nuclear power plant that would in reduce the country’s need to import energy and thus reduce energy costs and create jobs within the nuclear sector in their country. That’s an investment with a profit-generating potential. However, if you put the money into things that go “poof” then you are burning capital.
In individual terms, it’s the difference between borrowing to buy a house or fund your education as opposed to borrowing to go on vacation.

The problem is that in Europe there is the potential for a crisis of US magnitude and that’s what the IMF and ECB among others have been trying to prevent. The interest you pay on a loan is at least partially based on how much of a risk you are, so when the market went “risk off” the result was that interest on debt in countries where the debt was gigantic was higher interest. However, unlike the US the Euro countries have given up the ability to print their own currency, thus they are unable to inflate their way out of debt.
Just a quick explanation of how this works:

If you owe someone $10 and the daily salary is $1 per day, you could pay the person back in 10 days. However, if you are able to print money, you could print yourself $5 a day, the value of each dollar would drop, but the amount of you owe stays static. So in essence you would pay back the $10 but the value of each dollar would be 80% less.
As long as a country is able to do this, it can print its way out of debt.

Greece on its own was not a huge problem however Spain and Italy are because of the size of their debt. If they can’t pay their debt, the banks will have to take even bigger losses on their balance sheet, this will also extend to other countries as both banks, private investors and countries lend money to each other. This will cause another liquidity crisis, since countries have now used their big guns to keep everything afloat after the U.S crisis, and now have a much smaller toolbox.
If there is anything you’d like me to elaborate on, please let me know.

TM Your synopsis is fairly accurate with one significant exception. The banks in the U.S. paid off politicians and regulators as the Ponzi scheme developed. In fact, banks were rarely held accountable for anything -- I know. Having spent two years trying to get a bank to honor my paycheck written on its bank(Section 3 of the UCC clearly states a check is payable on demand). I even contacted the Obama White House twice with documentation of federal crimes by The Fed and The OCC. OWH never even acknowledged my correspondence. The U.S. Justice Department would not address any of my issues except to say my civil rights complaint did involve police brutality therefore the would not pursue. We now live in the United Banks of America.

Worse the regulators are still allowing the banks do any damn thing they please.

The major problem I see is the upper management of the banks did not seem to even care about the long term health of the bank as a company. It's hard for me to believe they really were stupid enough to believe the housing bubble would never burst. Ordinary borrowers being ignorant is one thing, but I have a hard time believing the people on top were that stupid. It seems they simply didn't care and were milking the thing for all its worth, so they could have a reason to pat themselves on the back and keep raising their own already astronomical salaries, with their golden parachute ready to deploy as soon as the s**t hit the fan. Our entire financial system is run by dyed in the wool sociopaths, and they have the means to control the government as well.

I bet it's more planned out than people normally would think.

The bankis and moragates where also a problem in this global economy practice and Wall street and special interests groups help cause it as well.

Anybody notice the huge increase in the price of gold during the 2000's? What to do with all these US dollars that will be devaluated due to massive inflation?

-stokes conspiracy embers-