Wall Street thread

[slappy4428]

I don't know how Bama has a gas shortage, I'm further north and our gas is down 80 cents in the past 2 weeks.

They get their gas from the Gulf Coast refineries.

it's not as bad a Georgia, but this is flippin ridiculous

 

[prezclinton]

799 just now. Almost cracked 800.

 

[Italian_Stallion]

I saw it off by more than 800 in the past hour. It has come back a little since then. The last hour can be a mess. Last week, that big drop included a huge fall right at the end. Potentially, we could be looking at a quadruple-digit decline.

 

[prezclinton]

Yea, I was thinking back to last week when it just bombed at the very end by a couple-hundred.

 

[The Big Ragu]

What we are seeing today is a reason why I said this corporate welfare -- bail out plan, was short sighted and feckless... and would create bigger problems in the long run.

There was no staving off a deep recession and probably a depression. So these legislators went in with their guns blazing, except the guns blazing amount to spitting into the wind when it comes to the world's credit markets. That spitting into the wind is a substantial sum of money to the typical American, though, and will create government deficit spending that only exacerbates a nasty economic downturn we were going to have to deal with either way.

This isn't the brain surgery some people pretend it is. This idea that government controls the economy is plain wrong. The financial system is simply a thin layer wrapped around the real economy. Strip it away and people will still behave in certain ways. They will still develop and market new products. People will still buy clothes and food. That goes on, even if an economic downturn causes people to tighten their belts because demand of things is elastic, depending on what you are talking about.

The bottom line is, though, even though you have to face hurt for a period time (and there was NO avoiding it, even with Senators and Congressmen puffing their chest and acting like they were saving the world), if a bank that was helping fuel the economy fails because of stupidity, ANOTHER one will take its place. The best course of action was to let the bad actors self select themselves out and allow new, smarter people to step in and create credit markets. It WILL happen, because there is an opportunity to make money doing it. Government interference screws that up, and when they interfere with private markets with $700 billion of our money, they take a bad situation and will undoubtedly make it worse -- and prolong the suffering.

Damned idiots. If only people could accept that some things can't be "fixed." Sometimes you have to just take your medicine, and going for an "easy" fix stands to make you more sick in the long run.

 

[Armchair_QB]

One piece of good news: futures in crude oil, unleaded gasoline and home heating oil have also dropped (oil is below $90 for the first time since February).

You'd never know it by the gas stations... at least in my state

Reporter doing a local gas story for an Orlando station this morning says, without quoting anyone, that gas will be under $3 a gallon this fall.

It was under $3.00 ($2.99) at a station I drove by on Saturday. Gas dropped about 40 cents here over the weekend.

 

[BYH]

I'm sure it's just a coincidence prices are falling a month before the election.

 

[cranberry]

Ragu, on some level I agree that a bailout wasn't the right answer. I'd have favored a bill that would have done nothing except restore and strengthen regulation so that people had enough confidence to eventually invest again.

But, seriously, how do you know that today's free fall wouldn't have been exponentially worse without the government removing the toxic debt?

While it's easy to be cavalier when speaking purely in theoretic terms, it's probably quite different when you're in a position of responsibility and you believe you can soften the blow and possibly stave off at least some of the human suffering. Let's face it, most of the people calling for the bailout were free-market capitalists.

 

[ink-stained wretch]

There is no "bail out" for the consequences of greed, fraud, malfeasance and nonfeasance. Internal memos from Lehman Brothers revealed today ought to roil the waters of self-righteous indignation.

Woody Guthrie and the Wobblies were on to something. Perhaps the "murder" of jobs to fatten the corporate wallets ought to be a capital crime.

Karma is *****, ain't it Ken Lay.

I feel better now. Thank you.

 

[The Big Ragu]

Ragu, on some level I agree that a bailout wasn't the right answer. I'd have favored a bill that would have done nothing except restore and strengthen regulation so that people had enough confidence to eventually invest again.

But, seriously, how do you know that today's free fall wouldn't have been exponentially worse without the government removing the toxic debt?

While it's easy to be cavalier when speaking purely in theoretic terms, it's probably quite different when you're in a position of responsibility and you believe you can soften the blow and possibly stave off at least some of the human suffering. Let's face it, most of the people calling for the bailout were free-market capitalists.

cranberry, Well, I posted before today saying that we were in for a world of hurt regardless of government action. And our $700 billion package has zero impact on the WORLD'S credit markets, which dwarf that amount -- and all of Western Europe, Asia and South America, which we have no jurisdiction over, but which are related to us and therefore suffer the same problems when our credit markets dry up.

I predicted this wouldn't "soften the blow" for a number of reasons. One, they never intended to soften the blow. They intended to grandstand and gain political points. If they wanted to soften the blow, they wouldn't have been out with a doomsday scenario announcing to the financial markets (and the average person) that we were going to go to hell in a handbasket without the Senate and Congress playing superhero (how they wanted to be perceived). Bush wouldn't have gotten on TV and scared the hell out of the rest of the world. They wouldn't have set expectations of the necessity of a package, when they couldn't even get it passed the first time -- signaling to the world that they really AREN'T in control of anything. It had the exact opposite effect. The only thing they might have been able to do was bolster confidence. Instead, they created more doubt that anyone should be confident.

I'm all of easing "human" suffering. Short of that, I am all for trying to soften a recession, if it is possible. But I am saying that a convoluted government program that uses the money of the people suffering--and uses it in the WRONG ways, is not a formula for fixing anything. It hurts those people worse than they would have been hurt. Done correctly (and as I pointed out above, it was done wrong in most ways), it might have had an effect of bolstering consumer confidence. We didn't even get that. But even done correctly, it would have given us a short-term bounce, NOT prevented the recession we are staring down and created a mountain of debt that is sure to extend the economic downturn. We would have ended up with the same exact recession (and let's face it, this has depression written all over it), except with $700 billion of our money pissed away in a feeble attempt to make it look these morons who have no clue can actually manage an economy they don't understand.

It was a bad idea in every way. I don't care if people who call themselves "free-market capitalists" were for this. A bad idea is a bad idea no matter what you call yourself to justify it.

 

[amraeder]

Ragu, just trying to learn. Why do you say this is the WRONG way to try and bring life back to the credit market?
What, IYO, would the RIGHT way be?
And, what makes you think that's a better way than the current way?

 

[The Big Ragu]

Ragu, just trying to learn. Why do you say this is the WRONG way to try and bring life back to the credit market?
What, IYO, would the RIGHT way be?
And, what makes you think that's a better way than the current way?

am, Well, not sure I can teach. A little of this is a background in economics, a little bit is personal philosophy. The best I can say about myself is that I believe my ideas are informed.

Credit markets rely on confidence. When you lend someone money, you are not going to do it unless you feel with a degree of certainty that they will meet their repayment obligations. Government can't legislate that. Markets legislate it. Risky borrowers have to pay more to get loans. That way lenders can eat some bad loans and make up for it with he higher interest payments they get from those that meet their obligations. Less risky lenders can pay a market rate, based on current inflation and interest rates.

What happened in this crisis is that the largest borrowers (investment banks, insurance companies), got out of control and did some incredibly stupid things. And lenders got stupid at the same time and afforded them VERY risky loans. The investment banks got crazy betting on the housing market -- they bought these complicated securities that were futures (technically, they were a type of investment called derivatives and swaps) based on packaged loans (mostly tied to the housing market). That in itself was OK. Investment banks make bets on investments all the time and they can absorb bad bets when they get it wrong. In this case, though, many of these investors leveraged themselves to abnormally ridiculous levels. And the lenders were complicit. So a firm like Lehman Brothers could leverage itself to 50 times the worth of its assets. And it took a bath. As a result, their creditors were left holding the bag. Multiply Lehman by hundreds of other firms, and creditors -- which were allowing companies to leverage themselves to that degree and handing out ill-advised loans -- swung to the opposite end of the spectrum and got gun shy. They won't extent credit to anyone with any degree of risk -- let alone affording any power of leverage.

The government can't fix that. Think of it as me and you. If I lend you $10,000 (even knowing you don't earn a lot of money) because I think you have a great investment idea, and then you lose the money, when you come back and ask me for another $10,000, I am going to cut you off. Government can't change that. If they do, they are just trying to change it with OUR money, because the only money government has is tax revenues. In the case of the financial crisis, the average American is going to suffer as a result of the recession being brought on -- with less liquidity out there, there is less economic development and our economy retracts. Government's solution is to tax us on top of it and take a ridiculous sum -- $700 billion -- of money we can't afford and muck things up with it.

If they stay out of it, it is STILL going to be ugly. But these things sort their way out. If a bank dries up, there will be others who spring up ready to make loans. There is a profit incentive to. The NEW lenders will be more careful with their money. They won't let a firm like Lehman borrow well beyond its means. They will charge a lot in interest because everyone is so gun shy now. But eventually someone else will step in and undercut them, because they will know they can afford the risk and still earn a healthy profit. And as more new lenders step in, it will create competition and things will stabilize and normalize.

It may take time. We are staring at a nasty recession. But that is the way markets work. Government can't legislate it.

I'll turn it back around. Find me someone who can explain how government, aided by debt that will have further negative effects on our economy, can fix something that we just have to ride out because a lot of people made bad decisions and now the world's economies are paying for it? What is this magical solution?

 

[BTExpress]

Do we have an accepted definition for Depression, since that word seems to be thrown around a lot lately?

Don't know how bad things will get, but consider this:

Unemployment, inflation and interest rates are a fraction of what they were in 1982 . . . and I don't remember the "D" word rearing its head back then.

People actually bought homes with 18 percent mortgages.

 

[Pancamo]

The depression will hit when companies that use credit lines to pay bills and salaries are not able to access those lines.

 

[The Big Ragu]

BT, a depression isn't a well-defined term. There are no parameters that officially make a recession into a depression. A recession is a simply a decline in gross national product of two quarters or more. A depression -- in loose terms -- is a recession that spirals and turns into a prolonged recession. Typically attempts at fiscal policy make the situation worse, too.

 

[amraeder]

Ragu, just trying to learn. Why do you say this is the WRONG way to try and bring life back to the credit market?
What, IYO, would the RIGHT way be?
And, what makes you think that's a better way than the current way?

am, Well, not sure I can teach. A little of this is a background in economics, a little bit is personal philosophy. The best I can say about myself is that I believe my ideas are informed.

Credit markets rely on confidence. When you lend someone money, you are not going to do it unless you feel with a degree of certainty that they will meet their repayment obligations. Government can't legislate that. Markets legislate it. Risky borrowers have to pay more to get loans. That way lenders can eat some bad loans and make up for it with he higher interest payments they get from those that meet their obligations. Less risky lenders can pay a market rate, based on current inflation and interest rates.

What happened in this crisis is that the largest borrowers (investment banks, insurance companies), got out of control and did some incredibly stupid things. And lenders got stupid at the same time and afforded them VERY risky loans. The investment banks got crazy betting on the housing market -- they bought these complicated securities that were futures (technically, they were a type of investment called derivatives and swaps) based on packaged loans (mostly tied to the housing market). That in itself was OK. Investment banks make bets on investments all the time and they can absorb bad bets when they get it wrong. In this case, though, many of these investors leveraged themselves to abnormally ridiculous levels. And the lenders were complicit. So a firm like Lehman Brothers could leverage itself to 50 times the worth of its assets. And it took a bath. As a result, their creditors were left holding the bag. Multiply Lehman by hundreds of other firms, and creditors -- which were allowing companies to leverage themselves to that degree and handing out ill-advised loans -- swung to the opposite end of the spectrum and got gun shy. They won't extent credit to anyone with any degree of risk -- let alone affording any power of leverage.

The government can't fix that. Think of it as me and you. If I lend you $10,000 (even knowing you don't earn a lot of money) because I think you have a great investment idea, and then you lose the money, when you come back and ask me for another $10,000, I am going to cut you off. Government can't change that. If they do, they are just trying to change it with OUR money, because the only money government has is tax revenues. In the case of the financial crisis, the average American is going to suffer as a result of the recession being brought on -- with less liquidity out there, there is less economic development and our economy retracts. Government's solution is to tax us on top of it and take a ridiculous sum -- $700 billion -- of money we can't afford and muck things up with it.

If they stay out of it, it is STILL going to be ugly. But these things sort their way out. If a bank dries up, there will be others who spring up ready to make loans. There is a profit incentive to. The NEW lenders will be more careful with their money. They won't let a firm like Lehman borrow well beyond its means. They will charge a lot in interest because everyone is so gun shy now. But eventually someone else will step in and undercut them, because they will know they can afford the risk and still earn a healthy profit. And as more new lenders step in, it will create competition and things will stabilize and normalize.

It may take time. We are staring at a nasty recession. But that is the way markets work. Government can't legislate it.

I'll turn it back around. Find me someone who can explain how government, aided by debt that will have further negative effects on our economy, can fix something that we just have to ride out because a lot of people made bad decisions and now the world's economies are paying for it? What is this magical solution?

Thanks. That definitely helps. So many people screwed up along the line to get us to this point, it's been hard for me to wrap my head around.

As an aside, borrowing money to invenst in those derivatives seemed just as stupid as buying stocks on margin. And we all know how well that turned out....

 

[BYH]

Do we have an accepted definition for Depression, since that word seems to be thrown around a lot lately?

Don't know how bad things will get, but consider this:

Unemployment, inflation and interest rates are a fraction of what they were in 1982 . . . and I don't remember the "D" word rearing its head back then.

People actually bought homes with 18 percent mortgages.

That's because back then we didn't live in the 24-hour newscycle, with talking heads giving us the best- and worst-case scenario on multiple platforms.

Let me make it abundantly clear I'm not falling into lockstep with the lemmings who prattle on about how negative the media is and how it's the media's fault everything is going to hell in a handbasket. But 25 years ago, our only way to read or hear more about the recession was to pick up one of the financial papers (unless you had CNN, still in its infancy, or watched PBS and Louis Rukeyser...every Friday night at my house was fish sticks and Rukeyser).

Nowadays, we see stories about the recession everywhere we go and everyone has an opinion on it.

 

[The Big Ragu]

am, It's not the borrowing of money. Our economy lives on borrowed capital. It is how much some of these firms were allowed to leverage their assets by lenders. Wall Street played this high-stakes game of poker for at least the last 15 years. It was insidious in a few ways. One, they screwed shareholders. They did that by leveraging up the cash provided by shareholders (which more and more include regular people who own either stocks or mutual funds that own those stocks) and used that debt to accumulate giant portfolios of securities. Those securities included things like those derivatives and swaps that have exploded on them. The Fed -- our government -- actually enabled them. To try to bolster the economy and make things continue to look better than they were, they kept interest rates low and continued to reduce rates, even when we started to see a trend toward inflation. As those rates went down, the value of those Wall Street portfolios swelled. Their massive debt, in effect, became cheaper to carry. And it yielded them gigantic returns, even though they had very little equity as collateral for what they owned.

We actually had some warnings that no one heeded. There was the Asian currency crisis. The tech meltdown. But they were able to skate through with just a little damage, and aside from those relatively few scares, this has been the game Wall Street has played since the early 90s.

As long as interest rates remained low and the economy was growing, they could play that game. But economies don't grow forever. We have economic cycles. And the deeper they got into that game, the bigger the fall they set up. In the mean time, though, based on the enormous profits they were seeing, employees of those firms got huge compensation packages and bonsuses.

The obvious flaw that was bound to bite them in the ass eventually (what we are seeing now) is that Wall Street turned from a place where profits came from recurring businesses -- actual businesses that created economic growth -- into a place living on a wing and a prayer on huge amounts of leverage and huge risk. When their good luck turned about a year ago, all of the shareholder wealth supporting their leverage got wiped out and it started to fold like a house of cards.

The problem now is that the damage has already been done. It's been being built up for 15 to 20 years. There is no government bail-out that can undo it. And putting all Americans $700 billion in debt, when that is a drop in the bucket when looking at the magnitude of the money that has been lost, is a bad idea because it creates a host of OTHER economic woes that can only serve to extend the recession this whole thing is going to make worse. It was short-sighted thinking. Even if it it had had a positive short-term effect, it wasn't worth the negative long-term effects. But politicians don't consider the long term. They consider the length of their elected terms.

 

[jgmacg]

Big --

Did you see '60 Minutes' last night? Interesting piece on the current Wall Street implosion. Including the unsecured, unregulated market in "credit default swaps." Which apparently totals something around $60 trillion dollars.

Good thing I keep my savings bonds, buttons and bits of string in a shoebox.

http://www.cbsnews.com/stories/2008/10/05/60minutes/main4502454.shtml

"Well, we really don't know. There's this voluntary survey that claims that the market is in the range of 50 to 60 or so trillion dollars. It's sort of alarming that, in a market that big, we don't even know how big it is to within, say, $10 trillion."

"Sixty trillion dollars. I know it seems incredible. It's four times the size of the U.S. debt. But that's the size of the market according to these voluntary reports," says Partnoy.

He says this market is almost entirely unregulated.

 

[The Big Ragu]

jg, I didn't see it. But I believe the dollar amounts are that high.

A lot of people pointing fingers right now throw in the "unregulated" characterization over and over again. It may not surprise you, knowing me, that I don't think this should be regulated. If people want to be stupid with their money, they should lose it. We don't need regulation. This isn't a matter of anyone infringing on others' rights, so we shouldn't be legislating it. Let Lehman and JP Morgan and Merrill Lynch pay their price. If I am stupid with my money, I pay my price.

The real regulation occurs when people hopefully learn from their mistakes. The problem with regulation that is trying to protect people from themselves (and not from each other) is that it relies on our moronic elected officials knowing how to regulate things, without arbitrary political decisions and special interests forcing irrational regulations on us.

If I want to go out and spend all my money on horse dung and I put up my house as collateral to do it, there shouldn't be "regulation" stopping me. I am stupid. When I lose everything, I got what I deserved.

America was kind of founded on financial freedom and liberty. The Boston Tea Party epitomizes our early principles.

Regulation (and I am not talking about the types of necessary regulations, or laws, that protect our rights from others infringing on them) implies: 1) You can protect people from themselves. 2) Elected officials will do things with pure motives.

I don't believe either of those things are true.