I'm amazed at how little most people know about economics. For example, many people think that the Bear Stearns break down was a hit job.

It's going to take a serious recession or depression to get folks elected with a public mandate to get this done.

But as far as the public is concerned, we're not there yet. People still have no idea what's happening, and the media and pols aren't telling them. In fact, they are being told that everything is under control.

Here's an example from a computer forum that I visit discussing the current situation:

Well it is my understanding that congress ordered mortgage comps to make housing loans to poor people, you know "be fair to them". So they did. And the predictable happened. The poor are poor for a reason. And most assuredly they don't understand the dangers of an A. R.M. loan! So congress feigns outrage and promises to provide "oversight, so that such an outrage doesn't happen again". Neat trick don't you think, cause a disaster, then leap in with the 'fix'. When in reality, all that has happened is that the Marxist Socialists in our Govt, now control the Mortgage industry. Destroying the nation bit by bit until it collapses, it is the only way the Marxist Socialists, can take over. We are in a financial war with the democrats aka (global socialists.) I have read that soros bet against the pound and the dollar. Ask the bankers at the Bank of England. The democrats aka global socialists want a financial crash. I despise democrats who allow these monsters, yes monsters, to rule their party.

These are already supposed to be regulated to some extent by two entities--the Securities and Exchange Commission (SEC) and more importantly, the Comptroller of the Currency. The problem is/was that, like Department of Environmental Protection, the Food and Drug Administration, the Department of Justice, the National Labor Relations Board, the Consumer Protection Commission, the Supreme Court, the mainstream media, etc., etc., ad nauseum, these institutions have all been subverted to either 1: use their authorities to perform strictly political ends or, 2: benefit the corporatist oligarchs that installed the Bush administration in the first place. Everything else is irrelevant.

Hence our toddlers are suckling on toys constructed with toxic chemicals, DHS and other agencies didn't lift a finger to help the inhabitants of a Southern Democratic stronghold after Katrina. Rulings let the insurance companies get away scot-free, while Housing and Urban development allowed Katrina funds to be used for luxury high-rise apartment and housing developments slated specifically for affordable housing. U.S. Attorneys are fired for applying the law to political friends, while on the other hand other U.S. Attorneys are promoted for prosecutorial misconduct--suborning perjury, witness tampering, and suppressing exculpatory evidence (c.f. former Alabama Gov. Don Siegelman). Gaming intelligence agencies to produce justification for the invasion of a harmless sovereign nation.

Do we really have any expectation, any expectation, that the markets would be well and competently regulated, or that the major political donors who run it would ever have any benefit denied them, even to the point where ordinary people would demand blood on the streets?

We are at a point now in this country where if John Sidney McCain is elected, there may--and probably should--be widespread social disorder directed at either or both political parties, the corporations and financial institutions that have failed so utterly in every aspect of those things that necessitates their existence.

We have a justice department and judiciary who have thumbs on the scale of justice, energy companies that throttle the delivery of their goods, Civil Rights voting sections that cage minority voters, a media that identifies the most important things the citizenry needs to know and purposefully misleads us with false corporate and political propaganda or baffles us with stories about starlets' boob jobs. We have limp-wristed political opposition pantywaists in the House and Senate that resembles the defenders of the Weimar Republic.

This country has turned into a second-rate Third-World banana republic tinpot dictatorship. Everything has gone on too far for even an excellent president to turn around.

What go around comes around. What is unsustainable, won't -- as we are in the midst of learning the hard way.

300,000,000 people
100,000,000 dwellings
$200,000 Average Value (No Median BS)
50% Average LTV
$10 Trillion in Mortgages on Homes

So if 50% of homes foreclose, its $5 Trillion.

Feel free to argue with the numbers, they are estimates.

Consequences

Imagine the future dialogue:
"Hello Mr Investor, I have these Bonds, based on bundles of home loans for US Citizens, and as you know, they are low risk investments."

Would you, as an investor, trust the US to issue Credit-worthy Mortgage Backed Bonds again?

I suspect the whole mortgage market could go away. That would depress house prices more, which would cause more foreclosures, which would...

At a minimum we need an independent agency to rate bonds. Independence is only gained by taxpayers paying to salaries of the employees.

At the HIGH SCHOOL level. It is ridiculous that Americans do not know how to manage their money and do not know enough to insist their government supervise the markets.

The culture of ignorance HAS to end. We literally can no longer afford it.

...the working and lower middle classes as we have for the past 25 or so years, this is what you get. Kudos to Jonathyn for getting so much of this right! To touch on just a few of the mant reasons why: union-busting, the relentless movement & exploitation of our new immigrant population, pitting undocumented workers against American workers. Phony (even hilarious)economic statistics!

Until recently, the reduced buying power of the working & lower middle classes was compensated for with easily available credit & asset inflation, often of the only asset these people (will ever) own- their homes.

Even a paranoid eccentric like Henry Ford realized that he had to compensate his employees sufficiently in order to buy his product!

Ian, I submit this is the seminal problem. There has to be some hope for these people beyond being prision guards or riflemen!

and you will see the future.
I think this is what GWB was working for.

_{repressive governments mix administrative clumsiness & inefficiency with authoritarian tendencies.}

and is as much endemic to globalised late-capitalism as billion-dollar bonuses to "the smartest guys in the room" regardless of the long-term consequences of their actions. "Privatise profits, socialise losses", this is the reality of modern financial "best practices".

From Wikepedia:

Moral hazard
Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions.
...
Financial bail-outs of lending institutions by governments, central banks or other institutions can encourage risky lending in the future, if those that take the risks come to believe that they will not have to carry the full burden of losses. Lending institutions need to take risks by making loans, and usually the most risky loans have the potential for making the highest return. A moral hazard arises if lending institutions believe that they can make risky loans that will pay handsomely if the investment turns out well but they will not have to fully pay for losses if the investment turns out badly. Taxpayers, depositors, other creditors have often had to shoulder at least part of the burden of risky financial decisions made by lending institutions.[1]

Moral hazard can also occur with borrowers. Borrowers may not act prudently (in the view of the lender) when they invest or spend funds recklessly. For example, credit card companies often limit the amount borrowers can spend using their cards, because without such limits those borrowers may spend borrowed funds recklessly, leading to default.

Some believe that mortgage standards became lax because of a moral hazard—in which each link in the mortgage chain collected profits while believing it was passing on risk—and that this substantially contributed to the 2007 subprime mortgage financial crisis.[2] Brokers, who were not lending their own money, pushed risk onto the lenders. Lenders, who sold mortgages soon after underwriting them, pushed risk onto investors. Investment banks bought mortgages and chopped up mortgage-backed securities into slices, some riskier than others. Investors bought securities and hedged against the risk of default and prepayment, pushing those risks further along.

QED

via the economic website, RGE Monitor:

A Generalized Run on the Shadow Financial System
Nouriel Roubini | Mar 17, 2008

Since the onset of the liquidity and credit crunch last summer this column has been arguing that monetary policy would be impotent to address such a crunch because, in part, of the existence of a non-bank “shadow financial system”. This system is composed of conduits, SIVs, investment banks/broker dealers, money market funds, hedge funds and other non bank financial institutions.
...
Unlike banks this shadow financial system does not have access to the lender of last resort support of the central bank as these are not depository institutions regulated by the central banks. What we are now observing – with the case of Bear Stearns and the recent disaster among SIVs, conduits, run on a number of hedge funds and money market funds is a generalized liquidity run on this shadow financial system.
...
This is the most radical change and expansions of Fed powers and functions since the Great Depression: essentially the Fed now can lend unlimited amounts to non bank highly leveraged institutions that it does not regulate. The Fed is treating this run on the shadow financial system as a liquidity run but the Fed has no idea of whether such institutions are insolvent. As JPMorgan paid only about $200 million for Bear Stearns – and only after the Fed promised a $30 billlion loan – this was a clear case where this non bank financial institution was insolvent.
...
By lending massive amounts to potentially insolvent institutions that it does not supervise or regulate and that may be insolvent the Fed is taking serious financial risks and seriously exacerbate moral hazard distortions. Here you have highly leveraged non bank financial institutions that made reckless investments and lending, had extremely poor risk management and altogether disregarded liquidity risks; some may be insolvent but now the Fed is providing them with a blank check for unlimited amounts.
...
But this is not just a liquidity crisis; it is rather a credit and insolvency crisis. And it is not the job of the Fed to bail out insolvent non bank financial institutions. If a bail out should occur this is a fiscal policy action that should be decided by Congress after the relevant equity holders have been wiped out and senior management fired without golden parachutes and huge severance packages.

http://www.rgemonitor.com/blog/roubini/249924

Too bloody right, say all of us!!

I noticed this in the Monday NYT:

After a weekend of intense negotiations, the Federal Reserve approved a $30 billion credit line to help JPMorgan Chase acquire Bear Stearns, one of the biggest firms on Wall Street, which had been teetering near collapse because of its deepening losses in the mortgage market.

In a highly unusual maneuver, Fed officials said they would secure the loan by effectively taking over the huge Bear Stearns portfolio and exercising control over all major decisions in order to minimize the central bank’s own risk."

Doesn't that sound a lot like nationalization?