Ronald: good info. sounds about right. any trueth to the rumor that greenspan contributed to the house boom, and therefore, the current woes? I heard he implemented flexiable and non-traditional loans for the houseing market (or rather oked them) to stimulate the economy. any trueth there?
me: yo. Yes, greenspan approved a new wave of subprime loans during his service under Bill Clinton
2:27 PM That approval lead to the overleveraged companies that have failed today
2:28 PM Ronald: isn't he hailed as one of the greatest money minds? was it just an oops, or did people take advantage?
and thanks for the knowlege, I hear things, but don't believe them without independant confirm
2:30 PM me: Yep, greenspan is a genius
The problem is not necessarily the subprime loans. In fact, on paper the idea is brilliant.
2:31 PM Ronald: virtually creating money, making ownership available to literally anyone
me: Because mortgages are the prime valuation of our economy, they can be thought of as stocks in the economy
2:32 PM because stock is the valuation of a company, for the most part
The more stock that is issued at a certain price, the more the company is worth if they can continue selling more stock at that price
This is called market-captalization
2:33 PM Ronald: k
me: So, if more mortgages are sold, it is the same idea as increasing the amount of stock.
By doing so the economy becomes worth much more
2:34 PM To add to this, mortgages are sold both ways, the primary being to the consumer who buys into a mortgage to pay for their house
the secondary being through asset backed derivatives which investors buy into
2:35 PM those derivatives value are based on a "package" of mortgage assets
2:36 PM derivatives are the primary way in which the US gets back all of that money we send overseas for imports such as oil and other stuff we buy at Wal Mart from China
Those countries buy up these derivatives because they expect them to be a sound investment
So, what happened in a nutshell is this:
2:37 PM Greenspan along with the Clinton Administration dramatically increased the ability of banks, and more especially Fannie and Freddy to delve into subprime loans
2:38 PM That action, along with incredibly low interest rates sparked a huge boom in the economy that we have been riding and enjoying for the last 10 years
So, in short the idea worked
2:39 PM Ronald: but...
me: However, increasing pressure from dramatically increased energy and food prices and flat wage increases cut into the ability of many Americans to pay their mortgages
2:40 PM So those loans went into default, causing a double whammy
The banks weren't getting their projected income from those who owned mortgages
2:41 PM and they couldn't sell derivatives because the credit ratings on those derivatives decreased as more defaults piled up
This left the banks with huge losses, causing a credit crunch
2:42 PM to make matters worse, the banks now had asset backed derivatives that they couldn't price because home values sharply declined; there was no way for them to know how much their assets were worth
2:43 PM this made their balance sheets look horrible, which caused investors to leave in droves, bankrupting those firms, causing a huge ripple on Wall Street and furthering fueling the credit crisis
Ronald: is there any legislation on sub primes, or with the industry self regulate?
me: Whew!
Ronald: ps thanks for the info
2:44 PM me: There are, but they are a lot more laxed now
Ronald: I knew it had to be the big oils fault
! ;-)
! ;-)
me: Yep
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