The US Fed is a ______ (fill in the blank) - Page 4

ScratchMonkey · 03-18-2008, 05:10 PM

Anyone care to critique the analysis presented here?

http://www.downsizedc.org/blog/2008/...not_being_told

Quote:

First, Congress passed something called the "Community Reinvestment Act" in 1977, resulting in the creation of bureaucratic regulations designed to encourage, or even compel, financial institutions to make loans to people with lower incomes. These regulations were then amended in 1995 and 2005 to create different rules for institutions of different sizes, so that various kinds of institutions would be better able to meet the government's goals for fostering home ownership in lower income communities.
Second, the Federal Reserve starting making loans available to the banking system at extremely low interest rates.
Third, steps one and two combined to make cheap housing loans available to people who could not have afforded or qualified for them before. This caused an increased demand for housing that sent home prices spiralling upward.
Fourth, mortgage lenders managed the risk involved in making these loans by selling their mortgages to other companies, which in turn thought that they were managing their own risk because they had a wide variety of mortgages, from many different types of borrowers, in their portfolio.
Fifth, these decisions about how to manage the increased risk created by the "Community Reinvestment Act" were all in error, because the Fed's policy of easy money had falsely inflated the value of ALL homes. This meant that good mortgages could not be used to manage the risk involved in questionable mortgages, because the value of ALL homes was falsely inflated.
Sixth, as with all inflationary booms, increases in home prices finally absorbed the increased purchasing power provided by the Fed, leading to a slow-down in home purchases. When this moment arrived everyone realized that the homes they had purchased weren't really worth what they had paid for them. The defaults and foreclosures then began, along with the collapse of the financial institutions that owned these unsound mortgages.

bkelly · 03-18-2008, 05:21 PM

Quote:

Originally Posted by AMosely

Do you live on planet Earth?

I believe so but they changed the signs on me again this morning.

Quote:

Originally Posted by AMosely

...that B&S was placing way too much hedge fund investment in shaky sub-prime mortgages. This began the cascade the took the firm down.

You don't build a house on sand and then blame the sand when everything comes crashing down.

bkelly

ScratchMonkey · 03-18-2008, 08:05 PM

Quote:

Originally Posted by bkelly

You don't build a house on sand and then blame the sand when everything comes crashing down.

OTOH, you can build a house in a flood plain and get FEMA to bail you out when it goes underwater.

xTYBALTx · 03-19-2008, 12:27 PM

The credit crisis and Feds' actions explained in terms even I can understand:

http://www.nytimes.com/2008/03/19/bu...hp&oref=slogin

03-19-2008, 12:27 PM	#49 (permalink)
xTYBALTx Join Date: Aug 2005 Posts: 3,676	Re: The US Fed is a ______ (fill in the blank) The credit crisis and Feds' actions explained in terms even I can understand: http://www.nytimes.com/2008/03/19/bu...hp&oref=slogin __________________ Current Tybalt theme song: Mason v. Princess - Perfect "$250,000 a year won't get me to Central Park West."

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