Maybe if we elect another set of Reaganite Republicans we can find entirely new, as yet unthought of sections of the financial industry that can be destroyed through deregulation at taxpayers' expense.

With Reagan I's destruction of the S&L's and Reagan II's (Bush Jr's) strike for trillion dollar losses now, this only sets the bar higher for any future Reagan III (McCain?).

The irony is that the story seems to tell basically the correct story.

All these investments, of course, were highly risky...Mr. Greenspan, Mr. Bernanke, the top executives of almost every Wall Street firm and a majority of American homeowners — decided that the usual rules didn’t apply because home prices nationwide had never fallen before. Based on that idea, prices rose ever higher — so high, says Robert Barbera of ITG, an investment firm, that they were destined to fall. It was a self-defeating prophecy.

And it largely explains why the mortgage mess has had such ripple effects.

In light of the entire article, the "it all started in a small sector" turns out to be just a misleading journalistic hook. Dean's right, of course, that it's a hook we should know better than to use.

The conservatism has gone so far that it’s affecting many solid would-be borrowers, which, in turn, is hurting the broader economy and aggravating Wall Streets fears. Leonhardt 3/19/2008

Indeed, the top 150 U.S.-based nonfinancial multinationals . . . had more than $500 billion in cash and short-term investments at the end of 2007. Michael Mandel Business Week 3/10/2008

OT. Who are these "solid would-be borrowers" who presumably, can't get loans? Anybody know?

Dean knows that I agree with him that the fundamental problem in the current markets has been the popping of the housing bubble, with the subsequent undermining of subrprime mortgages. However, the problems would not be nearly so bad throughpout the broader financial markets if there had not been this explosion of securitization and then on top of that the generation of complex derivatives based on those securities. The filtering of these throughout the system in ways that nobody fully knows or understands so that the collapse of housing prices could bring such widespread difficulties has been the problem.

After all, as Jim Hamilton over on econbrowser has pointed out, the real problem at Bear Stearns was not just subprime mortgages or the securities directly based on them. They were the $13.4 trillion in derivatives deals based on those, withe credit debit swaps being the most humongous in value. The undermining of these is what sent BS's creditors running, making Jim Cramer look like a much bigger fool than usual.

Dean -

What's the best projection for the remaining dollar loss due to housing bubble collapse over the next 12 - 18 months, and the best projection for impact on the credit and financial system over the same time span?

This seems to be the crux of the issue - "how much damage to the sectors (housing, finance) left, over how long?"

Dean,

You are right, and we love your subtle touches on the FRB working late and on weekend. Yes, it's remarkable that the FRB has taken two drastic, significant actions on a Sunday: one was cutting interest rate a while back and the other more recently.

It has been reported that borrowers are having problem of refinancing bc the junior lien holders such as equity line lenders or down-payment lenders dont' want to subordinate their loans to the new 1st/senior lien. Many lenders are balking at the subordination request by borrowers and new lenders.

Can you imagine the problem if borrowers who qualify to refinance but couldn't get it done?

would "specualtion mania" be a better description of the the crisis in the financial system

this would encompass the monies lost to enron, oil and grain prices, subprime mortgages and other "innovative" financial schemes

Frankly, I'm investing all my money in cans of tuna and Hills Bros Coffee.

See you at the other end!

Why does the media continue to refer to the collapse of the financial sector as a subprime problem?

Come on, Dean, I know you know the answer to this.

Subprime refers to folks beneath them. Like everyone else held with disdain by the media elite - they're the ones they like to blame. You know, the victims of the fraud.

Of course, they don't want to tell the real truth.

That the collapse of the financial sector is attributable to one very simple and basic problem - a complete failure of regulatory control over the last 7 years.

Sure, the bubble is the result of that.

And all bubbles eventually pop.

But that bubble never would have been created had the Fed been doing its job.

They were asleep at the wheel.

In fact, they participated in hyping the bubble.

How is it that no one knows how much is in the shitpile? Because they didn't understand what was being done. Bankers live to manipulate balance sheets. The regulators are supposed to know that - and keep digging until they get to the truth. In this whole debacle, they never did that. In fact, they still don't know.

Like every other failed policy of the Reagonites, the media just can't bring it to themselve to cast blame upon the cocktail weenie set.

But, Dean, I'm sure you know that.

Much of the confusion Leonhardt and the rest of us ordinary folk experience is related to the misdirection inherent in the lingo used by Leonhardt and the other stenographers who cover Wall Street.

Does a "hedge fund" really have anything to do with "hedging" or "hedged" investments? Isn't a "hedge fund" just a huge, recklessly leveraged, virtually unregulated investment fund? Why should credible journalists adopt labels that serve primarily to misdirect and misinform?

What is the "collateralized debt obligation" Leonhardt so glibly mentions? A mortgage is a contract that gives the mortgage holder direct recourse to specific real property (collateral) in the event of default on the debt. Does the holder of a "collateralized debt obligation" have direct recourse to collateral? If so, why have banks become "insurers" as Leonhardt writes? The likely answer is that the holders of "collateralized debt obligations" do not have direct recouse to collateral.

Further, are the banks that Leonhardt mentions "insurers" or "guarantors"? The likely answer is that such banks act as guarantors and the that the banks' obligations (as guarantors) are not fully or fairly disclosed on the banks' books.

Isn't one of the main functions of the Federal Reserve to audit banks to be sure that banks have the assets needed to meet their obligations (including their obligations as guarantors)? How can the banks be well regulated if their financial statement do not accurately reflect their obligations?

Should the Federal Reserve subsidize investment banks at the "discount window" without subjecting the investment banks' financial transaction to the same audit as well regulated banks?

Misdirection inherent in the terms used to describe the housing bubble, the financial strategies that fueled the bubble and the regulatory failures that permitted the bubble to expand, prevents the NY Times and others from accurately reporting the plain truth and effectively conceals malfeasacnce and misfeasance.

Or is it as Tanta at Calculated Risj has said:
"We are all sub-prime now."

I was surprised by that article, because Leonardt has written some good columns before. He wrote the column about the cost of the Iraq war. And he has been on top of the illusion of prosperity, which is what is really revealed by the downturn.

I was astonished that there was no mention of Home Equity loans. It is as if the syndrome - the inflation of assets and the stagnation of wages - that basically drove the boom and - insofar as house values are going down - is driving the bust totally escaped him. I know it couldn't have, though You can say it in one short sentence.

My guess: Leonardt is afraid that he will seem extreme if he is always saying, the rich have too much, and the middle and working class have too little, and that's it, folks. So this was a "fair and balanced" column

60% of the subprime foreclosures were caused by the loss of jobs. 2% were caused by interest rate resets on ARMs.

With this fact I demolish your entire article Dean Baker. You are off the mark and unfortunately of no use to your readers.

Why did they lose their jobs? Because the Fed raised rates 8 times. The Fed saw inflation and figured they needed to slow the economy.

No mainstream/liberal economist would look at the numbers and argue otherwise. Dean you and your buddies are all just as responsible for throwing those people out of work and making them lose their homes. Because you said back then it was a bubble and the Fed needed to cool it off. Well you got your wish!

well basically, those are great facts. Too bad they aren't true facts.

As the Iowa Attorney general said about the excess foreclosure of subprime mortgages:

"The only factor that could be materially different is unemployment and economic
weakness. However, the extremely high level of delinquencies and foreclosures is occurring at a
time when interest rates are still very low by historical standards and the general economy is
strong. While certainly there are pockets of the country that are experiencing economic
difficulty, the foreclosure crisis is occurring across the country. For example, in the first quarter
of 2007, Iowa was fourth in the country in subprime foreclosures at 9.2%.
4
Yet during the
relevant time period the unemployment rate in Iowa was a mere 3.2%, which was at or near a
six-year low.
5
Thus, there is no local economic condition in Iowa or many other states that can
account for the current level of foreclosures and delinquencies."

Nice try, though.

It's typical for the mainstream news media to label something incorrectly and hold on to it well past it's due date.

So it is with the label "U.S. Subprime Problem".

The label to apply all along should have benn the "Global Prime Problem". All assets became overvalued all over the globe on the excessive issuance of credit.

TO: Dean Baker, et al.

PLEASE it is not a HOUSING BUBBLE PROBLEM.

It is a DIGITAL DEBT SOLD AS CREDIT DEFRAUDING THE UNINTELLIGENT CONSUMER USA - who has been taught absolutely NOTHING ABOUT MONEY.

Let us begin by demanding our profit/s which do not begin to make us WHOLE.

You know, the hedge funds that paid for the best waterfront property that digitized debt could buy ... set up in 1948 in Dubai, Citigroup as the model for today's greatest PONZI scheme since Alexander the Great tried to own the whole wide world, too.

http://www.engdahl.oilgeopolitics.net

and

http://www.webofdebt.com

SEEDS OF DESTRUCTION by F. William Engdahl.

Do not read it at your own peril and should you think/feel the debt/credit expanded exponentially into digitized faux wealth is bad.

Read SEEDS.

What I want to know is...was there virtually no oversight by any governmental body? I know that the banking sector was deregulated..but did that mean that not one agency--vast as our burocracy has become--had any obligation to take a look at these financial "products" ? Notice how nobody talks about who or which company invented the idea of securitization of mortages or the now famed subprime mortgage. The subprime mortgage is the posterchild for unethical business practices. Just like the 911 disaster many will suffer but not one of the people who could have stopped it will lose his job except by his own company imploding. As Le Monde's editorial pointed out earlier this week.."The unique American engine is exhausted."

Dean, interesting post. Would you be interested in syndicating your content on the home page of my site? It's an online community of finance professionals ( http://www.wallstreetoasis.com ). I could add an RSS feed that will allow me to promote your blog posts to my home page (when i think it will lead to a good discussion and/or is appropriate), but I wanted to make sure you were comfortable syndicating first. The syndicated post would have a link back to your original post. Thanks, Patrick (you can reach me at wallstreetoasis@wallstreetoasis.com if you have any questions)

wellbasically,

Um, do you have a data source for your claims? Frankly your arguments look to be bogus. After all, the Fed has been vigorously lowering the fed funds rate for some time now, only to see the problem worsen. So much for your theory.

Jaki,

The person who has been following this most closely has been Timothy Geithner, prez of the NY Fed. He is reported to be the main figure behind the deal that led JPM to buy BS.

Jaki, you ask,

"What I want to know is...was there virtually no oversight by any governmental body? I know that the banking sector was deregulated..but did that mean that not one agency--vast as our burocracy has become--had any obligation to take a look at these financial "products"?"

The answer to both questions is no.

And that is why we are in this mess.

The Feds - much like the banks - did not scrutinize the SIVs, believing that they were inherently low-risk because the risk was spread out so thoroughly and the CDOs would protect each participant.

And because they basically had no friggin' clue what was in them.

There were many failures that led us to this place.

But the failure of regulatory control was the greatest.

people here made me laugh so hard...thanks (your dumb remarks). the current crisis is caused by job loss which caused by rising rate.

last time i checked unemployment has remained very low. in fact, people are saying stable job outlook might prevent us from having a 1930-type of depression.

Jaki & Raven, & particularly Raven,

first, MBS have been created for years and that's to create liquidity for banks so they could lend more. how? when u make a mortgage, that's a long-term asset sitting on your book requiring banks to place capital against it--it's called risk-based capital. But when u securitize them, package and sell off to wallstreet and make them into different tranches & gobbled up by investors, they r off your book and require no capital, freeing more funds to make more mortgage loans.

now, CDO has suffered great losses due to what? know what the C stands for? once you know, Raven, then u realize the problem.

I was the most recent "Anonymous." Not sure why my name did not show up.

James,

Really? Are you one of those who thinks that things are improving because the unemployment rate declined last month? Are you unaware that in fact we have had net job loss over the last few months (admittedly not of massive proportions), but that the decline in the UR is because more workers gave up looking for jobs and dropped out of the labor force?

I suggest you get your facts a bit straighter before you get so sneery.

Barkley Rosser (just in case my name does not show up again)

If the unemployment rate is falling, it is mainly because so many folks have given up on finding employment--they're not counted in the 'unemployed' statistic...

We all know that the Philadelphia Phillies of the National League have won the best-of-seven World Series against the American League's Tampa Bay Rays, four games to one. To do it, the Phillies prevailed in the first suspended game in World Series history. For the home fans it was surely worth the wait. It’s been several weeks since the Philadelphia Phillies were crowned World Series Champions 2008. Although the Major League Baseball season is over, it doesn’t mean that the baseball action is at an end. Fans of the national game have turned their hearts and minds towards baseball’s free agency period – the “Hot Stove League.” Previously players could be bought, sold, traded or released as management saw fit, without consideration of the player’s family or their livelihood in general. Players fought for years to obtain the rights to ply their trade for the teams they preferred. Similarly, every consumer has the right to seek personal loans where and whenever you want, regardless of what anyone tells you. Personal loan companies should compete for your business as teams compete for the services of players. Low rates would be maintained with more favorable terms in this case. Click to read more on Personal Loans.

I've red a lot about collapse of the housing bubble. I saw the video with empty houses and even streets.
But not long ago when I looked for a house in Los Angeles - California. And I was really surprised. Prices are high. My be in Los Angeles there isn't crisis?