I'm not a real expert on economics, but isn't this a textbook "Austrian" boom and bust credit cycle, helped alot by securitization hiding the real risk? And the fed response is to increase the money supply by 10% to 15% in like 48 hours, this is while other people are worried about a falling dollar.

Doesn't this look good for Ron Paul, whos written more books and articles about economics and financial policy that all other presidential canidates combined, most of them coming from an Austrian perspective? And the only canidate with what you could really call some sort of actual economic policy?

I know alot of republicans think he's a little wacky, but alot of people thought Reagans "voodoo economics" and sound money talk was wacky.

Like I said, I'm no expert on economics, I'm not sure of the exact merits of what Ron Paul suggest, but I think at least returning stuff like this to debate would be a good thing. I think we need more Forbes and Reagans and Kudlows debating the merits of the status quo.

robert,
In the Austrian school of thought the monetary market is manipulated to prevent a recession; the capitalization comes before the market correction, not as a response. The Fed (and other central banking institutions) pumped money into the markets in a number of ways; some put money in the hands of lenders on a short term basis so that the lenders at risk had capital available to weather the storm. Whatever the method, the object is to prevent money from becoming scarce. Remember that during the Great Depression the lack of money to lend was a key factor in a market correction becoming a full blown depression. The government didn’t infuse enough money quickly enough. Instead, they used the Keynesian approach which was to make the Government a consumer. We’re well past that bit of arcane thinking these days, aren’t we Rico?

Not sure I’d agree that an economist is better positioned for the Presidency; I’d rather see the Administration call a council of economic experts, get their opinions, then flush them and their opinions in the Potomac. Seriously, you can take all the economists in the world, line them up head to toe and they still won’t reach a conclusion.

Good questions, though.

Well, like I said I'm not an expert on economics but my understanding is something like in the Austrian school of though, they believe that the coming crash is considered a liquidation of malinvestment and considered a good thing. More monetarist/keynesian schools believe that the crash creates a panic a leads to "fire-sale" losses.

But the Austrain would believe that the initial boom came from government created market distortians from the cheaper credit than the free market would itself create, creating an illusion of artificialy high capital reserves. And the more monetarist schools believe that when you expand the money supply, people spend that extra money, and that increases aggregate demand, and because of the boom this dosen't really create malinvesment.

Now my understanding of the subprime crash is that is was slightly created because of artificialy cheap credit, but the main reason is that securitization helped hide the actual risk, then theres the big upsidedown pyramid structure propped up by mostly hidden risk and no free market data on what the natural rate of interest should be.

So the question really is if the crash is liquidating malinvestments, or if it is panicked sellers, and I have a feeling that it's a little of both.

Since you seem more knowledgable than me Dasien, does this look correct to you?

But, in regards to an economist president, I'm not sure if the president needs to be an economist, but he does appoint and manage economist. And since we do have a central bank, and it is messing with markets and stuff, with a bunch of legacy laws, I don't think bringing stuff to do with fiscal and economic policy to the national debate is a bad idea. And theres one presidential canidate that stands way way ahead of the crowd on knowledge about fiscal and economic policy, although he probably won't be elected, at least he can bring some of this stuff to the debate.

Dasein: We’re well past that bit of arcane thinking these days, aren’t we Rico?

Well, perhaps not way past it, lol! In other words, I see this as the latest example of the fact that when the free market is left entirely to its own devices, without any regulation, will eventually shoot itself in the foot. Perhaps someone needs to explain to me how below prime mortgages predicated upon little, or even sometimes negative equity, should have been allowed in the first place. Maybe the lending institutions were figuring all along that the feds would bail them out when the poop finally hit the fan -- because, obviously, the feds couldn't afford not to.

We have known for a long long time that without any intervention bad things happen. Keynesian economics have kept our economy in check. Just like today when the Fed made a correction and stopped the downslide.

robert,
You’ve got some sound analysis there; let me see if I can clear up some of the fragments.

First, I don’t believe there is a “coming crash” in any sense of the term; and I don’t think the markets would agree with that assessment either. What is happening is a correction and the skittish response from the money markets because of the nature of the sub-prime lending. When lenders issue the loans they hold the notes themselves until they can package the loans and sell them off to another lender. What we have here is the “other” institutions have purchased packages that contain sub-prime loans as part of the group. How much and which lenders is the big problem; we don’t know whose holding the paper right now. Because only 3% of the loans are affected if the sub-primes are spread throughout the market, no one group is going to get hurt; so far that hasn’t been the case and a select few are taking the biggest hit.

Mal-investment is a good way to describe the situation although I don’t think that’s a real word, yet. From the Chicago School we learned that credit is not a commodity that people take simply because it’s available or cheap. Borrowed money is most likely going to be used in a manner advantageous to the market as a whole. In other words, you don’t borrow a bunch of money and buy lots of stuff you don’t need just because the interest rates are low. You borrow and buy a whole bunch of stuff you don't need because you believe your standard of living and your income potential will improve. The ones that don't look to the future while borrowing heavily are the exception. Those borrowers are high risk, not likely to make regular payments, and are almost likely to default; sub-prime.

The lower interest rates which preceded the housing boom facilitated the sub-prime problem. Securitization, as you put it was the ability to bundle these high risk loans with the low risk loans and assume that the default rate of the sub-prime would be offset by the constant and consistent repayments of the other 86% of the bundles. When property values stalled and then fell the exposure of the sub-prime became painfully evident. Even with that, only 3% of the overall loans are in danger, the majority of sub-prime are actually still paying and are current.

What we have is market correction, and I lost 4% even though I’m not invested in money funds at all; some of my equities depend on money markets to capitalize their businesses.

You’re right, the current situation is a little from column “A” and a little from column “B”; I can’t blame either; it’s like duck-duck-goose with investments. Does your 401(k) have sub-prime paper? We won’t know for a while yet.

Okay, I’ll agree, the next President should ask Ron Paul’s opinion; but first (s)he should read Milton Friedman’s books.

Rico,
With all due respect, you’re confusing the Fed’s actions and the Central Bank’s actions with Government intervention. Thus far the money suppliers have reacted in a positive manner to hedge the panic which could have happened over the past week, and may yet. Where we are in danger is from over-zealous political types sticking the government’s ham-handed intervention with a target that requires a sharp-shooter not a hand grenade.

Monetary economist reaction; capital infusion/money availability; Keynesian reaction; Government buys stock/government regulates the market so investors can’t buy in or buy out. See the difference now?

As noted above, the money changes were banking on the housing market continuing its upward trajectory and assumed they’d stop lending to high risk before the market tanked. Well, addicted to making loans; and considering all of the prime candidates had already taken advantage of the low rates, the lenders were left with the option of risking future loans on risky candidates. I’m not sure they considered the government as the last best hope against bankruptcy because obviously the first few to go would not be around when the government finally steps in.

"Perhaps someone needs to explain to me how below prime mortgages predicated upon little, or even sometimes negative equity, should have been allowed in the first place."

Are you really advocating that lenders not be allowed to take a chance on that family that wants to buy a house but had a run of bad luck? Should the government be the one to decide who gets the home loan and who doesn’t? I was considered a risky borrower not that long ago; I'ne never defaulted on a loan or filed bankruptcy. Someone had to take a chnce on me when i bought my first house and my finances were upside down.

Yes, the government can’t afford to stand by and allow the bad risk money-changers to go down in flames and take the economy with it ~ at least not all of them, a replay of the S&L debacle, the Chrysler bailout, and the airline intervention is possible.

Btw, I’m flush as of 11:00 today; looking forward to making a profit before the day is out.

liberalT,
Your brand of sophomoric diatribe sounds oddly familiar to me. Do you always post when you have nothing to say?

"liberalT,
Do you always post when you have nothing to say?
"

Apparently so DL.

Dasein: Are you really advocating that lenders not be allowed to take a chance on that family that wants to buy a house but had a run of bad luck?

There's a difference between taking a well-considered chance and shooting at the moon. Some guy above explained the problem pretty well I thought (hehe): "Well, addicted to making loans; and considering all of the prime candidates had already taken advantage of the low rates, the lenders were left with the option of risking future loans on risky candidates."

Unfortunately, it's the "risky candidates" that are going to be taking the bath more than the risky loaners.

But, far & away, most of those "risky candidates are paying full and on-time. Although, if I were in that sub-prime, and my equity went south of the loan threshold, I'd be tempted to walk away too.

Oh … and one other thing … I’m back in the black! Whoo-Hoo!

Think I'll take a Tahitian Cruise with the money I'm going to make.

Ya know DL,

I'm glad I don't have to debate you on money issues...LOL!

Good for you! But you know don't you, that it pisses off the kooks here when we conservatives make money.

BTW, four of my products were just accepted this week by Walmart.....whaaa...hooooo!
Book me on the same cruise DL!!

navydad,

A CAPITALIST???? Say it ain’t so!

I said it on another thread, but it's worth repeating; "I'm not adverse to a little risk if the potential rewards are great, unlike liberals that want no risk at all but a government guarantee. Then they don't understand why they are miserable that there is little or no return on that “investment”.

You took the risk, you deserve the reward.

May you be able to spend it friviously (after giving a healthy portion to church, community and charity and planning for your childrens' inheritance!) THAT'S the Conservative way!

btw, Is it just me or does liberalT sound a lot like blockhead?

Notice the dangling participles, the run on sentences, lack of a proper modifier, literary devices like finishing a sentence with dots (…) misplaced apostrophes, change in narrative mid-sentence from first person to third, rash generalizations without support, fixation of prepositional phrases, and inability to answer a direct question.

Dasein: But, far & away, most of those "risky candidates are paying full and on-time.

One wonders how many of them have hit the bubble.

Although, if I were in that sub-prime, and my equity went south of the loan threshold, I'd be tempted to walk away too.

Which is what is likely to happen when they do.

Oh … and one other thing … I’m back in the black! Whoo-Hoo!

Congratulations! But in what context do you mean that? Do you mean it in terms of your entire personal spreadsheet?

Ric,
I mentioned yesterday that my portfolio is still quite profitable this year. What I was talking about at 04:57 PM is the 4% in value I had lost since the slide began, I got back this morning and by the closing bell I'm up on those investments. I guess you're right; I was never actually in the red. Thanks for taking the wind out of my sails; 'preciate that!

My analyst says it's going up from here (with a few bumps along the way) but look for S&P to cross 1,600 and DJIA to poke a hole in 14,000. He also told me to stop counting my daily ups and downs or I’ll make myself as loony as a liberal.

"how many of them have hit the bubble"

1% in default; 3% in jeopardy; the problem could treble if they do.

Remember, this is a credit issue; equities are unintentional victims of the scramble for capital by nervous investors worried that the credit markets might collapse.

"likely to happen when they do."

They were a risk to begin with.

The Fed's action today was mostly for emotional than actual substantive need. The Dow did close up for the first time in 7 sessions today, but let's get real, most of us who have investments have them in our IRAs or 401(k)s, so we're in for the long haul anyway.

As far as Mark's comments about corporations: Most management is just inept; clueless empty suits who use buzzwords like synergy and proactive but couldn't tell you what they actually mean. Companies usually succeed because of luck or an internal advantage that management can't screw up.