If either US political party is responsible for the financial crisis …

[nerdgirl 0]

… why are other countries also experiencing banking, mortgage, and credit crisis?

At least two folks around here have posted links to youtube videos suggesting it was the Democrats, 4 or 5 folks (more?) have referenced a 1998 NY Times article on implementation of a domestic US housing program.

If it’s all the Democrats fault (or the Republicans for that matter), how do you explain that the financial turmoil has spread through Europe' to Russia (again, does anyone want to argue that Putin created a housing program for poor people? Altho’ *he* has tried to blame the US : “it is the U.S. banks’ careless policy as well as the U.S. Congressmen unwillingness to undertake measures to rectify the situation that is to be blamed for it [Russia's financial crisis]” … ); to Iceland, which seems to be the most unstable economically; to South America, particularly Brazil; to China, less so because of its comparatively closed status.

The best & most accessible causal explanations that I have found are relating to the US financial turmoil ... & that largely assert structural causes, the structure of banking, credit, and financial institutions that extend to other areas experiencing financial turmoil:

(1) Joe Stiglitz (Nobel Prize Winner in Economics)

Excerpts:

“There is ample blame to be shared; but the purpose of parsing out blame is to figure out how to make a recurrence less likely.

“President Bush famously said, a little while ago, that the problem is simple: Too many houses were built. Yes, but the answer is too simplistic: Why did that happen?

“One can say the Fed failed twice, both as a regulator and in the conduct of monetary policy. Its flood of liquidity (money made available to borrow at low interest rates) and lax regulations led to a housing bubble. When the bubble broke, the excessively leveraged loans made on the basis of overvalued assets went sour.

“For all the new-fangled financial instruments, this was just another one of those financial crises based on excess leverage, or borrowing, and a pyramid scheme. The new ‘innovations’ simply hid the extent of systemic leverage and made the risks less transparent; it is these innovations that have made this collapse so much more dramatic than earlier financial crises. But one needs to push further: Why did the Fed fail?

“First, key regulators like Alan Greenspan didn't really believe in regulation; when the excesses of the financial system were noted, they called for self-regulation -- an oxymoron.

“Second, the macro-economy was in bad shape with the collapse of the tech bubble. The tax cut of 2001 was not designed to stimulate the economy but to give a largesse to the wealthy -- the group that had been doing so well over the last quarter-century.

“The coup d’grace was the Iraq War, which contributed to soaring oil prices. Money that used to be spent on American goods now got diverted abroad. The Fed took seriously its responsibility to keep the economy going. It did this by replacing the tech bubble with a new bubble, a housing bubble. Household savings plummeted to zero, to the lowest level since the Great Depression. It managed to sustain the economy, but the way it did it was shortsighted: America was living on borrowed money and borrowed time.

“Finally, at the center of blame must be the financial institutions themselves. They -- and even more their executives -- had incentives that were not well aligned with the needs of our economy and our society. They were amply rewarded, presumably for managing risk and allocating capital, which was supposed to improve the efficiency of the economy so much that it justified their generous compensation. But they misallocated capital; they mismanaged risk -- they created risk. They did what their incentive structures were designed to do: focusing on short-term profits and encouraging excessive risk-taking.”

(2) Alan Greenspan on new economic schemes and regulating risk & the reality that regulation will never keep up with innovation and new methods of hiding and manipulation in financial schemes: “risk models and econometric models – as complex as they have become, are still too simple to capture the full array of governing variables that drive global economic reality.” Add globalization and interconnected/interdependent international markets into the mix and the situations becomes even more complicated.

(3) Recognition of the correlation between defaulting on home mortgages and inflated housing values, e.g., as this Kansas City, MO, column discusses “Where did the mortgage mess come from?”[/url] (More detailed discussion here)

Foreclosures rates in urban and rural areas of Mississippi (lowest per capita State income), *where the housing prices are reasonable,* has been on par with historical averages. Where housing prices have skyrocketed, e.g., California, which leads w/8 of the highest foreclosure communities, the foreclosures rates are the highest.

If a lower-income" mortgage is $150,000, it takes 3 of those loans defaulting to equal one $450,000 mortgage default or 6 of those loans defaulting to equal one $900,000 McMansion default (altho’ parts of California, $900k is a 1500ft^2 single-family home).

Historically, some very small percentage of home loans have defaulted and led to foreclosures (~1.5%, iirc), when the average default was some relatively smaller value, the impact could be adsorbed by the larger economic system; as mortgage defaults grew larger both in absolute number and average value, it’s a larger pressure on the system.

What would be very interesting, imo, is to compare and contrast across countries (both those in turmoil and more stable) banking systems, regulations (both existence and enforcement), inflation of property values, saving rates, ease of extension of private credit, and connectedness on the global market.

VR/Marg

Act as if everything you do matters, while laughing at yourself for thinking anything you do matters.
Tibetan Buddhist saying

[Gawain 0]

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… why are other countries also experiencing banking, mortgage, and credit crisis? [/reply

It wouldn't have anything to do with the fact that when these institutions sold the MBSs, CMOs to foreign investors, which would include foreign banks which might be investing on behalf of state pension funds.

I agree that there was an institutional problem in all this, the problem could trace its roots to the 1970s in some cases. I blame the left of advocating it with reckless abandon, and I blame the right for not sounding the alarm louder.

So I try and I scream and I beg and I sigh
Just to prove I'm alive, and it's alright
'Cause tonight there's a way I'll make light of my treacherous life
Make light!

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[nerdgirl 0]

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… why are other countries also experiencing banking, mortgage, and credit crisis?

It wouldn't have anything to do with the fact that when these institutions sold the MBSs, CMOs to foreign investors, which would include foreign banks which might be investing on behalf of state pension funds.

Sure ... it might. It's a hypothesis to test. Do you have any data to support that explanation? What percentage of investments was state pension funds? Why is that the single variable upon which you focus? How do you eliminate other causal factors?

VR/Marg

Act as if everything you do matters, while laughing at yourself for thinking anything you do matters.
Tibetan Buddhist saying

[Gawain 0]

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… why are other countries also experiencing banking, mortgage, and credit crisis?

It wouldn't have anything to do with the fact that when these institutions sold the MBSs, CMOs to foreign investors, which would include foreign banks which might be investing on behalf of state pension funds.

Sure ... it might. It's a hypothesis to test. Do you have any data to support that explanation? What percentage of investments was state pension funds? Why is that the single variable upon which you focus? How do you eliminate other causal factors?

VR/Marg

I didn't eliminate other casual factors, they are simply smaller parts of these larger institutional investment tools.

Mortgage to Bank. Bank rolls mortgages into Mortgage Backed Securities, sold to institutional investors. Investors then roll these into larger bond-type. The money wasn't all domestic.

The banks and investors were forced to revalue these investments every day, even though they intended to hold them for years.

I completely hold the individual responsible as well, I was focusing on the broader context of your post.

So I try and I scream and I beg and I sigh
Just to prove I'm alive, and it's alright
'Cause tonight there's a way I'll make light of my treacherous life
Make light!

[nerdgirl 0]

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… why are other countries also experiencing banking, mortgage, and credit crisis?

It wouldn't have anything to do with the fact that when these institutions sold the MBSs, CMOs to foreign investors, which would include foreign banks which might be investing on behalf of state pension funds.

Sure ... it might. It's a hypothesis to test. Do you have any data to support that explanation? What percentage of investments was state pension funds? Why is that the single variable upon which you focus? How do you eliminate other causal factors?

I didn't eliminate other casual factors, they are simply smaller parts of these larger institutional investment tools.

Mortgage to Bank. Bank rolls mortgages into Mortgage Backed Securities, sold to institutional investors. Investors then roll these into larger bond-type. The money wasn't all domestic.

The banks and investors were forced to revalue these investments every day, even though they intended to hold them for years.

I completely hold the individual responsible as well, I was focusing on the broader context of your post.

That's a lot more extensive explanation than "state pension funds." And it prompts questions regarding extent, incentives/disincentives to, and regulation of (or lack thereof) securitization of MBSs as a new methodology (or more pejoratively 'scheme') to hide risk for short-term profit.

Is there any indication than investors really did intend to hold them for years?

VR/Marg

Act as if everything you do matters, while laughing at yourself for thinking anything you do matters.
Tibetan Buddhist saying

[kelpdiver 2]

European financial institutions invest a considerable amount of money in the US, which still represents (25-30%? of the global market. So the sort of schemes that trapped firms here got some of them as well. And any hit to liquidity is going to affect them as well, otherwise foreign capital would rush in to solve it here.

Potentially adding to trouble is that securities regulation in Europe is substandard even by our standards, allowing for some to hang themselves.

On your overall question - it can still be the fault of one party ensnaring Europe in the same mess. As much as they want to assert that the EU (a supposedly singular entity - not) is the largest economy now, they're not immune to US sickness. Just less vunerable than before.

[vortexring 0]

Our Western 'system' is failing - almost like the Soviet 'system' failed. Simple.

In a nutshell, it's through the nature of us. One important factor to the failure of the Soviet system was that it couldn't work properly unless we had a mentality similiar to ants or termites.

Our Western failure is through our unrestricted greed and desires. Which also leads to an explanation why 'everything is shit these days'.

'for it's Tommy this, an' Tommy that, an' "chuck 'im out, the brute!" But it's "saviour of 'is country" when the guns begin to shoot.'

[marks2065 0]

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Our Western 'system' is failing - almost like the Soviet 'system' failed. Simple.

In a nutshell, it's through the nature of us. One important factor to the failure of the Soviet system was that it couldn't work properly unless we had a mentality similiar to ants or termites.

Our Western failure is through our unrestricted greed and desires. Which also leads to an explanation why 'everything is shit these days'.

i feel that the global economy is partially to blame. we have jobs and companies going to were the cheap labor, taxes, and land is. we as americans have let the global economy in and are loosing the battle to retain big producing companies just because we are to high priced.

this reason is why Obama's plan is bad for us, if taxes get raised to larger companies they will just go overseas to save costs. this will cause the tax burden of his policies to shift to the next lower income branch of our economy. also we need to drill for more oil here. this will lower our dependancy and keep billions of $ here to invest in us. yes we need more alternatives to oil but the technology is still being developed and will be some time before it replaces oil. also the oil in the US can give companies here the money to help develope new energy technologies.

oil isn't going to last forever and the oil companies know that, so thier only choice to not go out of business is to invest themselves in alternate sorces of energy and the technology to make that possible.