American Unemployment Rate Approaches 10%

[Darth Wagtaros]

Is America done for?

Yes.

I'd give us a li'l while yet, eating us underdone could result in intestinal parasites.

[DGuller]

As usual, good job on pounding on the factors that are least responsible for the current meltdown.  Fannie and Freddy were an abomination, but they were much more of a victim of the meltdown rather than the root cause.

How so?

They did not buy most of the riskiest mortgages, and the trouble didn't start with the mortgages they were holding.  They were done in by the knock-on effects of the subprime meltdown.

[Admiral Yi]

They did not buy most of the riskiest mortgages, and the trouble didn't start with the mortgages they were holding.  They were done in by the knock-on effects of the subprime meltdown.

What do you mean by knock-on effect?

[DGuller]

They did not buy most of the riskiest mortgages, and the trouble didn't start with the mortgages they were holding.  They were done in by the knock-on effects of the subprime meltdown.

What do you mean by knock-on effect?

Google it.

[saskganesh]

"look it up" "gogle it" " I am not going to tell you" "I don't know either but I am going to repeat what I read elsewhere because I think it makes me look clever"

great conversational gambit.

[ulmont]

"look it up" "gogle it" " I am not going to tell you" "I don't know either but I am going to repeat what I read elsewhere because I think it makes me look clever"

great conversational gambit.

A "knock-on effect" is a "secondary effect."  It's not jargon, just British.

[Sheilbh]

Yi, I did a little search.  Here's the only page I found that I could understand
http://www.economist.com/blogs/freeexchange/2008/09/crisis_roundtable_were_fannie.cfm

I recommend Martin Wolf's stuff though.  What he emphasises is that this is a global crisis and its roots are global.  In his view the 'cause' was the legacy of the Asian financial crisis and that the developed world didn't intervene, in the way the US had with Mexico, which lead to very conservative policies in the developing world as they basically tried to build a central bank dike that would protect them from something like the Asian crisis happening again.

Edit:  Here's a precis of the argument from Wolf who doesn't have to use matchsticks to do his economic working outs:
'It is neither desirable nor feasible for the US to be the world's dominant borrower forever. Indeed it is absurd for the world economy's stability to depend on the willingness of the world's richest consumers to borrow ever more.' The globalisation of finance should have brought substantial benefits. In practice it brought a series of devastating currency and banking crises in the 1980s and 1990s, particularly in the developing world. The failure of advanced countries and of the IMF to rescue the damaged economies of Asia, Russia or Brazil taught those countries, and the emerging Chinese giant, an overwhelming lesson: never again. Emerging economies ceased importing capital, but by keeping their exchange rates down, running huge current account surpluses, recycling capital inflows and accumulating enormous foreign currency reserves, they began to export it on a vast scale. Since several advanced countries also ran large current account surpluses, to which the oil exporters added their own massive contributions in the mid-2000s, the US emerged as the spender and borrower of last resort. The US is the world's most creditworthy borrower. But as its external deficit exploded, so did the domestic borrowing of US households, stimulated by rising house prices. The result was the subprime mortgage crisis of 2007.

[Neil]

"look it up" "gogle it" " I am not going to tell you" "I don't know either but I am going to repeat what I read elsewhere because I think it makes me look clever"

great conversational gambit.

Dorsey isn't really known for his ability to carry an argument.

[Admiral Yi]

Shelf:

Is there anything in your article about the role played by Freddie and Fannie?

[Sheilbh]

Shelf:

Is there anything in your article about the role played by Freddie and Fannie?

Which article?

[Admiral Yi]

Which article?

http://www.economist.com/blogs/freeexchange/2008/09/crisis_roundtable_were_fannie.cfm

Or does your blog/freeexchange mention it.

[Sheilbh]

The Economist's blog mentions it. 

The bit I italicised is from Martin Wolf's book in which he suggests that the flood of capital from developing economies into the developed world funded and enabled the housing boom and indeed the credit boom for people in countries like the US and the UK. 

If you have an hour I'd really recommend listening to Martin Wolf here:
http://fora.tv/2008/10/15/A_Conversation_with_Martin_Wolf

Edit: I recommend section three of that conversation with Martin Wolf on the housing stuff in particular, which is about 10 minutes long.  His basic argument is that the US housing bubble isn't special, that there's a similar bubble in many other economies now and in the past and in proportion many of those are larger.  The only possible difference is that 'it seems' that the quality of lending in the US seems a bit lower.

So the housing bubble is, in his view, not the problem but a symptom of the problem which is the international climate which made such bubbles not just possible, but likely.  Interest rates that were kept too low for too long, a flood of capital from the developing world into the developed world and external debt in the US and the UK helped create a lot of household debt that then hit financial institutions that were over-leveraged.

Edit:  Basically this is a global crisis that started globally, not one that started with the US sub-prime mortgate market, that emerged from nowhere, and that then spread around the world.  The housing bubble, which is the real problem, had global causes and sub-prime loaning was a further complication that hastened the collapse of the bubble.

[Admiral Yi]

OK, read the blog.  The not Frennie's fault argument is that they didn't guarantee (did they buy?) subprimes.  The yes Frennie's fault argument is that they bought a buttload of MBS's.

Martin Wolf (at least in the summary) skips over the part that I'm interested in.  Yes there was a housing bubble driven by cheap credit.  Yes cheap credit was driven in part by foreign macro policies and perceptions of relative risk.  But that doesn't explain why knowledgable financial institutions made immense one way bets on markets that (a) *everyone* knew were overvalued and (b) whose future perfomance depended on cleaning ladies putting 60% of their paychecks into a mortgage payment.

This was different than the dotcom bubble.  In the dotcom bubble the people who got burned were retail investors, not the pros. 

60 Minutes did an interview with the new CEO of AIG a couple weeks back.  He came out of retirement to work for a dollar a year because he thinks it's the right thing to do.  He oozed sincerity.  He was asked about the subprime meltdown and his answer was that people tend to discount "remote catastrophic outcomes."  Now that makes no sense to me.  Based on everything I know there was nothing remote about the subprime meltdown, it was odds-on.

[DGuller]

"look it up" "gogle it" " I am not going to tell you" "I don't know either but I am going to repeat what I read elsewhere because I think it makes me look clever"

great conversational gambit.

I don't think being asked to be a dictionary is a reasonable demand on a debater.  I know you just need to throw yet another jab at me, because for some reason you really like doing it rather than contributing anything of value to the debate, but you're really barking up the wrong tree.  I'll pit my record of original analysis on this topic against anyone else on Languish.

[DGuller]

But that doesn't explain why knowledgable financial institutions made immense one way bets on markets that (a) *everyone* knew were overvalued and (b) whose future perfomance depended on cleaning ladies putting 60% of their paychecks into a mortgage payment.

1) Financial types are more stupid than they let on.
2) Financial institutions were run by people with hugely misaligned incentives.