Links 9/11/08

Pollution ‘hinders heart pacing’ BBC

Protecting Our Banks The Onion

Rationality Quotes 17 Eliezer Yudkowsky

Cash Crunch Looming? Michael Panzner

Wall Street tax avoidance ‘gimmicks’ rebuked Financial Times. What is particularly interesting is not just the list of Wall Street perps, but the fact that the IRS chose to ignore questionable strategies and Congress is the one pushing this crackdown.

Foreign Buyers Flee Fannie Bill Sale Housing Doom

Real Estate Woes Spread to China New York Times

Credit crunch halts boom in executive pay Guardian

Antidote du jour:

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  1. Mitchell

    Pardon me for appropriating comment-space for the following purpose… I just wrote an instant synopsis of the US housing bust for a friend, from subprime through to the GSE bailout, and I thought I might run it past the audience here to see what I got wrong (already had to correct Freddie Mac’s acronym).

    “Some bare essentials, written down as I think of them…

    “1. Like I said, home loans were aggregated by the thousands and turned into investments you could buy (mortgage-backed securities, MBS), with the income from your investment consisting of a fraction of all those loan repayments as they get made for years to come.

    “2. Prime loans = made to creditworthy individuals, subprime loans = risky loans. Subprime MBS (MBS made of subprime loans) were the first to fail thanks to rising rates of borrower delinquency and default.

    “3. However, as US housing prices fall, even many of the so-called prime loans are defaulting – about one in ten US home loans isn’t being repaid properly, right now.

    “4. The majority of US home loans were made by statutory bodies called “government-sponsored enterprises”, GSEs (Fannie Mae and Freddie Mac, nicknames derived from acronyms FNMA and [FHLMC]). The GSEs were legislated into being in order to promote home ownership, but they were supposed to be financially self-sufficient. However, they ended up taking risks at least as much as the private-sector investment banks did.

    “5. Subprime MBS were packaged by Wall Street banks and sold to investing institutions (pension funds, oil-state sovereign funds, other banks) all around the world. So when they started to go bust, it created a financial panic as suddenly no-one wanted to invest in anyone else any more, for fear of getting involved with subprime losses.

    “6. The main buyers of GSE bonds – prime MBS, basically – have been the central banks of China, Japan and Russia, and Arab oil funds. Basically, those countries accumulated enormous stockpiles of US dollars because they sold so much in this decade (Russian and Arab oil, Chinese and Japanese manufactures), and investing in the booming US housing market was considered a solid dollar investment.

    “7. The US government itself sells bonds, Treasury bonds or Treasuries. Selling a bond = borrowing money at interest; a bond is a promise to pay. The sales of Treasury bonds are the main source of that enormous US government debt you keep hearing about, and it’s a major way in which the government finances itself. Of course, the loans have to be repaid – the bondholders get their dividend – ultimately from the US taxpayer (who I think is mostly oblivious to this whole system).

    “8. The GSEs – the housing agencies – were *not* supposed to be backed by the US government – financially self-sufficient, remember? However, the same people who bought GSE bonds (betting on the US housing bubble) are also the ones who buy the Treasuries that keep the US government funded. Above all this refers to China.

    “9. So if China started losing money on the GSE bonds, it might decide that Treasury bonds were risky too, and stop buying them, i.e. stop lending money to the US government. Therefore, over the weekend the US Treasury announced that it would formally accept responsibility for the future payments promised by the GSEs.

    “10. In other words: the US taxpayer has been shafted with a new debt of several hundred billion dollars, possibly over a trillion dollars (estimated GSE losses), the result of the bubble in housing prices, so that China and the others will, for the moment, keep lending money to the US politicians.

    “Warning: I am entirely self-taught in these matters, it is likely that there are several minor errors and at least one major error somewhere in the above.”

    So is there a gaping hole or two in the account above? e.g. is it an error to think of GSE bonds as “prime MBS”? The guiding intuition is that first we had subprime failures initiating a financial crisis in the private sector, and now we have prime failures threatening a financial crisis for sovereign entities. But probably the worst mistakes are the ones I don’t even know I’m making…

  2. Anonymous

    It’s just a cute animal picture. That’s all. I think central bankers would behave differently if they were
    forced…yes..forced to view at least ten such pictures daily.

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