Poll: Investment Bank Blowups / Financial Market Meltdown

Please vote in this poll using the sidebar.

Investment Bank Blowups / Financial Market Meltdown

  • Holy crap, we're screwed. (36%, 97 Votes)
  • Woo-hoo! (12%, 31 Votes)
  • About time. (34%, 90 Votes)
  • But I thought it was contained. (9%, 23 Votes)
  • Time for another bailout! (10%, 27 Votes)

Total Voters: 268


This poll will be active and displayed on the sidebar through 09.21.2008.

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

48 comments:

  1. 1
    The Tim says:

    This is basically an open thread to discuss the weekend’s happenings re: Merrill Lynch, Lehman, etc.

  2. 2
    emailers2 says:

    REPUBLICAN DEREGULATION AND FINANCIAL INSOLVENCY
    In 2004, the US SEC deregulated the leverage rules for investment banks. What had been regulated at 10-15 to 1, was eliminated. The investment banks then levered up to 30-1 and perhaps higher. When the crises broke, it was compounded by the high leverage. For every dollar lost, 30 dollars of leverage fell.

    Next within the last few years the stock exchange eliminated the uptick rule. Again damaging the system.

    To further encourage speculation in the markets taxes were lowered on capital gains. Many of the hedge fund managers now pay virtually no income tax by claiming that their earnings are in the form of a capital gain.

    Instead of money creating production jobs in the economy, the tax benefit to the rich went into creating dividends and cap gains as they invested in the stock markets. History proves that these tax incentives always produce the same effect. Witness the tax structure before the Great Depression.

    Again, the unregulated derivatives’ market has helped create this mess. Instead of allowing Bear Sterns to file for bankruptcy it was bailed by the US taxpayer. All because it was too big to fail in part because of the counter party risk.

    Also, the short sellers have run wild by trading naked shorts. Again, no regulation.

    Hedge funds account for 40% of the market trades on any given day and yet they are not substantially regulated. Imagine the consequences of such action.

    Profits of the few have overwhelmed the financial system created for the benefit of the many.

    Next, the GAAP and FSAB have rules that encourage manipulation of assets on a company’s balance sheet. A typical problem is company assets that are marked to model. That is computer model, not marked to market. Debts and investments can be moved off the books of a company in SIV or SPE. No transparency and certainly adverse accounting. When a crisis occurs, this too rapidly unwinds.

    A company with what had appeared to be a strong balance sheet finds that mark to model was, in fact, based on little more than fantasy when these assets are sold into the market to raise capital. Thus, their ratio of assets to liabilities rapidly diminishes causing potential insolvency.

    As the unwinding of the credit bubble continues, and it will, it may look like a Cat-5 Hurricane. Basel II will not settle or calm the markets. Strong regulation is needed.

    We are now looking at a Cat-5 financial crises based on the Republican deregulation and free market principles. Corporate America has substituted debt and leverage for real earnings, and looks into the face of insolvency. The majority of America workers now face insolvency as their wages have stagnated and their consumption was fueled with debt. Debt was substituted for income.

    by Ella Schaffer, an attorney on main street

  3. 3
    Charles Dean says:

    But Wait! I thought free markets fixed everything?

  4. 4
    tacomarenter says:

    Now imagine what happens if the Republicans get another 4 years in office. We are doomed.

  5. 5
    BubbleBuyer says:

    The free markets do fix everything. Lehman ended up the way a company should if executives, employees & investors gamble and lose – without their shirts. I am just amazed our socialist government didn’t step in and bail out the executives, employees and debt holders. I hope the Chinese aren’t too pissed off though on their losses. We need their money in order to continue living beyond our means.

  6. 6
    SeattleMoose says:

    Let’s see

    1) The ship has been steered onto the rocks
    2) There was plenty of warning
    3) The captain and officers didn’t listen to the warnings
    4) Now all passengers on the ship are either dead or in the water

    So what happens to the captain/officers?

    Air lifted (in BB’s private helicopter) to safety, told to lay low for awhile, and then given a new ship to run aground again.

    The American Financial System….you just gotta love the accountability.

  7. 7
    Scotsman says:

    I still believe this system works…. if we work it. Call your lovely senators and tell them no more tax money for bail-outs. If they only hear from a few, nothing will change. But if they hear from thousands, the people will get what they want.

  8. 8
    Markor says:

    Scotsman: I still believe this system works…. if we work it. Call your lovely senators and tell them no more tax money for bail-outs.

    The system works only when the voters are reasonably smart. But over half of the voters are planning to vote for Palin for president, so it’s clear that only the rich will continue get bailed out. The majority of voters will need to face starvation before they’ll wisen up and the country can begin to improve again.

  9. 9
    Dan says:

    This might be good for the economy in the long run. After all, what are these investment banks and brokerage houses actually producing? I saw a chart in the Economist showing how the financial sector had doubled in size over the last 20 years or so.

  10. 10
    The Tim says:

    Markor @ 8,

    It sounds like you’re saying that voting for the D’s this election is the way to vote against bailouts. However, as we discussed the other day, a whopping three (count ’em, 3) Democrats voted against the latest bailout bill HR 3221.

    If you think either Obama or McCain will hesitate to throw more of our tax dollars into bailing out the rich, you’re only fooling yourself.

  11. 11
    Markor says:

    The Tim,

    I believe that Obama will waste hundreds of $billions less than McCain will, and by waste I mean shower borrowed money on the rich, i.e. a bailout for the rich to mitigate any damage they have done to themselves while raping the country. McCain will continue to privatize the profits and socialize the losses. Obama will do that too, but to a lesser extent. Many people who vote Democrat aren’t much smarter or less selfish than those who vote Republican, so Obama must support the bailouts in some form. Democrats too will need to face starvation before they’ll support the most liberal of causes.

  12. 12
    The Tim says:

    Markor @ 11:

    I believe that Obama will waste hundreds of $billions less than McCain will, and by waste I mean shower borrowed money on the rich, i.e. a bailout for the rich to mitigate any damage they have done to themselves while raping the country. McCain will continue to privatize the profits and socialize the losses. Obama will do that too, but to a lesser extent.

    Okay, I’m curious. What exactly are you basing this belief on? As I pointed out before, only 3 Democrats in the House or Senate voted against the most recent big bailout. That’s 3 out of 285 (1%) sitting Democrat Representatives or Senators.

    By contrast, 162 out of 248 (65%) sitting Republican Representatives or Senators voted against HR 3221.

    Not saying I support McCain, just pointing out that to me it looks like the Republicans are (statistically speaking) the ones more likely to be anti-bailout.

  13. 13
    Sniglet says:

    I don’t see any difference between how either Obama or McCain would handle this financial crisis. Look at how Bush (a self proclaimed conservative) is lavishing tax-payer money around trying to keep the ship afloat. Anyone who thinks that either of the presidential candidates would take a hands-off approach, allowing the system to self-correct (which is by far the best solution for the long term) is seriously deluding themselves.

    Heck, even Hoover was spending money like a drunken sailer before FDR created the New Deal programs. Politicians will ALWAYS pander to the screaming masses.

    Unfortunately, this pretty much means that WHOEVER gets elected we will wind up a long, and very nasty, recession since no policy maker has the guts to administer the medicine that’s needed.

  14. 14
    The Tim says:

    Politicians will ALWAYS pander to the screaming masses.

    Exactly. I don’t think it’s a coincidence that the House vote had a higher rate of votes against HR 3221 than the Senate.

    Here in WA, our Representatives answer to ~700,000 people and Senators to all 6,468,424 of us. Then there’s the president, who has a “constituency” of 300 million plus.

    The larger the number of people the politician has to pander to, the lower their standards go.

  15. 15
    Chris says:

    Sniglet: So you’re saying the New Deal DIDN’T involve spending like a drunken sailor???

  16. 16
    Sniglet says:

    So you’re saying the New Deal DIDN’T involve spending like a drunken sailor???

    Not at all. The New Deal threw tax-dollars around like water as well (not to mention confiscating huge amounts of wealth via currency depreciation). I just wanted to point out that the Republican President was well on his way to bloating the debt in a futile attempt to bail out the nation even before FDR got his fingers on the budget.

    Republicans or democrats, its all the same thing.

  17. 17
    Markor says:

    Not saying I support McCain, just pointing out that to me it looks like the Republicans are (statistically speaking) the ones more likely to be anti-bailout.

    You’re looking at one particular bailout. I’m looking at the whole picture–all the bailouts. The Iraq war is effectively one big bailout, one of the largest in the country’s history. Democrat politicians supported the authorization for that war because, as Sniglet point out, politicians will ALWAYS pander to the screaming masses. In 2003 the masses (Democrats and Republicans alike) were screaming for revenge against somebody, anybody, for 9/11. But I believe that if Democrats had been in control of the White House, the war would not have been suggested in the first place. The revenge would have been directed solely against Afghanistan, at far less cost.

    The main point of the Iraq war, IMO, is to transfer money, borrowed on behalf of future taxpayers, to the rich. The largesse offsets the losses they incur elsewhere as the economy craters; e.g. less customers for their businesses. Democrats also don’t support tax cuts for the rich, another bailout for them. HR 3221 is small potatoes compared to the Iraq war and tax cuts for the rich, so it behooves the Republicans to be against HR 3221, for show.

  18. 18
    Markor says:

    Sniglet: Republicans or democrats, its all the same thing.

    Yet Republicanism created the Great Depression, and liberalism (Democrats) fixed it. The Democrats are easily the best viable choice in my book.

  19. 19
    Sniglet says:

    Republicanism created the Great Depression, and liberalism (Democrats) fixed it. The Democrats are easily the best viable choice in my book.

    I have a very different take. I don’t think any particular politician, or party, was responsible for the Great Depression. Credit creation had run out of control in the ’20s, and there was no other way out than a significant economic downturn. The credit binge wasn’t caused by the republicans (it had more to do with societal trends and general social attitudes).

    I also don’t give the democrats any credit for “fixing” the depression. If anything, all the New Deal expenditurs merely prolonged the downturn to much longer than needed. The best way to recover from downturns is to let markets find their clearing prices, and let all the struggling debtors default. By contrast, FDR did his level best to prop up businesses and debtors.

    Worse, by siphoning off more money in taxes he prevented capital from finding the most productive uses that would result in economic growth.

    Like I said earlier, the Republicans and Democrats were both equally guilty. A pox on both their houses…

  20. 20
    The Tim says:

    Republicanism created the Great Depression, and liberalism (Democrats) fixed it.

    That’s funny, I always thought the Great Depression ended thanks to the war economy brought on by WWII.

    And as far as comparing today’s “Republicans” and “Democrats” to politicians that went by those names in the ’30s, well, let’s just say I generally don’t see that as particularly useful or instructive.

  21. 21
    Markor says:

    The Tim: That’s funny, I always thought the Great Depression ended thanks to the war economy brought on by WWII.

    I would say that WWII expedited the end of it.

    And as far as comparing today’s “Republicans” and “Democrats” to politicians that went by those names in the ’30s, well, let’s just say I generally don’t see that as particularly useful or instructive.

    I only brought it up because of the New Deal talk above. Sure, look at the more modern times, like in this chart:

    http://i27.tinypic.com/120m447.jpg

    It’s clear there’s a big difference in quality between Democrats and Republicans, with the former on top. Though I’d like to see a constitutional amendment enabling vote prioritization, a la Australia, so a third party can finally have a viable chance of winning.

  22. 22
    Markor says:

    Sniglet: If anything, all the New Deal expenditurs merely prolonged the downturn to much longer than needed. The best way to recover from downturns is to let markets find their clearing prices, and let all the struggling debtors default.

    I disagree to both. I don’t believe that totally free markets are good for the public. The system then was so broken in favor of the robber barons that the general public needed a form of affirmative action, lest they starve.

  23. 23
    Charles Dean says:

    One of the main reason that the Great Depression happened was because of market deregulation and being allowed to buy on ridiculous margins. Whether this was the fault of Reps. or Dems. I’m actually not sure. I would venture to say Reps. more than likely.

    And that’s alot of what has happened recently. A big portion of the mortgage crisis was because of banking dregulation and much of the downturn now in the stock market is because of the same being able to buy more with money you don’t have.

    So I would venture to say that deregulation of the markets is what has caused both crises.

  24. 24
    tacomarenter says:

    You are looking at the wrong side of the bailout issue (HR 3221). Sure Democrats voted for a bailout for the working people- but what did Paulson and Bush do? They gave a bailout to Bear Sterns, Fannie Mae and extended huge credit lines to all kinds of banks. Which is the more expensive bailout? Which is going to prolong the inevitable further? That’s an easy question to answer..

  25. 25
    Alan says:

    That’s funny, I always thought the Great Depression ended thanks to the war economy brought on by WWII.

    WWII slowed the recovery from the great depression. War always slows economic growth. Economies grow when resources are invested to build things that build things. Investment in factories, training, and tools grow the economy. War is an investment to blow stuff up. It diverts resources from tools to bombs.

    It looks like it helps the economy because it is often accompanied by deficit spending which creates short term jobs, but the economy would grow much much more quickly if that borrowed money were put into things that can be used to build more stuff.

  26. 26
    The Tim says:

    Markor @ 21:

    I only brought it up because of the New Deal talk above. Sure, look at the more modern times, like in this chart:

    It’s clear there’s a big difference in quality between Democrats and Republicans, with the former on top.

    I think it’s a bit disingenuous to look at control of the presidency when discussing matters of the national budget. Congress is the one that writes and passes the budget, after all. Here’s a few charts of congressional control vs. federal spending growth and debt:

    Looks to me as though spending like a drunken sailor is a bipartisan attribute, to me.

    Data source here.

  27. 27
    sunsplint says:

    I think that the problem with the bailouts on wall street are occuring without any legislative support. It seems like we are completely turning our pockets inside out to keep these risk takers afloat without nary a discussion in the open air about the consequences and probably more importantly the alternatives.

  28. 28
    The Tim says:

    Oh, I should point out that the charts I linked are adjusted for inflation, which your (Markor) chart is not. Here’s a directly comparable chart to the one you linked.

  29. 29
    TheHulk says:

    Democrat/Republican IMHO both pander equally well to the lobbyists out in washington who care less for common folk like us. Nonetheless, I would just like the leaders of this country to be at least *smart*, so we can count on them to at least make reasonable decisions.

    Considering all that, the choice of Palin as a running mate is probably one of the worst “early” pseudo-executive decisions I have seen McCain make (and I don’t think he will be making any executive decisions at all). The woman is plain and simple clueless. I don’t understand why the republicans are celebrating having such a bimbo (politically savvy, but still a bimbo) one heartbeat away from the presidency.

    Say what you will about bush/cheney, whatever they did, they did knowing all the ramifications. They twisted facts and put out spin to sell stuff to the sheeple, but all along they *knew* what they were doing. I had some respect for McCain back in 2000 but he has lost all of it and then some, especially in the last 6 months, selling out everything he stood for just to get the nomination.

  30. 30

    Thought I’d share my insights into the election this year. A couple of obvious assertions:

    1) either president is screwed economically
    2) it doesn’t really matter what we in WA think…I’m fairly certain Obama will carry WA….if you want your vote to matter, move to Ohio.

    Onto a more novel idea….I should preface that I have always been a moderate conservative. Conservative economically, yet socially liberal. My reason was always that the private sector was far more efficient than the public sector. Having followed the markets as closely as I do, I have changed aisles as the economy has gotten worse and worse. I believe we need heavy expenditures from the government in terms of improvement of infrastructure and expansion/ creation of alternative energy sources (wind, solar, etc) to keep the economy afloat….simply put, the private sector just won’t be there over the next few years to create jobs….Go Obama!!

  31. 31
    Markor says:

    The Tim: I think it’s a bit disingenuous to look at control of the presidency when discussing matters of the national budget. Congress is the one that writes and passes the budget, after all.

    You can assume that, while I may be wrong, I’ll not be disingenuous. Congress does not write the budget; the executive branch does, which puts the credit or blame for federal deficits/surpluses squarely on the president, unless a veto by the president on the budget (after the budget is adjusted by Congress) is overridden by congress. See http://en.wikipedia.org/wiki/United_States_budget_process

    So take a look at your directly comparable chart. What I see is that Clinton did an amazing task: he righted the world’s largest sinking ship, sinking due to Republicanism, and put it back on track. Then GWB bored holes in the ship again, larger than ever.

  32. 32
    Markor says:

    The Tim,

    My thoughts on the federal budget got flagged as spam. Oh well. The essence was that Congress does not write the budget; the executive branch does, so your chart shows that Clinton temporarily saved the country from disaster, until GWB put us back on track to disaster.

  33. 33
    EconE says:

    You know Tim…I was thinking.

    Perhaps you should have a daily music video similar to the Irvine Housing Blog.

    This would be a good one for today for example…

    http://www.youtube.com/watch?v=fhcflDSUMvc

  34. 34
    Markor says:

    Alan: It looks like it helps the economy because it is often accompanied by deficit spending which creates short term jobs, but the economy would grow much much more quickly if that borrowed money were put into things that can be used to build more stuff.

    This is a very good point. A caveat, however, is that deficit spending can do more good than harm in the long run when it leads to other advances. Think of all the good things that were put on the fast track due to WWII: radar, machines of all kinds, opportunity for women to work a man’s job, nuclear power, the list is a long one.

  35. 35
    Markor says:

    TheHulk: Say what you will about bush/cheney, whatever they did, they did knowing all the ramifications. They twisted facts and put out spin to sell stuff to the sheeple, but all along they *knew* what they were doing. I had some respect for McCain back in 2000 but he has lost all of it and then some, especially in the last 6 months, selling out everything he stood for just to get the nomination.

    Many people like to paint Democrats and Republicans with the same brush. The way I see it, Democrats are public servants who submit to being private servants only to get elected and stay in office. Republicans are the exact opposite.

    McCain & Palin have sold their souls. When there’s a Republican in the White House, the president does not call the shots. Rather the very wealthy do. That’s why McCain has been forced to change his tune on so many issues. He was allowed to be a maverick because that can help get him elected. But once elected he must do what he’s told.

  36. 36
    The Tim says:

    Well Markor, it sounds like you’ve got it all figured out. D=good, R=evil. Black and white, plain as day. If only everybody would just open their eyes we could bring on utopia, I’m sure.

  37. 37
    Markor says:

    Charles Dean: So I would venture to say that deregulation of the markets is what has caused both crises.

    I agree that’s a large part of it. People should ask themselves, why are Republicans so for deregulation even when it clearly doesn’t work for the public at large? I think one need look no further than the mega-yacht companies going gangbusters now.

  38. 38
    Markor says:

    The Tim: Well Markor, it sounds like you’ve got it all figured out. D=good, R=evil. Black and white, plain as day. If only everybody would just open their eyes we could bring on utopia, I’m sure.

    It’s this: D=as evil as needed, R=just plain evil.

    I do see a lot of things as black and white, where that can be backed up. A good citizen votes for the best viable party, and supports vote prioritization. I don’t have much respect for those people who throw up their hands and declare all politicians to be bad, when that’s clearly not the case.

  39. 39
    The Tim says:

    Well at least we agree on vote prioritization (assuming you’re referring to some form of preferential voting). As far as what’s “clearly” the case or not, if it’s as “clear” as you seem to think, why are most elections so close? 50% of the population just prefers evil?

  40. 40
    Markor says:

    Back to the financial market meltdown itself (and off of what caused it): Wow, this day could one day be seen as the first clear step into Great Depression II.

    If I had any 401K money that wasn’t in cash and couldn’t be moved to cash within the 401K, I’d take the 10% hit and pay the taxes to get to cash.

  41. 41
    Markor says:

    The Tim: Well at least we agree on vote prioritization (assuming you’re referring to some form of preferential voting).

    Yes. I think our not having that is one the world’s biggest problems.

    As far as what’s “clearly” the case or not, if it’s as “clear” as you seem to think, why are most elections so close? 50% of the population just prefers evil?

    No, most of those people just aren’t smart enough or care enough to make the best choice. It’s harder to be smart than dumb. It’s harder to care than to not care. So it should be no surprise that half the population routinely votes against their own best interests. The genius of the GOP is to convince them that winning against liberals is more important than improving their own standard of living.

  42. 42
    The Tim says:

    No, most of those people just aren’t smart enough or care enough to make the best choice. It’s harder to be smart than dumb. It’s harder to care than to not care. So it should be no surprise that half the population routinely votes against their own best interests.

    You do realize that intelligent people in both parties genuinely believe that exact same argument about the other side, right?

  43. 43
    Scotsman says:

    Markor, the whole BDS thing works best if you never let any facts get in the way of a good rant. At least you’ve got that figured out. The rest, well, what’s the point of even trying to discuss it? Carry on.

  44. 44
    mukoh says:

    10% hit on 401k? How about 40% from the top?

  45. 45
    da bum says:

    So how is this going to affect the Seattle area real estate market?

  46. 46
    Charles Dean says:

    It’s not!!!! The Seattle Real Estate Market is the envy of the WORLD!

  47. 47
    LotharBot says:

    RE: Sniglet,

    Bush is a Republican, but not a conservative. His low approval ratings aren’t just coming from Democrats; most of the Republican party thinks he’s spent too much and done too little to stop screwing up the economy.

    RE: emailers2,

    Some of the blame lies with the 1999 Gramm-Leach-Bliley Act, which repealed the key provision of the Glass-Steagall Act: separating banks, insurance, and securities/investment. Some blame lies with the federal reserve pushing interest rates down for so long. And much of the blame lies with companies generating bad loans, packaging them with a high rating, and pawning them off on unsuspecting victims (which, I believe, was made possible by GLB.)

    I think the bursting of this bubble will be a good thing in the long run. When an institution fails, other institutions that didn’t have the same weakness will gain market share. And when people take a loss on a sale, others who played it safe before can pick up an asset at a discount. It’s like natural selection…

  48. 48
    Markor says:

    The Tim: You do realize that intelligent people in both parties genuinely believe that exact same argument about the other side, right?

    The Republican side is wrong. “Palin’s hot!” doesn’t signify intelligence. How is that great Republican leadership working out for us? Just today, people find out they have to delay retirement another year or two. Oh it’s all Greenspan and Clinton’s fault, by golly. Bush has no control.

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