The Financial Crisis: What Do We Get?

[flwyd]

mackys asks What is a reasonable estimate for the ACTUAL value of the mortgage-backed "junk" securities that $810 billion of my tax dollars bought?
The answer to that question has fluctuated every few days recently, so note that everything I say could be wrong soon.

First, a timeline.

1. US Financial System: OMG! We paid way too much for all these

Comments

[mackys]

The individual mortgages in default are not the main piece of the global economic crisis (though it's certainly part of personal economic crises). Assets were overvalued and so banks were undercapitalized when the bubble burst. This is the liquidity portion of the crisis. Further, investors are very leery of many of the existing assets and don't trust their lending options. This is the credit part of the crisis. So while $2 billion might stabilize a lot of mortgages, it wouldn't go very far to recapitalize the banks. (For comparison, Warren Buffet invested $5 billion in Goldman Sachs.)

My uneducated opinion is that we should address the underlying cause (credit) and let the liquidity stuff work itself out. I haven't been a big fan of this WE MUST MAINTAIN LIQUIDITY AT ALL COST thing since way back when Bernake first started making noise about it this spring. Seems to me that we're fixing the short-term problem (stupid derivatives and bad financial instruments that have already proven themselves worse than worthless) and not addressing the cause.

I don't claim to be degreed in Econ, though. Nor even as self-educated as you are.

And yes, it's certain in my mind that we should have let some banks fail. If there was a worry about people losing their money, maybe the right thing would have been to extend FDIC deposit insurance so the little guys wouldn't get screwed.

[flwyd]

My uneducated opinion is that we should address the underlying cause (credit) and let the liquidity stuff work itself out.

It seems like liquidity would make credit a lot easier. But that sort of interplay is getting out of my realm of understanding.

[mackys]

It seems like liquidity would make credit a lot easier.

Ya think maybe we've had enough easy credit already?

[flwyd]

Sorry, I wasn't clear. I didn't mean "Easy" as in "I just got a mortgage, but I don't have a job." I meant it'll be easier for a bank to agree to lend money to qualified borrowers if they've got sensible levels of cash. Perhaps "would make it easier to provide credit."