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This is absolutely shameless. Why should Main Street pay for Wall Street's mistake?

by s_baar 19y ago

caudicus 19y ago
http://en.wikipedia.org/wiki/Moral_hazard http://en.wikipedia.org/wiki/Moral_hazard
timr 19y ago
This isn't just Wall Street's mistake. Did you read the bit in the article about the 25-year-old kid with "investment properties" in San Francisco and a "lifeline" in the form of a huge home equity loan? That's nothing more than gambling, dressed up as investment (of course, investment banks and hedge funds were doing the same thing on a much larger scale, so it's hard to say that kid was being much dumber than anyone else.) The article very clearly describes the downward feedback loop that is underway, but what it doesn't tell you, is how this loop is a mirror image of the feedback loop that puffed up home prices in the first place: 1) People overpaid for houses because capital was cheap. 2) Rising home prices made mortgage-backed equities look like a safe, high-return investment. 3) High-risk investment funds (such as hedge funds) went on margin to buy these MBEs in large quantities. 4) Increased demand for MBEs caused mortgage originators to lower lending standards, which made capital cheaper. 5) Goto 1. I'm certainly annoyed that the government is bailing out companies that should have had better judgment in these matters (companies like Bear Stearns could have interrupted the cycle at step 3; mortgage lenders should have been exercising better judgment at step 4), but I don't see that it now has a choice. When banks the size of Washington Mutual (whose bonds are now almost junk) and Bear Stearns start to go bust, the greater economy has one foot in the grave, and another on a banana peel. That said, I don't think the Fed is going to save us from our own greed. They can only do so much before they risk turning the dollar into toilet paper. The rest of us just have to not be the 25-year-old kid in San Francisco with huge debt and multiple property "investments" -- he deserves to lose his ass.
- johnrob 19y ago
  What bothers me is how we bail out people like that 25 year old, which happens when the government tells banks not to foreclose. People take risks, and people get burned. Nobody understands that better than entrepreneurs. It's not like the government comes and gives your startup a bridge loan if you can't raise VC money.
  - ashu 19y ago
    I think in this case, the 25 year old does get burnt - at least a little bit. The question at this moment really is: do we let the whole economy (other saner people who had nothing to do with this mess) suffer now that the plague is spreading, or provide some respite to the entire economy (and not care if, as a by-product, the 25 year old is bailed out a little bit.)

This is absolutely shameless. Why should Main Street pay for Wall Street's mistake?

by s_baar 19y ago

This is absolutely shameless. Why should Main Street pay for Wall Street's mistake?

caudicus 19y ago

http://en.wikipedia.org/wiki/Moral_hazard http://en.wikipedia.org/wiki/Moral_hazard

timr 19y ago

This isn't just Wall Street's mistake. Did you read the bit in the article about the 25-year-old kid with "investment properties" in San Francisco and a "lifeline" in the form of a huge home equity loan? That's nothing more than gambling, dressed up as investment (of course, investment banks and hedge funds were doing the same thing on a much larger scale, so it's hard to say that kid was being much dumber than anyone else.) The article very clearly describes the downward feedback loop that is underway, but what it doesn't tell you, is how this loop is a mirror image of the feedback loop that puffed up home prices in the first place: 1) People overpaid for houses because capital was cheap. 2) Rising home prices made mortgage-backed equities look like a safe, high-return investment. 3) High-risk investment funds (such as hedge funds) went on margin to buy these MBEs in large quantities. 4) Increased demand for MBEs caused mortgage originators to lower lending standards, which made capital cheaper. 5) Goto 1. I'm certainly annoyed that the government is bailing out companies that should have had better judgment in these matters (companies like Bear Stearns could have interrupted the cycle at step 3; mortgage lenders should have been exercising better judgment at step 4), but I don't see that it now has a choice. When banks the size of Washington Mutual (whose bonds are now almost junk) and Bear Stearns start to go bust, the greater economy has one foot in the grave, and another on a banana peel. That said, I don't think the Fed is going to save us from our own greed. They can only do so much before they risk turning the dollar into toilet paper. The rest of us just have to not be the 25-year-old kid in San Francisco with huge debt and multiple property "investments" -- he deserves to lose his ass.

johnrob 19y ago
What bothers me is how we bail out people like that 25 year old, which happens when the government tells banks not to foreclose. People take risks, and people get burned. Nobody understands that better than entrepreneurs. It's not like the government comes and gives your startup a bridge loan if you can't raise VC money.
- ashu 19y ago
  I think in this case, the 25 year old does get burnt - at least a little bit. The question at this moment really is: do we let the whole economy (other saner people who had nothing to do with this mess) suffer now that the plague is spreading, or provide some respite to the entire economy (and not care if, as a by-product, the 25 year old is bailed out a little bit.)