In another expose' on things not American Ross Gittens has some interesting thoughts on the way governments operate
Recession | unemployment | youth | Ross Gittins (http://www.smh.com.au/opinion/oh-what-a-lovely-recession-x2026-for-comfortable-old-folks-20091110-i7i6.html?autostart=1)

It's not surprising our house prices have held up so well. For a start, we haven't had many distressed sellers because so few home-owners have lost their jobs and because our Reserve Bank avoided the Americans' mistake of leaving interest rates too low for too long, tempting people to take on home loans they'd no longer be able to afford once rates rose to more normal levels. As well, our banks avoided lending to bad (''subprime'') risks.


Gittins is right about the interest rates ;but he neglects to mention the interventions and the government mandates that created the housing bubble. The lending institutions did not go out of their way looking for risky loans to make.They were forced to make them.


Young people aged 15 to 24 constitute about 18 per cent of the labour force, but account for almost twice that proportion among those who've become unemployed since February last year. Then, the rate of unemployment among this group was 8 per cent; today it's almost 12 per cent.


The unemployment rate for the Hope N Change youth in this country is a disaster that is being sort of under reported here. Youth unemployment is nearly double the national average... around 20% .

I would have thought that the apathetic young [ less than 30 ] would be aware that all the gov debt and expanding entittlements would be fundednot only by the "rich," but by them. As a 40 something, I worry that soc security, medicare, medicaid, will be bankrupt in the next 15 years.


G&P

[QUOTE=tomder55;2079311]Gittins is right about the interest rates ;but he neglects to mention the interventions and the government mandates that created the housing bubble. The lending institutions did not go out of their way looking for risky loans to make.They were forced to make them.

QUOTE]

Forced? Or just protected. They weren't forced to securitise these loans and sell them to someoneelse. The lending institutions went out of their way to dress up their balance sheets and the result was a disaster. I would have thought those insuring these loans would have had the wisdom to ensure that the terms were such that there wouldn't be default in the ordinary course of business. Why do you keep blaming your government for this when what they did was facilitate business, in this case housing loans.

As to the youth v oldies situation, youth actually has very little expectation about what is actually going on. It isn't until a person is settled in a family that they start, on average, to become familiar with issues such as property ownership, taxes, insurance, debt until that time they are a consumer of goods

They weren't forced to securitise these loans and sell them to someoneelse

That's a different issue. The point is that government policy forced them to make risky loans. The lending institutions then did their best to make a profit out of a bad situation .But make no mistake. They were forced by government policy to make the loans.

Forced? Or just protected.

Actually, we are FORCED to make those loans. 60% of any bank's lending is REQUIRED to be for CRA credits, which means loans in "bad neighborhoods" where the borrowers can't pay back what they borrow. It is a requirement of law.



They weren't forced to securitise these loans and sell them to someoneelse. The lending institutions went out of their way to dress up their balance sheets and the result was a disaster.

With respect, you have absolutely NO IDEA what you are talking about.

First of all, the secondary market for sub-prime loans was created by Fannie Mae and Freddie Mac.

Second of all, most banks sell ALL OF THEIR LOANS in the secondary market, whether they are prime or sub-prime. That's how banks get back their money quickly and profitably in order to make more loans. You make the loan, you sell the loan for a premium, you get back the money you loaned right away, and you use that money to make another loan. That is how ALL BANKS WORK EVERYWHERE IN THE WORLD. When banks sold sub-prime loans, they were simply doing what all banks consider to be normal banking practice, and what has been normal banking practice for literally hundreds of years. The banks didn't do anything out of the ordinary in the making and selling of these government-guaranteed loans.

But here's the kicker: the sub-prime loans were given a government guarantee. Fannie, Freddie and Ginnie all said that they would guarantee those loans, as long as the loans fell within federal guidelines... they claimed that they would purtchase for their portfolio any loan that fell into the government guidelines, especially those that were failing. And for decades they did exactly that, they bought up bad loans that fell within guidelines, a practice which gave the guarantee added strength. That implicit guarantee made those loans more valuable in the secondary market than they would have been without such a guarantee. Buyers "knew" that they would "always" be made whole by Fannie or Freddie. The MBS traders and derivatives markets based their valuations of those assets on those government promisses to guarantee the loans... giving those loans a value that would have never existed without those promisses.

And then the government defaulted on those implicit guarantees.

THAT is what made the assets being held by the banks, derivatives traders and MBS traders "toxic" and unable to be valued. The thing that gave them their value... the government guarantee... disappeared.

For the first time in our history, the "full faith and credit of the US Government" failed to meet its obligations.

The derivatives players didn't mess with the book-values of those loans... the government did. The values of those loans were based on promisses that were not kept by the government. Otherwise, the loans would never have been made, and they certainly would not have been purchased in the secondary market.


I would have thought those insuring these loans would have had the wisdom to ensure that the terms were such that there wouldn't be default in the ordinary course of business. Why do you keep blaming your government for this when what they did was facilitate business, in this case housing loans.

I blame the government because they didn't "facilitate" this business, they mandated it. And they did so with a promise to guarantee the loans and then failed in their promise. The government is culpable on two levels... forcing the banks to make the loans, and then not coming through with the guarantees.

Elliot

For the first time in our history, the "full faith and credit of the US Government" failed to meet its obligations.


Elliot

And you might wonder why the rest of the world would devalue your currency