[TwoBlackEyes]

Originally Posted by George W. Bush

To Mr. Black Eyes:

I'm not a Mister.

Originally Posted by George W. Bush

First of all, the ability for politicians to affect the economy is minimal at best! I HATE it when people blame broad economic problems on politicians, especially the President.

Well, that would be because you have no idea what caused the current crisis. Politicians are 100% responsible for the deregulation of the financial markets. Unless you think that was the result of magic fairies and voodoo.

Originally Posted by George W. Bush

What I was saying is that, on the margin, Clinton had more to do with it than Bush. When I say Clinton, I mean the entire Clinton government. I honestly don't think you can point a finger at a president for this and say with a straight face "He did it!".

So when you say "Clinton" you mean the entire Clinton gov, but when I say "Bush" you think I only mean the individual? Are you joking?

Originally Posted by George W. Bush

When I say Clinton did more, I mean that government, at the time, had the mindset that we needed to forcefeed home ownership to the masses (IE lowerclass people) who can't afford home ownership. We forcibly made getting mortgages artificially easy. That's what caused this. We artificially kept interest rates too low for too long as well...

The "forced" low-income mortgages you're talking about are actually the one set of mortgages that have not seen an increase in foreclosure rates. You really clearly don't understand what caused this crisis, but it was rich white men that caused the crash, not poor people. The vast majority of foreclosures have been on "investment" properties bought with the intent of "flipping" the house for a profit, not on primary residences. Who buys investment properties? Here's a hint: it's not the lower class.

But in the end it wasn't even foreclosures that caused the crisis at all. The crash has little to do with irresponsible borrowing. It has to do with irresponsible lending and the way debt is sold in the mortgage industry.

I could spend the time to type out the full explanation for you, but Good Math, Bad Math does it better:

What really created the disaster is a combination of leverage - that is, borrowing money to amplify an investment, and derivatives - fancy investments that are really nothing more than bets.

Leverage is easy to understand, and it's easy to see how it leads to disaster. Suppose you've got $10,000 to invest, and there's a really good investment that you think is going to make around 5%. But you want to make more than 5% on it. Now, suppose that you can borrow money at 2% interest. So you borrow $90,000, and invest $100,000. You'll make $5,000 on the investment, and you'll owe $1,800 in interest. So your profit on your $10,000 has been increased from $500 to $3,200. Now, think of what happens if your investment, instead of earning 5% ends up losing 2%. You wind up with $98,000; you owe $91,800. Your loss has been amplified from 5% to 18%!
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Investment firms were leveraging investments by a factor of close to 30 to 1.

Then we get to the derivatives and related "financial instruments". A derivative is really a fancy term for a legal bet in the financial market. You think that some kind of asset is going to change value - so you bet that it will. It's called a derivative because its value "derives" from the value of the asset that the bet is related to. But you don't have to own anything to buy a derivative. It's really a pure bet. The payoff of a derivative is really just the odds on the bet. So essentially, investment firms were being high-class bookies.

So, if you thought that the dollar was going to go down, and you wanted to make money off of it? Fine, no problem. No need to do something as complicated as pick a different currency, whose value you think will increase. Just make a bet: buy a derivative. If it's paying 2:1 - if the dollar goes down by 10%, you'll make 20%!

Derivatives don't represent anything real - they're not built on buying or selling things that have real value: they're just a fancy form of gambling. The idea behind them is that they're like a kind of insurance. If you're afraid of the dollar going down, you buy some derivatives that will pay off if it does - so that you'll be protected. Someone will take your money if it goes up, in exchange for paying you if it goes down.

The way that derivatives play into this isn't particularly simple - there are tons of varieties of derivatives, corresponding to gambles on different assets. But the key features are:

1. They're completely artificial. There is no asset, no fundamental value underlying a derivative, beyond the contract, which is basically like the ticket you get at a racetrack.
2. Since there is no valuable asset underlying a derivative, if a derivative goes wrong, you can lose everything.

Now, here's where it gets interesting. Combine leverage and derivatives. You've got people buying derivatives, leveraged with huge loans - people borrowed money to bet on derivatives. And they used things like mortgage bonds as collateral on those loans.

The problems here should be obvious. You've got people betting borrowed money in ways where they can easily lose everything, including the entire amount they borrowed. And they "secured" those loans using bad mortgages.

So when a bunch of mortgages start to fail, suddenly you've lost the collateral on your bigger loan - and you're expected to pay that back. And lots of those derivatives were the basis of the "insurance" backing the mortgage bonds; so you had loans built on loans.

Many of the big investment firms were letting people buy things like derivatives with as little as 3% down - leveraging an investment by borrowing 30 times the amount of the investment.

And there's not just one level of this. There are loans to purchase derivatives based on assets that are based on loans to purchase other derivatives based on ....

Each level of leveraging represents a dramatic increase in the amount of money at stake. So that original 10% loss on the mortgages can balloon by twenty to thirty times in one step of leveraging. Now consider that between all of the financial constructs that the big firms were working with, you could easily have ten or twenty levels of leverage (which were justified by fake "insurance", as I discussed in an earlier post), and you can start to see how losses that should have been no big deal can balloon into something like what we're seeing.