Anyway, I have what is probably a very basic question which I haven’t been able to get my head around. But then none of my freinds can explain either.
From the information in this blog, I still don’t get why 3 million Sub Prime and 2.25 million Alt–A mortgages, can bring the market down, even if they were all 100% in foreclosure. As it stands 11% of Sub Prime and 5.6% of Alt-A are in foreclosure and some percentages are in default. (I understand these numbers will rise dramatically as the ARM’s kick in and the economy falters) There are nearly 116 million dwellings in the US(according to Federal bank data in one of the links, without knowing what percentage of these have mortgages.) How can such a ‘relatively’ small number of foreclosures trigger such big problems.

It would seem like the house of cards scenario, but I still don’t quite get why. My sense of it is that the Sub-prime issue is a symptom and that the overall private debt in the US is the actual problem.(and probable problem here in Aust in the not to distant future)
Perhaps somebody can clarify for me.

thanks in advance
Steve
Adelaide

Those in charge of the US Federal Reserve and Treasury have known all along the full consequences that would result from their loose credit policy. They have for years progressively lowered interest rates and encouraged massive lending and borrowing not only in the housing market but in every sphere of available commerce, knowing that much of this credit would never be repayed.

If those making the policy didn’t know the likely consequences, they had only to look at the national and international papers and read what others had to tell them.

The questions must be asked what were/are the policy makers trying to achieve, and who were/are the real policy makers behind the scenes, and what are their motives?

Were the policies designed to allow those cashed up to reap the coming harvest as the fruit falls off the trees and/or are the policies designed to achieve the ultimate destruction of the existing world financial and monetary system?

Based on what we have witnessed, even the $700 billion bail-out proposed by the architects of the failed system will only postpone the final demise.

May be this result is inevitable.

Hyperinflation maybe the other risk and not as rare as one would think.

Hyperinflation Around the Globe: http://www.dollardaze.org/blog/?post_id=00107&cat_id=17

Govenments have a vested interest in keeping this mess afloat.

It’s probably passed the point where they do anything else as were all pretty much on the hook now.

Stephen

I apologise to all and sundry that I don’t have time to take full part in the discussions, but I keep as much of an eye as I can on the contributions, and I certainly enjoy them.

All the best, Steve

Check out this chart of average relative pay and interesting it begins around the time of fiat money.

http://www.nytimes.com/2008/09/24/business/24pay.html?em

What I fear is the dynamics that have created these disparities will continue.

An obvious disequilibrium is credit expansion and a denial of that reality has obvious advantage to those who make use of it. I hope such initiatives of advanced physics, engineering, and hardcore mathematics and so on and a purist passion wins out in main stream economics. What my concern is is that the disequilibrium dynamic of credit expansion is not complicated of itself and if it will just become more shrouded in complex new models . I thought it was the mathematicians and physicists who have been employed creating these wonderful derivative instruments we have now.

““Also buying may have less loop gain than short selling”

Are you including credit expansion in the above opinion?”

No, but this and some others factors would need to be considered in a complete analysis.

Phil and David

On the question of equilibrium. From a completely engineering point of view any exponential growth is not sustainable, so economic growth is a terminal condition that is unstable. I think that for economics an exception for this could be derived from its qualitative nature.

If however the parameter can go positive and negative like the Current Account no explanation is possible. Therefore continuous CADs or CASs are definite harbingers of disaster. I started to worry about 1986. To my Engineering mind (and my son’s) the bubble started to grow in 1973 third quarter.