Maybe....................probably?
What a way to run a world.
The Black Box Economy
http://www.boston.com/bostonglobe/ideas/articles/2008/01/27/the_black_box_economy/
Behind the recent bad news lurks a much deeper concern: The world
economy is now being driven by a vast, secretive web of investments
that might be out of anyone's control.
But when the mortgage crisis broke last summer, it opened a window on
something else: The existence of a huge wilderness of investments in
the financial sector that are nearly impossible to track or measure,
and which operate out of the view of both investors and regulators. It
emerged that investment banks, hedge funds, and other financial
players had issued, bought, and sold hundreds of billions of dollars'
worth of esoteric securities backed in part by other securities, which
in turn were backed by payments on high-risk mortgages.
When borrowers began defaulting on their loans, two things happened.
One, banks, pension funds, and other institutional investors began
revealing that they owned huge quantities of these unusual new
securities, called collateralized debt obligations, or CDOs. The banks
began writing them off, causing the massive losses that have buffeted
the country's best-known financial companies. And two, without a
market for these securities, brokers stopped wanting to issue risky
mortgages to new home buyers. Home values began their plunge.
In other words, a staggeringly complex financial instrument that most
Americans had never heard of, and which many financial writers still
don't fully understand, became in a matter of months the most
important influence on home values in America. That's not how the
economy is supposed to work - or at least that's not what they teach
students in Economics 101.
JL>
<<< Last week the National Association of Realtors announced that home
sales dropped by 13% nationwide. They also said that the median price
for a home dropped by 1.8% for the entire year 2007. Their chief
economist said that was the first yearly drop in home prices since
they started keeping records in 1968. He also said it was probably
the first time since the great depression that home prices dropped
over the yearly period.
In 2008 there will be more than $500 billion dollars in mortgages with
variable interests rates that will be resetting. They will reset
upward, never downward. $165 billion of that will be in prime
mortgages, $365 billion in these shaky subprime mortgages that support
the CDO derivatives sold thruout the world economy. Most borrowers of
these loans took the mortgages out expecting to refinance their loan
after their home's value had appreciated. They're not appreciating,
they're depreciating. They won't be able to refinance and their rates
are going up.
Analysts are looking at another $300 billion dollars in mortgage
defaults next year. The current cause for the shaking in the
financial markets are partly the $100 billion in write-down they've
had to take on mortgage defaults already. The other cause for the
credit crunch is that nobody knows for sure how deep everyone is
exposed to these derivatives based on mortgage bonds. We've already
talked about banks stopping runs on them in Scotland and New Zealand.
Towns in Norway losing millions. $3.5 billion lost in the Florida
state education investment pool.
If there is another $300 billion lost this year it could easily be
what triggers the falling of a worldwide derivatives house of cards
that has been estimated at between $450 and $770 trillion dollars.
The uncertainty is extending into credit cards, automobile loans and
even MUNICIPAL BONDS.
One of the things I've been doing is reading up on what's gone on in
Argentina since 2001. Not just economically but socially too. More
recommended reading there.
.
|
|
|
Related Articles |
|
|
