Bonham lives! wrote:- globalism, i.e. cheap labor, leads to a ton of American capital getting invested in countries with rather shaky political structures. These people immediately put this money in American banks, where they believe it is safe. American banks now have a glut of cash, so they loan it out to everyone who wants a house. A lot of those people were terrible, terrible investments.
- an investment banker realizes that if you packaged up all these mortgages into derivatives, you could sell them at a profit to institutional investors (endowments, insurance companies, pension funds...). These institutions are only allowed to buy AAA quality debt, though. About 80-90% of these mortgage derivatives are AAA, but the sub-prime stuff is BB/B. Because the institutional investors are forbidden from buying it and no one with a brain is stupid enough to buy it, the investment banks get stuck with the BB/B grade junk.
- after the investment banks had sold off their highly in-demand AAA derivatives to institutional investors, they were left with the lower rated BB and B grade junk. Knowing it's garbage, they get rid of it by re-packaging it into CDO's. These CDO's, despite being made up entirely of junk grade mortgages, then get magically turned into AAA grade debt by either yield spreads (which were based negligently selected statistics) or by taking out insurance - that's right folks, in the free market, you can take a piece of shit, get it insured as though it were a bar of gold, then openly market and sell it as a bona fide bar of gold. A lot of this is bought up by foreign investors who didn't know any better (hence the global implications of all this), or by institutional investors and banks who didn't know any better (but should have).
I think you neglect the impact the DotCom Bubble had regarding the sub-prime thing we're in now. When the bubble burst in 2000, alot of people who lost out shifted their investing into real estate thinking it was an inherently safer place to invest, and as a result there was alot of imprudent mortgage lending, not to mention slews of tasteless McMansions dotting some of the townships near where I live.
As far as the "packaging" of junky mortgages into financial instruments, well yes that is what happened. My older sibling works at a financial firm which did this to an extreme and is now paying the price.
You really shouldn't blame "globalism" or "the free market" for the situation we're in now. The real culprits in my mind regarding this whole thing are greedy, imprudent managers and equally greedy, imprudent investors and homebuyers. The market is the playing field wherein people exchange things (with impartial and fair referees and umpires to make sure everyone is playing ethically, i.e. making sure
it really is a free market)..it's neither right nor wrong.
And to Bob, Reuben.......etc.......no....I still do not see some massive crisis looming. You guys seem to have that as a subtext to all your posts regarding this. A recession though? We'll see.......