Monday, October 6, 2008

Obama Agrees With Me

At least about the cause of the current financial problems. My comments are pretty clear. It turns out that Obama said roughly the same thing last year, September 17, 2007:
Subprime lending started off as a good idea - helping Americans buy homes who couldn't previously afford to. Financial institutions created new financial instruments that could securitize these loans, slice them into finer and finer risk categories and spread them out among investors around the country and around the world.

In theory, this should have allowed mortgage lending to be less risky and more diversified. But as certain lenders and brokers began to see how much money could be made, they began to lower their standards. Some appraisers began inflating their estimates to get the deals done. Some borrowers started claiming income they didn't have just to qualify for the loans, and some were engaging in irresponsible speculation. But many borrowers were tricked into glossing over the fine print. And ratings agencies began rating bundles of different kinds of these loans as low-risk even though they were very high-risk.
(emphasis mine).

(Bonus Question: If they "previously" couldn't afford it, why can they now?)

Now, think about how stupid this whole scheme is for a moment. I have an investment so risky, I don't want to own it. I only want to own part of it, so I split it up and sell parts of it off. But if I don't want the risk of 1 such investment, why would I produce 10 of these investments and keep 10% of each? It's the same monetary commitment to a risky prospect, but it's harder to tell what my portfolio is worth, and I have less personal control over the risk (because I'm essentially trading my 10% risk for someone else's).

The only reason this whole thing got under way is because the Federal Government forced the lenders to make bad investments, and then didn't throttle back in time to put the brakes on. At least now McCain is hammering Obama over it.

1 comment:

Big Jay said...

McCain may be 'hammering' Obama over this - but he sure isn't laying a glove on him. Which kind of pisses me off. Gee, it sure would be nice to have someone on the republican ticket who could talk about the economy. Romney would be literally beating Obama to a pulp on this issue. The Democrats would be trying to paint Romney as one of the bad guys (after all, Bain Capital controls like 80 billion dollars, a lot of it in hedge fund type deployments) -- Romney's response would be thus: "Yeah. I know what the goons did who got us into this mess. I know what pieces to regulate, and what pieces to leave alone. Unless you think a community organizer could do a better job." But the republicans sort of gave up the 'Anything you can do, we can do better.' argument against Obama during the Iowa Caucus.