Recession or Depression

[shoottx]

To address the original question.

A recession is when friends or relatives lose their jobs.

A depression is when you lose your Job!

[TB Roye]

Well if the current admistration doesn't get it right. We will find out what our parents and grandparents went through 77 or so years ago.

Tom

[sparkeyjames]

Along with the GDP falling more than 10% you must also add that the unemployment rate must rise above 10 to 15%. Depression era unemployment at it's worst was an estimated 24.75% and was achieved in 1933. Starting at 3.14% in 1929 and finally falling below 10% in 1941. As you can see by those stats the cure took quite a long time. If it were not for FDR and all his public works projects and the making of war material for England and later the U.S. forces it probably would have remained higher for a much longer period of time.

This is the second time in less than 100 years that bad fiscal policy and Wall street have been directly responsible for tanking the U.S. economy. When will we learn.

[cgallery]

This is the second time in less than 100 years that bad fiscal policy and Wall street have been directly responsible for tanking the U.S. economy. When will we learn.

I will add social policy.

For decades, mortgages were seen as extremely safe investments. The old refrain when I was growing up was "Fannie Mae and Freddie Mac are safe because they are backed by mortgages and the government, and both of those are safe investments."

When they made mortgages available to more people of modest means, they didn't consider what even a marginal increase in default rates would do to the entire portfolio. They also didn't understand how it would drive real estate prices.

Systems that have been in place for decades reach natural equilibriums. Some of them are like a house of cards, but still they stand. Tampering with them to achieve a social outcome (or for any reason) is extremely dangerous, and should only be undertaken with the understanding that adjustments will be reversed if problems arise.

FINALLY (this is boring, isn't it?) the government should do what is possible to stamp out bubbles as they appear. The Great Depression was brought on by a bubble on Wall Street. The tech bubble was a similar, albeit smaller stock market bubble. The oil bubble, the housing bubble. They all have disastrous consequences when they burst.

[Kristofor]

When they made mortgages available to more people of modest means, they didn't consider what even a marginal increase in default rates would do to the entire portfolio. They also didn't understand how it would drive real estate prices.

The way I understand it, it's not that the default rate in and of itself is the problem. If they knew the potential for foreclosure they could build that into the cost of the product, and if that still wasn't enough they could cut down or eliminate lending to less credit worthy folks. Those existing loans would be worth less than ones from credit worthy folks, but everyone would know the score.

What I've read is that due to the combination, packaging, and recombining, and repackaging of the the mortgage backed securities there is no longer any way to determine which loans were the good ones and which ones are bad. If it gets really bad, maybe 5% (or maybe more, who knows) of all of the loans will default, a huge hit no doubt, but not something that should be blowing banks out of the water.

Unfortunately if you're holding those CDOs you don't know if your package contains all loans from that 5%, or no loans that will fail. The effect is that nobody wants to buy any of the loans and the prices are lower than they should be when simply adding up the sum value of all of the outstanding loans times the likelihood of repayment. Add in a housing market falling through the floor and you start seeing folks realize that even if they can pay the mortgage that if they're $200,000 upside down it might just be worth it to take the credit rating hit and walk away...

Abandoning my responsibilities wouldn't sit right with me personally, but things have been changing a lot in the last several decades. It used to be that people had incentive to be loyal to their company because they knew it's where they'd work for years. Today there aren't but a handful of companies that don't immediately look for head-count reduction when they miss their numbers, and as a result I have no problem with workers bolting to a better opportunity when they see one.

The same thing is happening in banking. They were greedy and negligent when they could make a quick buck selling worthless loans regardless of the damage those loans would cause. Then when the problems started coming to light folks with perfect payment histories and good credit scores are having their home equity lines of credit cut off. Credit cards whose owners have never been over the limit and who pay off their balance every month are having their limits reduced or their accounts canceled. All of those actions are rational and reasoned from a short term profit maximization (or loss reduction) perspective.

If that's the approach banks want to use (turn a quick buck by being irresponsible, then cut services to those that were never involved with the scam loans) I guess that's their call and it's the path they want to walk down. I no longer hold the young family in a southern California exoburb who owes $700K on a house that's now worth $350K (and which would sell for $200K in other markets) in contempt for walking away from that obligation. They have the right to use the same profit maximizing / loss minimizing logic that the lenders used. Both sides going to the lowest standard is "fair" even if it means bad things for our society...