Thursday, September 25, 2008

Some of my thoughts on the current financial market credit crisis

I find myself very interested in the current credit crisis. This is a side of me many of you don't know. I am a student of the system. That's why I went to law school and that's why I am fascinated by what's going on in the financial market right now.

I am having a hard time figuring out what's going on out there. Ultimately, it seems like the government has to do something to create liquidity in the credit market. Banks are afraid to lend to each other and to their customers (which is crucial to the health of the economy). Banks are stuck with a huge amount of mortgage-backed securities with high percentage of the loans in the portfolio in default or foreclosure. This means that they are losing a lot of money and losing value of their assets. When they try to dump the assets in the securities market in order to raise money to cover their losses, they find that the market does not exist to unload their bad assets. No one wants to buy them! My understanding is that the government wants to step in and buy up bad assets (mortgage backed securities) in order to create liquidity for banks (so that they will lend again). The real issue I think is how much the government will pay for the bad assets. According to experts, it is very difficult to price the value of these securities because the market has dried up--the market does not exist anymore. So, the question is: how much is the government going to pay? The the answer to this question will determine how much it will cost the taxpayers, ultimately.

I think if the government is going to buy bad assets without really knowing the full value of the bad assets, the government should demand warrants (right to buy the stock of the company) on the amount the government lost on the deal. It doesn't seem to make sense to buy bad assets from banks to save the shareholders of the bank. I can see why it is important to buy bad assets in order to create liquidity in the financial market, but not to help bank shareholders!

If you know why the government is not requiring warrants, let me know. Is this on the table? If you understand what's going on, let me know if I am getting this right.

One other thought: I think the downturn in the housing market (although it is creating a huge mess in the financial market) might ultimately be good for young people and the poor who do not own a home. Ultimately, if the housing price comes down, the rental market also has to come down in the future because ultimately, the rental market is related to the housing value.

I think the biggest reason for homelessness is the price of housing. If that comes down, it's going to help the poor. This kind of market correction might be bad for homeowners like me but we have to think not only about own pocketbooks but also about the poor.

I hope the the housing correction creates a systemic shift that ultimately benefits the poor.

Let me know your thoughts!

2 comments:

Rethinking said...
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Jackal said...
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