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Forget Drilling for OIL

Discussion in 'Uncategorized Threads' started by BILL GRILL, Nov 9, 2008.

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  1. BILL GRILL

    BILL GRILL Well-Known Member

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    Finally one person said it. The price of fuel is what is wrong with our economy. The mortgage crisis was coming but the rapid rise in fuel caused this crash. Anybody noticed the prices at the grocery store lately? All due to the price of fuel! The length of time it took to get here after the rise of price in fuel is a testament to how strong our economy was.
     
  2. JBrooks

    JBrooks TS Member

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    "The housing market crashed because of $4+ oil."

    Actually, this is 180° incorrect. The housing market crashed because the basic law of supply and demand had been compromised by the subprime lending practices underwritten by Freddie Mac and Fannie Mae which was instituted and encouraged by Democrats during the Clinton administration.

    Fueled by no down/no income purchasers coming into the market, housing prices rose at a far faster rate than inflation for several years. Inevitably, many of these borrowers were not in a position to actually pay for these mortgages, particularly those with interest rate upward adjustments. Once the defaults started taking place, Wall Street investment banks and Main Street Banks had to write down the value of these basket of mortgages which were supposedly guaranteed by Freddie Mac and Fannie Mae. When the default in guarantees exceeded the capital structure of Freddie Mac and Fannie Mae, they no longer could purchase an aggregate additional loans.

    As credit tightened, a tipping point came when there were fewer purchasers who could qualify for loans and suddenly the supply side of the housing market took over from the demand side. This caused values to start down burning up what ever equity there may have been in the houses purchased with the subprime mortgages. This made it impossible for these mortgage holders to borrow additional funds to make their payments which then caused more defaults.

    All in all, when the house of cards of ever increasing housing prices fueled by subprime mortgage practices tipped into a downtrend, that downtrend quickly became a death spiral.

    When this started happening last spring, investment money started to be pulled out of of subprime mortgage backed securities and that cash was reinvested in commodities. That is why you saw the huge rise in gold, silver and oil. Consequently, it wasn't the high gas prices that caused the housing market to fail, it was actually the failing housing market that caused the oil prices to rise as the price of oil was bid up fueled by the cash seeking a safer haven than the subprime mortgage market.
     
  3. claybrdr

    claybrdr Well-Known Member

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    Exactly
     
  4. Little Dog

    Little Dog TS Member

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    Too bad there are so few people who understand basic economics. Even rarer are those who can explain it as well as JBROOKS can. Well done.

    Housing prices collapsing because of gas prices- gimme a break.
     
  5. b12

    b12 Well-Known Member

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    However the rising price of fuel rushed the economic crunch on. People had to deciede if they should make their payment on their no down payment house or eat and buy gas to get to work. After all many of these homes were bought with people having temperarey jobs. It just boiled down to who was going to get the persons paycheck. B12
     
  6. birdogs

    birdogs TS Member

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    JBrooks,

    The one element you neglected to mention is the "securitization" of these none-performing mortgages. The creation of securities and derivatives created "money" which had no basis in reality. This is what compromised the financial institutions, not to mention the elimination of the firewalls between banks and brokerage houses created in 1933 by Glass-Steagle..

    Birdogs
     
  7. JBrooks

    JBrooks TS Member

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    True Birdogs. That securitization process was what Fannie Mae and Freddie Mac were all about.
     
  8. pendennis

    pendennis Well-Known Member

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    You also had a chairman of the Fed urging people to get ARM's at a time when the trend on interest rates had bottomed out, and started upward.

    That's fiscal stewardship. <:(

    Greenspan also had the belief that the investment bankers would self-regulate. Fat chance, everyone, including the lifeguards went swimming in the same pool.

    Best,
    Dennis
     
  9. David Knapp

    David Knapp TS Member

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    Fannie and Freddie did not "securetize" mortgages. They did the opposite, they actually held the mortgages that are going bad. Freddie and Fannie buy mortgages from banks and other mortgage companies that have originated them. They set the lending standards for the mortgages they will buy. They did in fact loosen lending standards, that allowed a lot people to buy houses they could not afford.

    Lehman, Goldman, and Merrill Lynch invented and used the CDO's , Synthetic CDO's and other exotic financial instruments that brought them to their knees.

    AIG insured a lot of these CDO's that have gone bad. That is why they are basically bankrupt.
     
  10. JBrooks

    JBrooks TS Member

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    Not quite Dave. From wikipedia:

    "The Federal National Mortgage Association (FNMA) (NYSE: FNM), commonly known as Fannie Mae, is a stockholder-owned corporation chartered by Congress in 1968 as a government sponsored enterprise (GSE), but founded in 1938 during the Depression. Contrary to some beliefs, Fannie Mae does not make home loans directly to consumers, but rather functions as an intermediary in the U.S. secondary mortgage market. By purchasing and securitizing mortgages, Fannie Mae facilitates liquidity in the primary mortgage market by ensuring that funds are consistently available to the institutions that do lend money to home buyers."

    "Fannie Mae buys loans from mortgage originators, repackages the loans as mortgage-backed securities, and sells them to investors in the secondary mortgage market with a guarantee that principal and interest payments will be passed through to the investor in a timely manner. Also, Fannie Mae may hold the purchased mortgages for its own portfolio. By purchasing the mortgages, Fannie Mae and Freddie Mac provide banks and other financial institutions with fresh money to make new loans. This gives the United States housing and credit markets flexibility and liquidity.[14]"


    Freddie Mac does the smae thing, again from wikipedia.

    "The Federal Home Loan Mortgage Corporation (FHLMC) (NYSE: FRE), commonly known as Freddie Mac, is a government sponsored enterprise (GSE) of the United States federal government.

    The FHLMC was created in 1970 to expand the secondary market for mortgages in the US. Along with other GSEs, Freddie Mac buys mortgages on the secondary market, pools them, and sells them as mortgage-backed securities to investors on the open market."

    Use Google.
     
  11. bobdog

    bobdog Active Member

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    This is a pretty good thread. Nice to see a reasonable and intelligent conversation again.
     
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