California hints at bottom to housing slump

Reuters ^ | Aug. 1, 2008 | Jim Christie

[Freedom_Is_Not_Free]

Having the dollar as the world’s reserve currency is what lets the USA get away with printing money with impunity without ending in a Weimar situation. What happens in your future world when the US wants to print money out of thin air?

[ThePythonicCow]

What happens in your future world when the US wants to print money out of thin air?

The same as happens when any other country inflates their currency too much; which would be the same as happens now if a major new source of some commodity is found. The value of that currency or commodity goes down, in proportion to the over supply.

I envision that we will have the option to use "currency baskets" which include precious metals (gold!) in some proportion, which will essentially ground the worlds paper currencies to gold once again, but at a dynamically changing price, market driven, rather than a long term fixed price.

If all or most of the worlds currencies inflate their supply, then they can all lose value relative to the gold in such baskets, in proportion to their respective inflations.

GoldMoney is actually some part of the way toward realizing this possibility, in my view.

[Toddsterpatriot]

I don't know the numbers exactly (I doubt anyone does), but my recollection is that there is over $100 Trillion of this toxic paper, built in a Ponzi scheme on roughly $10 Trillion of mortgages.

I wish someone would explain how this works. Instead of just saying it.

[Toddsterpatriot]

I have to wash my mouth out with soap, detox, decontaminate, have my stomach pumped and go to Confession

All because I pointed out your stupidity? Wow, you're a delicate flower. LOL!

[ThePythonicCow]

I wish someone would explain how this works.

I don't understand it entirely myself (I'm not alone in this regard), but what I've figured out so far is that:

1. The first key step is that the banks and mortgage brokers selling mortgages at the retail level, to you and me, no longer keep these long term loans on their books, but rather package up a bunch of them as a Mortgage Backed Security (MBS) and sell them, shortly after the mortgage is created. They take their money and run. This means that the people selling mortgages these days no longer have long term skin in the game, so are encouraged to sell mortgages that aren't healthy.
2. The second step (and the above first step) is nicely explained in the YouTube video to which I linked in my Post #128 above. Low quality MBS's are sliced and diced to create high quality AAA rated paper, in a bit of financial alchemy that is now coming unglued. Along with this, the two major rating agencies MBIA and AMBAC, who provided these AAA ratings are themselves failing and have lost their own AAA rating, which once realized will drive down the AAA ratings of all this toxic paper, drastically lowing their value.
3. The next step(s) I am less clear on. It seems to involve writing derivative contracts (not traded in any open market) called Credit Default Swaps (CDS) in which hedge funds "insure" the banks and investment firms against losses on these assets ... however hedge funds aren't regulated and well backed institutions operating with a high degree of public transparency.

Try a Google search for "credit default swap mbs cds" for more explanations of this. One link I see on that search looks useful and more readable: Intro to Credit Default Swaps.

[rbmillerjr]

mark for reading

[Toddsterpatriot]

The first key step ...

The second step ...

Yeah, those steps are clear.

The next step(s) I am less clear on. It seems to involve writing derivative contracts (not traded in any open market) called Credit Default Swaps (CDS)

These are different than equity or debt securities. If you buy a stock or bond, they can become worthless.

If you buy a CDS to protect your bond purchase, you're not typically going to buy 10 times the insurance on your bond. And even if you did, that won't turn $10 trillion in losses into $100 trillion in losses.

Say a CDS on your $1 billion in MBS costs $10 million a year to insure (just picking a number out of the air, feel free to use your own). Every one of your mortgages defaults in the first year. You're protected because your CDS issuer will pay you $1 billion. Except the CDS issuer took your $10 million payment and then went bankrupt. You lose $1.01 billion, not $10 billion or $100 billion or $100 trillion.

These fear mongers take something that everyone understands, leverage, and try to use it in an area where it doesn't really apply.

It makes good copy. $100 trillion!! Bigger than US GDP!! How can we ever pay it back? But if they ever explained it correctly, it wouldn't really apply.

[ThePythonicCow]

But if they ever explained it correctly

So ... either you are explaining it clearly for us, or else you are just taking the opposite side of the fear mongering you claim to see here, a sort of anti-fear mongering, which is usually no more illuminating or helpful.

I suspect the latter. Your claims that "They are fear mongering!" sound like name calling to me, not illumination.

[Toddsterpatriot]

So ... either you are explaining it clearly for us, or else you are just taking the opposite side of the fear mongering you claim to see here

Saying that $10 trillion in bad mortgages (BTW, there are only about $10.6 trillion in U.S. home mortgages) somehow turns into $100 trillion in toxic paper is fear mongering.

I keep waiting for an explanation for how this works. Please ping me if you ever find one.

sort of anti-fear mongering, which is usually no more illuminating or helpful.

Correcting the bad math is more illuminating than spreading the bad math.

[ThePythonicCow]

I keep waiting for an explanation for how this works.

Well ... if you don't know how it works either ... how do you know if it's fear mongering or not?

Enough ... I should resist responding to your posts. Some folks are hear to have friendly discussions, working together to understand. Some folks are here, it seems, to prove their superiority by poking holes in others posts.

[Toddsterpatriot]

Well ... if you don't know how it works either ... how do you know if it's fear mongering or not?

Well, if you're spreading it and you can't explain it, I'll just assume it's B.S.

Some folks are here, it seems, to prove their superiority by poking holes in others posts.

Don't post stupid stuff, I won't poke holes in your posts.

[groanup]

Some folks are here, it seems, to prove their superiority by poking holes in others posts.

Poking holes is not the same thing as pointing out the holes that glaringly exist. Why do you not like having someone who knows what they are talking about enter the discussion?

[ThePythonicCow]

Why do you not like having someone who knows what they are talking about enter the discussion?

Contributing to the discussion is good - we're all trying to figure this out.

There is a difference, however, between playing 'gotcha', and contributing further understanding or information to the discussion.

[Toddsterpatriot]

Contributing to the discussion is good - we're all trying to figure this out.

Excellent! I'm still willing to be convinced. Just find a credible source who can explain how it works.

There is a difference, however, between playing 'gotcha', and contributing further understanding or information to the discussion.

You didn't like my contribution that better explained how a CDS works? And how a CDS doesn't multiply your debt?

[groanup]

I don't know the numbers exactly (I doubt anyone does), but my recollection is that there is over $100 Trillion of this toxic paper, built in a Ponzi scheme on roughly $10 Trillion of mortgages

Leverage is not a Ponzi scheme. It is simple:

You have 100 million in cash.

You use it to buy 100 million of mortgages.

You use your new mortgages for collateral on a loan and you borrow 95 million dollars.

You buy 95 million dollars of mortgages.

You use your new 95M mortgages as collateral on a loan and you borrow 90 million dollars....

And so on.

Each time you make a new borrowing the lender makes you take a haircut on the collateral. But that's okay. There will be plenty to leverage with.