mortgage debt

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pages: 249 words: 66,383

House of Debt: How They (And You) Caused the Great Recession, and How We Can Prevent It From Happening Again by Atif Mian, Amir Sufi

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Andrei Shleifer, asset-backed security, balance sheet recession, bank run, banking crisis, Ben Bernanke: helicopter money, Carmen Reinhart, collapse of Lehman Brothers, debt deflation, Edward Glaeser, en.wikipedia.org, financial innovation, full employment, high net worth, Home mortgage interest deduction, housing crisis, Joseph Schumpeter, Kenneth Rogoff, liquidity trap, Long Term Capital Management, market bubble, Martin Wolf, moral hazard, mortgage debt, paradox of thrift, quantitative easing, Robert Shiller, Robert Shiller, school choice, shareholder value, the payments system, the scientific method, tulip mania, young professional

Using a longer historical pattern (based on the household-debt-to-GDP [gross domestic product] ratio), economist David Beim showed that the increase prior to the Great Recession is matched by only one other episode in the last century of U.S. history: the initial years of the Great Depression.7 From 1920 to 1929, there was an explosion in both mortgage debt and installment debt for purchasing automobiles and furniture. The data are less precise, but calculations done in 1930 by the economist Charles Persons suggest that outstanding mortgages for urban nonfarm properties tripled from 1920 to 1929.8 Such a massive increase in mortgage debt even swamps the housing-boom years of 2000–2007. The rise in installment financing in the 1920s revolutionized the manner in which households purchased durable goods, items like washing machines, cars, and furniture. Martha Olney, a leading expert on the history of consumer credit, explains that “the 1920s mark the crucial turning point in the history of consumer credit.”9 For the first time in U.S. history, merchants selling durable goods began to assume that a potential buyer walking through their door would use debt to purchase.

But in Spain a law from 1909 stipulated that most Spanish home owners remain responsible for mortgage payments—even after handing over the keys to the bank. If a Spaniard was evicted from his home because he missed his mortgage payments, he could not discharge his mortgage debt in bankruptcy. He was still liable for the entire principal.1 Further, accrued penalties and the liabilities followed him the rest of his life. And bankruptcy registers made it difficult for him to lease an apartment or even get a cell phone contract.2 As a result of these laws, mortgage-debt burdens continued to squeeze Spanish households even after they were forced out of their homes. Suzanne Daley of the New York Times reported on the story of Manolo Marban, who in 2010 was delinquent on his mortgage and awaiting eviction. He expected no relief from his $140,000 mortgage even after getting kicked out: “‘I will be working for the bank the rest of my life,’ Mr.

Macroeconomic Failures Perhaps no other government official did more harm to mortgage-debt write-down efforts than Edward DeMarco, the acting director of the Federal Housing Finance Agency, which oversees the government-sponsored enterprises (GSEs) of Freddie Mac and Fannie Mae. Despite evidence from his own researchers that principal reduction would have large benefits to both the GSEs and taxpayers, DeMarco obstinately refused to budge on the issue.16 His strong stance against principal reduction earned the ire of Secretary of the Treasury Timothy Geithner, who wrote a public letter to DeMarco in July 2012 condemning his stalling on principal-reduction efforts.17 In 2013 a prominent group of state attorney generals took the unusual step of publicly calling on President Obama to fire DeMarco because of his refusal to help reduce mortgage-debt burdens for underwater home owners.18 This was not a partisan issue.


pages: 93 words: 24,584

Walk Away by Douglas E. French

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Elliott wave, forensic accounting, full employment, Home mortgage interest deduction, loss aversion, McMansion, mental accounting, mortgage debt, mortgage tax deduction, New Journalism, Own Your Own Home, Richard Thaler, Robert Shiller, Robert Shiller, the market place, transaction costs, unbiased observer

The data showed that a borrower ... willing to invest with a risk level associated with the S & P 500 would benefit from a 30-year mortgage.” “Effect on Net Worth of 15- and 30-Year Mortgage Term.” Journal, Association for Financial Counseling and Planning Education, 2004. “The popular press, following conventional wisdom, frequently advises that eliminating mortgage debt is a desirable goal. We show that this advice is often wrong ... mortgage debt is valuable to many individuals.” “Mortgage Debt: The Good News.” Journal of Financial Planning, September 2004. “... U.S. households that are accelerating their mortgage payments instead of saving in tax-deferred accounts are making the wrong choice ... in the aggregate, these misallocated savings are costing U.S. households as much as $1.5 billion dollars per year.” “The Tradeoff between Mortgage Prepayments and Tax-Deferred Retirement Savings.”

With the government promoting home ownership and the emergence of building and loan associations (the predecessors to today’s S&Ls, which operated much like Credit Unions pooling savings and making loans to members), the percentage of Americans owning their homes increased to 39.7% in 1920. But these building and loan associations paid high rates to savers and so in turn the mortgage loans were at high rates. Herbert Hoover pushed for mass homeownership on a large-scale with the aid of government coordination and regulation of development. During the roaring ‘20s residential mortgage debt tripled, but “much of this financing consisted of a crazy quilt of land contracts, second and third mortgages, high interest rates and loan fees, short terms, balloon payments, and other high risk practices,” explains Weiss. The presidential election of 1928 had Secretary of the Commerce Hoover vs. New York governor Alfred E. Smith. Governor Smith was an ardent progressive, believing in the obligation of government to intervene in economic and social affairs, and a belief in the ability of experts and in the efficiency of government intervention.

The more ownership there is in America, the more vitality there is in America, and the more people have a vital stake in the future of this country.” In October of that year as the housing bubble expanded, Bush told the nation, “We’re creating ... an ownership society in this country, where more Americans than ever will be able to open up their door where they live and say, welcome to my house, welcome to my piece of property.” However, the ownership society came with a huge debt burden. Mortgage debt in the U.S. more than doubled form $6.3 trillion at the start of the decade to $14.4 trillion by the end of 2009 two years after the market crashed. Nationwide, the price of housing rose 86 percent. “The economy became governed by a new exercise in make-believe, the notion that housing prices could never fall,” wrote Peter Goodman. “Still the responsibility for the housing bubble cannot be hung on any single person or institution.


pages: 251 words: 76,128

Borrow: The American Way of Debt by Louis Hyman

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asset-backed security, barriers to entry, big-box store, cashless society, collateralized debt obligation, credit crunch, deindustrialization, deskilling, diversified portfolio, financial innovation, Ford paid five dollars a day, Home mortgage interest deduction, housing crisis, income inequality, market bubble, McMansion, mortgage debt, mortgage tax deduction, Network effects, new economy, Plutocrats, plutocrats, price stability, Ronald Reagan, statistical model, technology bubble, transaction costs, women in the workforce

But of those programs, Section 235 was the most important in that it was the largest and had the longest-run consequences. The federal government’s role in housing in 1971, when federal programs subsidized 30 percent of housing starts, was shockingly higher than the 4.4 percent subsidized in 1961, and, according to Nixon administration officials, “much of the increase in housing units … occur[ed] in section 235.”8 Government-sponsored mortgage debt accounted for 20 percent of the overall increase in mortgage debt in 1971.9 While in operation, Section 235 marshaled mortgage-backed securities to transform hundreds of thousands of Americans from renters to owners. Section 235 created such an upswing in housing that by 1972, the president of MBA could declare it the “principal system” for low-income housing.10 Poor Americans across the country left rented quarters for what they believed would be a true piece of the American dream.

After four years of withdrawals that withered even the sturdiest of mortgage funds, in 1933 the U.S. housing industry was effectively dead, having shrunk to just one-tenth what it had been only a few years before. A third of all American families who qualified for “relief” at the height of the Great Depression landed there by losing a construction job. Dick didn’t work in construction, but his business, building automobiles, was hit just as hard. The 1920s were similar to today in terms not only of young love and mortgage debt but of all forms of debt. In fact, it was the spread of automobile debt that had given Dick his job in the first place. Automobile finance emerged after World War I as one of the hottest industries, spreading its methods in just a few years to nearly all other household durables. Vacuum cleaners, washing machines, and oil burners could all be had on the installment plan. The U.S. savings rate dropped precipitously, and nearly all of what would have been saved went into paying off installment credit.

Miller & Company—collapsed after $50 million in defaults.22 Mortgage bankers around the country wrung their hands in anxiety but consoled themselves that the system itself was sound. The Mortgage Bankers Association rolled out the ill-named “6–6–6 program” to reassure investors that with six guiding principles formulated over six months, the real estate bond market could be disciplined within a half year.23 Even amid these crises, Americans invested approximately $1 billion in mortgage bonds in 1926. At their peak, real estate bonds funded one-quarter of all urban mortgage debt, equal in volume to the bonds of industrial corporations. Particular examples of failure could not dampen most small investors’ faith in the reason of real estate. Yet by 1927, even conservative probusiness groups such as the Rotary Club found naysayers castigating mortgage bonds in the pages of their official publications. A 1927 issue of the The Rotarian warned its membership that “under the old and established system of lending money on real-estate security it rarely happened that too much money was loaned … for the borrower and the lender were closer together than they are now.”


pages: 342 words: 99,390

The greatest trade ever: the behind-the-scenes story of how John Paulson defied Wall Street and made financial history by Gregory Zuckerman

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1960s counterculture, banking crisis, collapse of Lehman Brothers, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, financial innovation, fixed income, index fund, Isaac Newton, Long Term Capital Management, margin call, Mark Zuckerberg, Menlo Park, merger arbitrage, mortgage debt, mortgage tax deduction, Ponzi scheme, Renaissance Technologies, rent control, Robert Shiller, Robert Shiller, rolodex, short selling, Silicon Valley, statistical arbitrage, Steve Ballmer, Steve Wozniak, technology bubble

So they made appointments with bankers at Bear Stearns, Deutsche Bank, Goldman Sachs, and other firms to ask if they would create CDOs that Paulson & Co. could essentially bet against. Paulson’'s team would pick a hundred or so mortgage bonds for the CDOs, the bankers would keep some of the selections and replace others, and then the bankers would take the CDOs to ratings companies to be rated. Paulson would buy CDS insurance on the mortgage debt and the investment banks would find clients with bullish views on mortgages to take the other side of the trades. This way, Paulson could buy protection on $1 billion or so of mortgage debt in one fell swoop. Paulson and his team were open with the banks they met with to propose the idea. “"We want to ramp it up,”" Pellegrini told a group of Bear Stearns bankers, explaining his idea. Paulson and Pellegrini believed the debt backing the CDOs would blow up. But Pellegrini argued to his boss that they should offer to buy the riskiest slices of these CDOs, the so-called equity pieces that would get hit first if problems resulted.

For years, Americans had been pulled by two opposing impulses—--an instinctive distaste of debt and a love affair with the notion of owning a home. In 1758, Benjamin Franklin wrote: “"The second vice is lying; the first is running in debt.”"1 The dangers of borrowing were brought home in the Great Depression when a rash of businesses went bankrupt under the burden of heavy debt, scarring a generation. In the 1950s, more than half of all U.S. households had no mortgage debt and almost half had no debt at all. Home owners sometimes celebrated paying off their loans with mortgage-burning parties, setting loan documents aflame before friends and family. The practice continued into the 1970s; Archie Bunker famously held such a get-together in an episode of All in the Family. Until the second half of the twentieth century, borrowing for anything other than big-ticket items, such as a home or a car, was unusual.

“"I probably wouldn’'t have bet the house.”" Instead, most traders prefer “"positive”" carry trades, or those where profits are immediate and clear. Banks, for example, borrow money at low interest rates and lend it out at higher rates. A borrower may go belly-up, of course, but on paper the move looks like a winner. There didn’'t seem to be a more surefire positive-carry trade than selling insurance on even risky mortgage debt. Insurance companies like American International Group, huge global banks, and countless investors locked in instant gains from the premiums that Paulson and other bears paid for their CDS insurance. These profits sometimes meant the difference between hitting a profit goal and missing out on a huge bonus. “"Positive carry is the mother’'s milk for capitalism; it’'s ingrained and embedded in the minds of investors,”" says Gross.


pages: 726 words: 172,988

The Bankers' New Clothes: What's Wrong With Banking and What to Do About It by Anat Admati, Martin Hellwig

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Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, bonus culture, Carmen Reinhart, central bank independence, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversified portfolio, en.wikipedia.org, Exxon Valdez, financial deregulation, financial innovation, financial intermediation, George Akerlof, Growth in a Time of Debt, income inequality, invisible hand, Jean Tirole, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, margin call, Martin Wolf, moral hazard, mortgage debt, mortgage tax deduction, Nick Leeson, Northern Rock, open economy, peer-to-peer lending, regulatory arbitrage, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, shareholder value, sovereign wealth fund, technology bubble, The Market for Lemons, the payments system, too big to fail, Upton Sinclair, Yogi Berra

With no investment in the house, none of her money is exposed to the risk that the subsequent value of the house might not be enough to pay the mortgage debt; she can never lose, but she will gain if the house appreciates by more than is needed to pay the mortgage debt. The house will become a kind of money machine for Kate; allowing her to enjoy the full upside while facing no downside. The downside will be fully borne by Aunt Claire. Banks Have Uncle Sam The relation between Kate and Aunt Claire in the example is similar to the relation between banks that are too important to fail and taxpayers. Just as Aunt Claire steps in when Kate cannot pay her mortgage debt, governments often support banks when they cannot pay their debts. And banks, like Kate, want to economize on equity and use debt as much as possible.

If the value of the house has stayed the same, Kate can sell it for $300,000. After settling the mortgage debt of $270,000, she has $30,000 left, which is just the amount of her down payment. She had to pay interest on the mortgage and also has foregone the money she could have earned if she had invested her own $30,000 elsewhere, but if she liked living in the house, she may still be happy with the investment. The interest she paid can be thought of as replacing the rent she would have had to pay if she had not owned the house. FIGURE 2.1 Balance sheet diagram for buying a house. Kate will be happier, of course, if the house has gone up in value during the year. Suppose the house has increased in value by 5 percent, to $315,000. After paying the mortgage debt of $270,000, Kate will be left with $45,000, which is $15,000 more than her down payment of $30,000.

In borrowing $270,000 at 3 percent instead of at 4 percent, Kate pays only $8,100 in interest instead of the $10,800 she must pay without the guarantee. She saves 1 percent in interest on the loan of $270,000, which amounts to $2,700 for the year. This leaves Kate with more money after paying the mortgage debt. For example, if the house subsequently increases in value by 5 percent to $315,000, we saw in Chapter 8 that Kate will be left with $34,200, a 14 percent return on her equity investment, if she borrows at 4 percent. If she borrows at 3 percent and owes only $278,100, she will instead have $36,900 left, a 23 percent return on her equity investment, after selling the house for $315,000 and paying her mortgage debt. The saving of $2,700 in interest will also soften the blow should Kate lose some of her investment, assuming that she is still “above water” and able to pay her mortgage. For example, if the house sells for $300,000, Kate will be left with $19,200 if she borrows at 4 percent, a loss of 36 percent of her investment, but she will have $21,900 if she borrows at 3 percent, losing only 27 percent of her investment.


pages: 311 words: 99,699

Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe by Gillian Tett

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accounting loophole / creative accounting, asset-backed security, bank run, banking crisis, Black-Scholes formula, Bretton Woods, business climate, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, easy for humans, difficult for computers, financial innovation, fixed income, housing crisis, interest rate derivative, interest rate swap, locking in a profit, Long Term Capital Management, McMansion, mortgage debt, North Sea oil, Northern Rock, Renaissance Technologies, risk tolerance, Robert Shiller, Robert Shiller, short selling, sovereign wealth fund, statistical model, The Great Moderation, too big to fail, value at risk, yield curve

“We just could not get comfortable,” Masters later said. In subsequent months, Duhon heard on the grapevine that other banks were starting to do CDS deals with mortgage debt, and she wondered how the other banks had coped with the data uncertainties that so worried her and Varikooty. Had they found a better way to track the correlation issue? Did they have more experience with dealing with mortgages? She had no way of finding out. Because the CDS market was unregulated, the details of deals weren’t available, and she had no good intel sources at the other banks. Like most of those working on Demchak’s team, she had spent her entire career at J.P. Morgan. The team did only one more BISTRO deal with mortgage debt, a few months later, worth $10 billion. Then it dropped the line of development altogether. Years later, Duhon was stunned when she learned of the staggering volume of mortgage-based CDS deals the rest of the banking world had gone on to do.

Dimon declared to his staff, and there was one sector in particular in which the bank really needed to catch up: mortgage finance. J.P. Morgan should have been able to raise its profile in the repackaging of mortgage debt quickly. Inside the vast, sprawling empire of JPMorgan Chase sat Chase Home Finance, one of America’s largest home loan mortgage originators. But though the volume of mortgages Chase had offered had surged as the housing boom took off, they were being sold to Lehman Brothers, Bear Stearns, and others for their mortgage CDO and CDS assembly lines. That was partly because the J.P. Morgan side had less experience with mortgage debt than with corporate loans, and was so leery about the risks involved with BISTRO-like products made from mortgages. Relations between the managers of Chase Home Finance and the J.P.

Varikooty was renowned on the team for taking a sober approach towards risk. He was a stickler for detail who loved to get things right, and that stubborn scrupulousness sometimes infuriated his colleagues, who were urgent to make deals. But Demchak always defended Varikooty. “Once, people shouted at Krishna and made him upset, and Demchak just went ballistic,” one of his teammates later recalled. Varikooty’s judgment on the mortgage debt was clear: he could not see a way to track the potential correlation of defaults with any level of confidence. Without that, he declared, no precise estimate of the risks of default in a bundle overall could be made. If defaults on mortgages were uncorrelated, then the BISTRO structure should be safe for mortgage risk, but if they were highly correlated, it might be catastrophically dangerous.


pages: 435 words: 127,403

Panderer to Power by Frederick Sheehan

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Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, British Empire, call centre, central bank independence, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversification, financial deregulation, financial innovation, full employment, inflation targeting, interest rate swap, inventory management, Isaac Newton, Long Term Capital Management, margin call, market bubble, McMansion, Menlo Park, mortgage debt, new economy, Northern Rock, oil shock, place-making, Ponzi scheme, price stability, reserve currency, rising living standards, rolodex, Ronald Reagan, Sand Hill Road, savings glut, shareholder value, Silicon Valley, Silicon Valley startup, South Sea Bubble, supply-chain management, supply-chain management software, The Great Moderation, too big to fail, transaction costs, trickle-down economics, VA Linux, Y2K, Yom Kippur War

Household net worth had risen $2.8 billion from stock gains in 1995, $2.5 billion in 1996, $3.8 billion in 1997, $3.3 billion in 1998, and $4.75 billion in 1999.1 This does not count stock-option cash outs or the contribution of house sales and home equity. In the 1990s, total mortgage debt (commercial, residential, and farm) rose an average of $268 billion a year.2 In 1995, total mortgage debt increased $233 billion, and home mortgage debt increased $153 billion.3 1 Gloom, Boom & Doom Report, September 2000. 2 Doug Noland, “Credit Bubble Bulletin,” Prudent Bear Web site, March 9, 2007, p. 12. 3 Federal Reserve Flow-of-Funds Accounts, Z-1. 265 That was when Larry Lindsey told the FOMC, “[T]here has been a lot of easing of credit terms. At some point that is going to stop.” As it turned out, easy credit was not enough. The stock market bubble was needed as a supplement. In 2000, home mortgage debt rose $380 billion.4 Stock market collateral could, in part, explain how households were able to buy more and higher-priced houses.

In 2000, home mortgage debt rose $380 billion.4 Stock market collateral could, in part, explain how households were able to buy more and higher-priced houses. By 2001, though, the mirage of Internet wealth was collapsing. Median household incomes were falling (after having risen between 1994 and 2000),5 and layoffs were rising. Yet, Americans acquired $506 billion of new mortgage debt. By most standards, 2002 was an even worse year for Americans (stock prices and incomes continued to fall), but they added an additional $708 billion of mortgage debt. Greenspan’s Attempt to Block Fannie and Freddie The backbones of the government effort to stoke credit were Fannie Mae and Freddie Mac. These government-sponsored entities (GSEs) played the central role in the mortgage balloon. If Fannie and Freddie had not grown to such mammoth proportions, it is doubtful that the rest of the machinery could have achieved such destructive capacity.

During the first nine months of 2006, 22 percent were subprime mortgages.17 By February 2007, 6 percent of mortgages packaged into a security during 2006 were already delinquent.18 Bernanke had used practically the same data in a November 2006 speech: “In 1994, fewer than 5 percent of mortgage originations were in the subprime market, but by 2005 about 20 percent of new mortgage loans were subprime.” In the same speech, Bernanke went on to discuss other data that should have caused a stir: “[T]he expansion of subprime lending has contributed importantly to the substantial increase in the overall use of mortgage credit. From 1995 to 2004, the share of households with mortgage debt increased 17 percent, and in the lowest income quintile, the share of households with mortgage debt rose 53 percent.” Reading the transcript, it appears Bernanke considered this to be good news. He did advise “greater financial literacy” for “borrowers with lower incomes and education levels.”19 The former South Carolina seventh-grade spelling bee champion often urged self-improvement. 15 Paul Muolo and Matthew Padilla, Chain of Blame, How Wall Street Caused the Mortgage and Credit Crisis (Hoboken, N.J.: Wiley, 2008), pp. 170–171.


pages: 147 words: 45,890

Aftershock: The Next Economy and America's Future by Robert B. Reich

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Berlin Wall, declining real wages, delayed gratification, Doha Development Round, endowment effect, full employment, George Akerlof, Home mortgage interest deduction, Hyman Minsky, illegal immigration, income inequality, invisible hand, job automation, labor-force participation, Long Term Capital Management, loss aversion, mortgage debt, new economy, offshore financial centre, Ralph Nader, Ronald Reagan, school vouchers, sovereign wealth fund, Thorstein Veblen, too big to fail, World Values Survey

But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped. The borrowing had taken the form of mortgage debt on homes and commercial buildings, consumer installment debt, and foreign debt. Eccles understood that this debt bubble was bound to burst. And when it did, consumer spending would shrink. And so it did. When there were no more poker chips to be loaned on credit, debtors were forced to curtail their consumption. This naturally reduced the demand for goods of all kinds and brought on higher unemployment.

The drop in savings had its mirror image in household debt (including mortgages), which rose from 55 percent of household income in the 1960s to an unsustainable 138 percent by 2007. Ominously, much of this debt was backed by the rising market value of people’s homes. The years leading up to the Great Depression saw a similar pattern. Between 1913 and 1928, the ratio of private credit to the total national economy nearly doubled. Total mortgage debt was almost three times higher in 1929 than in 1920. Eventually, in 1929, as in 2008, there were “no more poker chips to be loaned on credit,” in Eccles’s words. And “when … credit ran out, the game stopped.” A third parallel: In both periods, richer Americans used their soaring incomes and access to credit to speculate in a limited range of assets. With so many dollars pursuing the same assets, values exploded.

But the borrowing didn’t even stop there, especially after the Federal Reserve Board lowered interest rates and made borrowing easier. By 2007, as I said earlier, the typical American household owed 138 percent of its after-tax income. Americans borrowed from everywhere. Credit card solicitations flooded mailboxes; many American wallets bulged with dozens of cards, all amassing larger and larger debt loads. Auto loans were easy to come by. Students and their families went deep into debt to pay the costs of college. Mortgage debt exploded. And as housing values continued to rise, homes doubled as ATMs. Consumers refinanced their homes with even larger mortgages and used their homes as collateral for additional loans. As long as housing prices continued to rise, it seemed a painless way to get money (in 1980 the average home sold for $64,600; by 2006 it went for $246,500). Between 2002 and 2007, American households extracted $2.3 trillion from their houses, putting themselves ever more deeply into the hole.


pages: 460 words: 122,556

The End of Wall Street by Roger Lowenstein

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Asian financial crisis, asset-backed security, bank run, banking crisis, Berlin Wall, Bernie Madoff, Black Swan, Brownian motion, Carmen Reinhart, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fear of failure, financial deregulation, fixed income, high net worth, Hyman Minsky, interest rate derivative, invisible hand, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, Martin Wolf, moral hazard, mortgage debt, Northern Rock, Ponzi scheme, profit motive, race to the bottom, risk tolerance, Ronald Reagan, savings glut, short selling, sovereign wealth fund, statistical model, the payments system, too big to fail, tulip mania, Y2K

Less than a generation after the fall of the Berlin Wall, when prevailing orthodoxy held that the free market could govern itself, and when financial regulation seemed destined for near irrelevancy, the United States was compelled to socialize lending and mortgage risk, and even the ownership of banks, on a scale that would have made Lenin smile. The massive fiscal remedies evidenced both the failure of an ideology and the eclipse of Wall Street’s golden age. For years, American financiers had gaudily assumed more power, more faith in their ability to calculate—and inoculate themselves against—risk. As a consequence of this faith, banks and investors had plied the average American with mortgage debt on such speculative and unthinking terms that not just America’s economy but the world’s economy ultimately capsized. The risk grew from early in the decade, when little-known lenders such as Angelo Mozilo began to make waves writing subprime mortgages. Before long, Mozilo was to proclaim that even Americans who could not put money down should be “lent” the money for a home, and not long after that, Mozilo made it happen: homes for free.

In 2002, subprime issuance totaled $200 billion. By 2004, it was over $400 billion. As a percentage of annual volume, subprimes now topped 16 percent—up from a mere 8 percent a couple of years earlier and hardly anything in the ’90s.4 The subprime onslaught was part of a broader and no less remarkable mortgage wave. Over those same two years, following the dot-com crash in 2001, total outstanding mortgage debt grew from $6 trillion to nearly $8 trillion—an extraordinary rise in a stable population.5 The most plausible explanation for this sudden surge lies in the country’s remarkably forgiving credit markets. Starting the week after New Year’s, 2001, the Fed lowered short-term interest rates thirteen times until, finally, in June 2003, rates touched 1 percent—their lowest level since the John F. Kennedy era.

By 2006, half of all CDOs were said to be syn thetic. 18 Synthetic CDOs did not add to the country’s economic output any more than did a bet at the track or, for that matter, a wager on the direction of the stock market. They were a mere—though a massive—side bet. To paraphrase the financial journalist Michael Lewis, synthetic CDOs had as much to do with real estate as fantasy football had to do with the NFL.19 They built no houses and painted no walls; they simply multiplied the Street’s gamble. Thanks to these derivative ventures, far more money was wagered on mortgage debt than the total of such debt in existence. In some cases, a single mortgage bond was referenced in dozens of synthetics.20 It was as if Wall Street, in all its mad, Strangelovian genius, had a found a way to clone armies of securities from a single strand of mortgage DNA. The subsurface multiplication of CDO exposure fooled many a forecaster. Even the Federal Reserve, with its scores of economists, underestimated the subprime threat.


pages: 280 words: 79,029

Smart Money: How High-Stakes Financial Innovation Is Reshaping Our WorldÑFor the Better by Andrew Palmer

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Affordable Care Act / Obamacare, algorithmic trading, Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Black-Scholes formula, bonus culture, Bretton Woods, call centre, Carmen Reinhart, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Graeber, diversification, diversified portfolio, Edmond Halley, Edward Glaeser, Eugene Fama: efficient market hypothesis, eurozone crisis, family office, financial deregulation, financial innovation, fixed income, Flash crash, Google Glasses, Gordon Gekko, high net worth, housing crisis, Hyman Minsky, implied volatility, income inequality, index fund, Innovator's Dilemma, interest rate swap, Kenneth Rogoff, Kickstarter, late fees, London Interbank Offered Rate, Long Term Capital Management, loss aversion, margin call, Mark Zuckerberg, McMansion, mortgage debt, mortgage tax deduction, Network effects, Northern Rock, obamacare, payday loans, peer-to-peer lending, Peter Thiel, principal–agent problem, profit maximization, quantitative trading / quantitative finance, railway mania, randomized controlled trial, Richard Feynman, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, short selling, Silicon Valley, Silicon Valley startup, Skype, South Sea Bubble, sovereign wealth fund, statistical model, transaction costs, Tunguska event, unbanked and underbanked, underbanked, Vanguard fund, web application

One reason is its sheer scale. It absorbs more wealth than any other financial asset, certainly in the rich world. Buying a house is easily the largest transaction of most people’s lives. The aggregate value of property held by American households in the peak house-price year of 2006 was $22.7 trillion, their biggest single asset by a wide margin (pension-fund reserves were next, at $12.8 trillion). The amount of mortgage debt in the United States almost doubled between 2001 and 2007, to $10.5 trillion. In Britain the sum total of every residential property in 2012 was a shade under £6 trillion, which (roughly) works out at an average of £96,500 for every person in the country. Globally, the Economist’s most recent best guess was that residential property in the rich world as a whole was worth about 126 percent of the rich countries’ combined GDP in 2010.

The obvious example is the policy of successive American administrations of promoting home ownership. Now politicians are looking at the way students are being funded through college and finding that it looks less and less sustainable. At a time when American households are paying down debt, student loans are the only form of consumer borrowing that has gone up since 2008. The total amount of student debt outstanding in the United States is now above $1 trillion. Only mortgage debt is bigger. Both the number of student borrowers and the average loan balance increased by 70 percent between 2004 and 2012. The Congressional Budget Office reckons that the government will loan students another $1.4 trillion over the next decade. This growth has been driven by a number of factors. The cost of a college education per student has risen by almost five times the rate of inflation since 1983.

By identifying the fraction of mortgage applicants that had been denied mortgages in a particular ZIP code in 1996, and then looking at the experience of the same ZIP code in 2001–2005, they found that credit flowed disproportionately to areas where previously applications had been denied—despite the fact that these areas suffered lower income and employment growth than others. Mortgage growth was driven by the less creditworthy borrower.4 Once in their homes, households could unlock yet more credit by borrowing against the equity. A 2013 study by the Federal Reserve Bank of New York showed that on average for every 1 percent rise in house prices, home owners increased their mortgage debt by 1 percent. As fast as the value of their equity rose, home owners turned it into debt.5 All that has changed. Mortgages and equity withdrawal are no longer the freely available options they once were. Other forms of credit (except for student loans) are also constrained. Between September 2008 and September 2012, American household debt dropped by 11 percent, to $11.3 trillion, partly because of write-offs, partly because of greater saving, and partly because of tighter credit standards.

Debtor Nation: The History of America in Red Ink (Politics and Society in Modern America) by Louis Hyman

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asset-backed security, bank run, barriers to entry, Bretton Woods, card file, central bank independence, computer age, corporate governance, credit crunch, declining real wages, deindustrialization, diversified portfolio, financial independence, financial innovation, Gini coefficient, Home mortgage interest deduction, housing crisis, income inequality, invisible hand, late fees, London Interbank Offered Rate, market fundamentalism, means of production, mortgage debt, mortgage tax deduction, p-value, pattern recognition, profit maximization, profit motive, risk/return, Ronald Reagan, Silicon Valley, statistical model, technology bubble, the built environment, transaction costs, union organizing, white flight, women in the workforce, working poor

The modern debt regime relied on this convertibility, not only to transform installment contracts into personal loans or credit card debts into home equity plans, but to turn the wages of labor into debt repayment as well. The transformation of labor into capital, and debt into other debt, is the crux of how the credit economy operates. To cordon off these transformations one from another, as we do when we, for instance, sanctimoniously discuss “non-mortgage debt” separately from “mortgage debt,” obscures the indispensable commutability of capital. For lenders, transforming capital into debt was the essence of their business. Capital ultimately comes from somewhere. When we need money, most of us wonder only if we can get it, and aside from the person who gives us the money, do not really care where the money comes from. Yet, once you start to think about it, how can credit card companies finance the trillions that Americans owe them?

The program provided billions of dollars in financing for millions of homes during its operation. The federal government’s role in housing in 1971, when federal programs subsidized 30 percent of housing starts, was shockingly higher than in 1961, when only 4.4 percent did, with “much of the increase in housing units . . . occur[ing] in section 235,” according to Nixon administration officials.16 Government-sponsored mortgage debt accounted for 20 percent of the overall increase in mortgage debt in 1971.17 While in operation, the Section 235 marshaled new financial instruments to transform hundreds of thousands of Americans from renters to owners. Section 235 created such an upswing in housing that by 1972 the president of the Mortgage Bankers’ Association could pronounce it the “principal system” for low-income housing.18 One prominent mortgage banker declared that Section 235 “answered the cry, ‘Burn, baby, burn’ with ‘Build, baby, build!”

A college student would receive a solicitation, and if that graduate had secured a “career-oriented job paying $12,000 or more a year,” possessed a “permanent Wisconsin home address,” and attended a Wisconsin school, then the bank would give that student a credit card, even though the student did not “qualify for credit under [the] usual criteria.”134 The alma mater frequently got a cut of revenue from such cards for providing access and mailing lists.135 While class identity flagged, perhaps, as a way to organize labor, it rejuvenated the organization of capital among the professional classes. 1986: Tax Reform and Securitization In 1986, two events made debt more expensive for consumers to borrow and cheaper for banks to lend. While these two events, the Tax Reform Act of 1986 and the first credit card asset-backed security, had nothing to do with one another, they both pushed all forms of consumer debt, in unexpected ways, toward complete interchangeability. Though the Tax Reform Act sought to differentiate credit card debt from mortgage debt, market forces and financial innovation like asset-backed securities pushed them back together. By the middle of the 1980s, credit cards and other non-mortgage debts were starting to be seen as something not to be encouraged. Owning a house, arguably, served a valuable social function by rooting home owners in a community, but auto loans, much less credit cards, did not. Yet taxpayers could deduct the interest that they paid on any and all consumer debt. The mortgage deduction on the income tax, commonly believed to have been intentionally invented to encourage home ownership, existed more as a residual of an older nineteenth-century idea of borrowing than an intentional policy.


pages: 318 words: 93,502

The Two-Income Trap: Why Middle-Class Parents Are Going Broke by Elizabeth Warren, Amelia Warren Tyagi

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business climate, Columbine, declining real wages, equal pay for equal work, feminist movement, financial independence, labor-force participation, late fees, McMansion, mortgage debt, new economy, New Journalism, payday loans, school choice, school vouchers, telemarketer, urban sprawl, women in the workforce

Each year, a growing number of stay-at-home mothers made the move into the workforce, hoping to put their families into solidly middle-class neighborhoods. But the rules quietly changed. Today’s mothers are no longer working to get ahead; now they must work just to keep up. Somewhere along the way, they fell into a terrible trap. Out of the Housing Trap? Can families extract themselves from the two-income housing trap? We could make all the obvious suggestions here. Families should “downshift,” taking on no more mortgage debt than they can afford. If that means renting for another ten years or living in a neighborhood with lousy schools, well, that’s just too bad. This advice would certainly be sensible from a financial point of view. The problem is that families don’t find it particularly compelling. The experts have been dispensing these words of wisdom for at least a decade with no discernible effect, and we’re pretty sure that adding our own voices to the chorus would be useless.

Just at the time when parents got caught in a vicious bidding war for middle-class housing, just as the cost of college tuition and health insurance shot into the stratosphere, just as layoffs increased and the divorce rate jumped, a new player appeared on the scene. A newly deregulated lending industry emerged, eager to lend a few bucks whenever the family came up short. Pick up almost any newspaper, and there will be a story about America’s most widespread addiction: the insatiable hunger for debt. Every year for the past decade, mortgage debt has set a new record.7 Home equity loans grew even faster, increasing by over 150 percent in just four years.8 And no one would dare leave home without a fistful of those little plastic cards. The news media rarely give any explanation for why all that debt piled up, leaving the reader to infer that the debt explosion is some sort of inevitable by-product of today’s moral and economic climate.

The mortgage industry shook off its interest rate regulations just a few years after the credit card industry.30 In the new world of unfettered mortgage lending, no longer would the middle-class family be restricted to a conventional 80 percent mortgage. The floodgates were opened, and families could get all the mortgage money they ever dreamed of to bid on that precious home in the suburbs—even if the price tag was more than they could realistically afford. Competition for houses in good neighborhoods has always been stiff, and overloading on mortgage debt to purchase a better home has long posed a temptation for young families. A generation ago, however, it simply wasn’t possible to give in to that temptation; mortgage lenders didn’t allow it. But today the game is different. It has become routine for lenders to issue unmanageable mortgages. The best evidence comes from the mortgage industry itself. Fannie Mae, the quasi-governmental agency that underwrites a huge fraction of home mortgage lending in the United States, advises families that “monthly housing expenses should not represent more than 25 to 28 percent of gross monthly income.”31 Accordingly, anyone whose housing costs exceed 40 percent of their earnings would be considered “house poor,” spending so much on housing that they jeopardize their overall financial security.32 But the label is misleading.


pages: 475 words: 155,554

The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge by Faisal Islam

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Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, British Empire, capital controls, carbon footprint, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, crony capitalism, dark matter, deindustrialization, Deng Xiaoping, disintermediation, energy security, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, financial repression, floating exchange rates, forensic accounting, forward guidance, full employment, ghettoisation, global rebalancing, global reserve currency, hiring and firing, inflation targeting, Irish property bubble, Just-in-time delivery, labour market flexibility, London Whale, Long Term Capital Management, margin call, market clearing, megacity, Mikhail Gorbachev, mini-job, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, North Sea oil, Northern Rock, offshore financial centre, open economy, paradox of thrift, pension reform, price mechanism, price stability, profit motive, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, reshoring, rising living standards, Ronald Reagan, savings glut, shareholder value, sovereign wealth fund, The Chicago School, the payments system, too big to fail, trade route, transaction costs, two tier labour market, unorthodox policies, uranium enrichment, urban planning, value at risk, working-age population

In January of that year, he regaled me with the finer details of Dutch economist Willem Buiter’s blog, and with his own appreciation of the difference between quantitative easing and qualitative easing. The former referred to the sheer amount of buying the central bank could do, the latter concerned an attempt to lower interest rates in specific markets, such as mortgage debt and corporate credit. So this was a policy initiated and decided upon by the Bank, but with considerable input from the government. At the top of the Treasury the assumption was that the structure created would be used, as was the case in the USA, to buy a wide range of commercial, government and mortgage debt, but that operational decisions regarding such purchases would be left to the Bank. And so, on 5 March 2009, quantitative easing was launched in Britain, accompanied by a cut in the base rate from 1 per cent to an unprecedented 0.5 per cent.

Greater increases in demand than in supply, and the prices went up, as in Britain. Large increases in supply over demand, as in the USA, Spain and Ireland after the crisis, and prices go down. Simple enough. Except, of course, this simple model is entirely misleading. The housing market is not really a market for houses. The housing market is driven principally by the availability of finance, mainly mortgage debt, but sometimes bonuses, inheritances, or hot money from abroad – London in particular has become the preferred residence of the world’s wealthiest people, from Russian oligarchs to Arab oil sheikhs. Let’s start with Britain. There are 27 million dwellings in the UK. The short-term supply is basically fixed. The number of new homes built each year has not topped 150,000 since the crisis – that’s less than 0.5 per cent of the total stock.

It was becoming increasingly difficult to write traditional mortgage business.’ The credit feeding frenzy in suburban Britain during this time was feeding off itself. But one innovation casts a particularly long shadow. Increasing multiples, decreasing deposits, allowing self-certification and stretching the term of a mortgage are all rather tame compared to never actually expecting the repayment of mortgage debt. That was the strategy behind ‘interest-only’ mortgages. In finance, a loan where the entire principal of the loan is due at the end of the term is known as a ‘bullet loan’, but that name might have conjured the wrong image. Interest-only loans are controversial. Forget trying to get one in Canada. In India, you’ll need to hand over a piece of gold. A version of the interest-only mortgage, the endowment mortgage, was popular in the UK in the 1980s and 1990s, but was sold with an investment to repay the loan at the end of the term.


pages: 422 words: 113,830

Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism by Kevin Phillips

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algorithmic trading, asset-backed security, bank run, banking crisis, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, collateralized debt obligation, computer age, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency peg, diversification, Doha Development Round, energy security, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, George Gilder, housing crisis, Hyman Minsky, imperial preference, income inequality, index arbitrage, index fund, interest rate derivative, interest rate swap, Joseph Schumpeter, Kenneth Rogoff, large denomination, Long Term Capital Management, market bubble, Martin Wolf, Menlo Park, mobile money, Monroe Doctrine, moral hazard, mortgage debt, new economy, oil shale / tar sands, oil shock, peak oil, Plutocrats, plutocrats, Ponzi scheme, profit maximization, Renaissance Technologies, reserve currency, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, sovereign wealth fund, The Chicago School, Thomas Malthus, too big to fail, trade route

In 1977, Time saluted another symptom, credit card growth, with a lengthy analysis of how “the Affluent Society has become the Credit Society, and an insistence on buying only what can be paid for in cash seems as outmoded as a crew cut.”4 Since 1950, the U.S. consumer installment debt outstanding had soared twelvefold to roughly $179 billion, omitting mortgage debt, which had risen comparably. Lacy Hunt, an economist at Philadelphia’s Fidelity Bank, enthused that “the ability of the consumer to take on more debt will be the underpinning of the economy in 1977. This year is the year of consumer credit.”5 The mortgage debt that so impressed Greenspan, along with the credit card volume saluted by Hunt, slowed down as interest rates soared from 1979 to 1981, and it’s probably fair to say that the deep 1980-82 recession squeezed the debt hangover out of the U.S. economy while it hammered down the inflation rate.

Foreclosing on the American Dream: Mortgage Finance and Housing The fifth vehicle of the financial sector’s mega-expansion, hardly a great disclosure, can be treated quickly, in light of the great 2000-2006 media focus on housing, mortgage finance, and related securitization. The buildup was huge, just like the eventual 2007-2008 implosion. As Figure 2.6 on page 51 shows, between the first quarter of 2001 and the first quarter of 2007, total mortgage debt in the United States doubled from $4.92 trillion to $9.96 trillion. As for mortgage origination, that had tripled from 1997 levels to reach a total of $2.5 trillion in the year 2006 alone (see pp. 112-119). United States banks, in the meantime, were moving into mortgage finance in a big way. Figure 2.2 on page 32 shows the mushrooming of the percentage of total bank earning assets that fell into the mortgage-related category.

By some hypotheses, an informal, broadly defined “housing sector” of the U.S. economy—mortgage finance, construction, furnishings, lumber, and related industries—might represent a 25 percent share of the notional gross domestic product, enough to include several million vulnerable jobs on top of the frightening blow to the national psyche’s sense of well-being and stability. And on top of that, between 2001 and 2006, an unprecedented number of Americans used their homes as ATMs, turning huge chunks of residential equity into borrowed, but spendable, cash. Harvard economist Martin Feldstein, a former Republican chairman of the White House Council of Economic Advisers, calculated in 2007 that over “the past five years, the value of U.S. home mortgage debt has increased by nearly $3 trillion. In 2004 alone, it increased by almost $1 trillion.” He went on: “Net mortgage borrowing that year not used [my italics] for the purchase of new homes amounted to nearly $600 billion, or almost 7 percent of disposable personal income.”12 In short, borrowing against homes enabled stressed consumers to keep consuming. FIGURE 1.2 Monthly Amount of Adjustable-Rate Mortgage Resets, January 2007-December 2008 Source: Millennium Wave Advisors.


pages: 278 words: 82,069

Meltdown: How Greed and Corruption Shattered Our Financial System and How We Can Recover by Katrina Vanden Heuvel, William Greider

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Asian financial crisis, banking crisis, Bretton Woods, capital controls, carried interest, central bank independence, centre right, collateralized debt obligation, conceptual framework, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, declining real wages, deindustrialization, Exxon Valdez, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, full employment, housing crisis, Howard Zinn, Hyman Minsky, income inequality, kremlinology, Long Term Capital Management, margin call, market bubble, market fundamentalism, McMansion, mortgage debt, Naomi Klein, new economy, offshore financial centre, payday loans, pets.com, Plutocrats, plutocrats, Ponzi scheme, price stability, pushing on a string, race to the bottom, Ralph Nader, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, sovereign wealth fund, structural adjustment programs, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, wage slave, Washington Consensus, women in the workforce, working poor, Y2K

Housing construction is up more than 17 percent from its level at the end of the recession. Purchases of existing homes hit a record of 6.1 million in 2003, more than 500,000 above the previous record set in 2002. Each home purchase is accompanied by thousands of dollars of closing costs, plus thousands more spent on furniture and remodeling. The indirect impact of the housing bubble is at least as important. Mortgage debt rose by an incredible $2.3 trillion between 2000 and 2003. This borrowing has sustained consumption growth in an environment in which firms have been shedding jobs and cutting back hours, and real wage growth has fallen to zero, although the gains from this elixir are starting to fade with a recent rise in mortgage rates and many families are running out of equity to tap. The red-hot housing market has forced up home prices na-tionwide by 35 percent after adjusting for inflation.

That effect could be anything from a mild drag on an already limp economy to a real financial crisis. What it is depends on whether other sectors pick up some of the slack—say, if businesses were to start hiring and investing rather than hoarding their plentiful cash or distributing it to their stockholders. If they don’t, things could get quite unpleasant. So many households have taken on so much mortgage debt that if prices merely stop rising, they’re going to find themselves under water. And the broad economy has become so dependent on home-equity credit that its withdrawal could come as a terrible shock. Maybe the economy will finally have to face the consequences of the collapse of the 1990s stock-driven boom that it managed to avoid by speculating on housing instead. In fact, the main thing arguing against that possibility is the economy’s stunning ability to evade its dates with destiny time after time.

People used their homes as ATMs, borrowing to take trips, buy cars or just to meet expenses. This pattern of growth could not be sustained. Record house prices were supported by a tidal wave of speculation, as millions of people suddenly became interested in investment properties. As prices soared, financing arrangements became ever more questionable. Down payments went out of style. Adjustable-rate mortgages and interest-only loans, even negative amortization loans (in which mortgage debt grows month by month), became common. The worst of the speculative financing was in the subprime market, where moderate-income home buyers were persuaded to take out adjustable-rate mortgages, which generally feature very low “teaser rates,” typically reset after three years, often to levels that are five or six percentage points higher. Millions of families who could afford the teaser rates cannot possibly afford the higher rates.


pages: 2,045 words: 566,714

J.K. Lasser's Your Income Tax by J K Lasser Institute

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Affordable Care Act / Obamacare, airline deregulation, asset allocation, collective bargaining, distributed generation, employer provided health coverage, estate planning, Home mortgage interest deduction, medical malpractice, medical residency, mortgage debt, mortgage tax deduction, passive income, Ponzi scheme, profit motive, rent control, telemarketer, transaction costs, urban renewal, zero-coupon bond

See Treasury Regulation Section 1.1038-2 for further details. 31.13 Foreclosure on Mortgages Other Than Purchase Money If you, as a mortgagee (lender), bid in on a foreclosure sale to pay off a mortgage that is not a purchase money mortgage, your actual financial loss is the difference between the unpaid mortgage debt and the value of the property. For tax purposes, however, you may realize a capital gain or loss and a bad debt loss that are reportable in the year of the foreclosure sale. Your bid is treated as consisting of two distinct transactions: - - - - - - - - - - Planning Reminder Voluntary Conveyance Instead of forcing you to foreclose, the mortgagor may voluntarily convey the property to you in consideration for your cancelling the mortgage debt. Your loss is the amount by which the mortgage debt plus accrued interest exceeds the fair market value of the property. If, however, the fair market value exceeds the mortgage debt plus accrued interest, the difference is taxable gain. The gain or loss is reportable in the year you receive the property.

Suppose your bid was $36,000 and you had $2,000 in expenses. Your bad debt deduction is $6,000—the difference between the mortgage debt of $40,000 and the net bid price of $34,000. You also had a capital loss of $4,000 (the difference between the net bid price of $34,000 and the fair market value of $30,000). Where the bid price equals the mortgage debt plus unreported but accrued interest, you report the interest as income. But where the accrued interest has been reported, the unpaid amount is added to the collection expenses. 31.14 Foreclosure Sale to Third Party When a third party buys the property in a foreclosure, you, as the mortgagee, receive the purchase price to apply against the mortgage debt. If it is less than the debt, you may proceed against the mortgagor for the difference. Foreclosure expenses are treated as offsets against the foreclosure proceeds and increase the loss.

However, you may realize a taxable gain. The IRS and Tax Court treat the transferred mortgage debt as cash received in a part-gift, part-sale subject to the rules for bargain sales of appreciated property (14.8). You will realize a taxable gain if the transferred mortgage exceeds the portion of basis allocated to the sale part of the transaction. This is true even if the charity does not assume the mortgage. EXAMPLE Bob Hill donates to a college land held over a year that is worth $250,000 and subject to a $100,000 mortgage. His basis is $150,000. Hill’s charitable contribution deduction is $150,000 ($250,000 − $100,000). He also is considered to have made a bargain sale for $100,000 (transferred mortgage debt) on which he realized $40,000 long-term capital gain. 40% of the transaction is treated as a bargain sale: Basis allocated to sale: 40% of $150,000, or $60,000 Amount realized $100,000 Allocated basis 60,000 Gain $ 40,000 Donating capital gain property to private non-operating foundations.


pages: 248 words: 57,419

The New Depression: The Breakdown of the Paper Money Economy by Richard Duncan

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asset-backed security, bank run, banking crisis, banks create money, Ben Bernanke: helicopter money, Bretton Woods, currency manipulation / currency intervention, debt deflation, deindustrialization, diversification, diversified portfolio, fiat currency, financial innovation, Flash crash, Fractional reserve banking, income inequality, inflation targeting, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, market bubble, market fundamentalism, Mexican peso crisis / tequila crisis, money: store of value / unit of account / medium of exchange, mortgage debt, private sector deleveraging, quantitative easing, reserve currency, Ronald Reagan, savings glut, special drawing rights, The Great Moderation, too big to fail, trade liberalization

To put that into perspective, consider that over the preceding 70 years, the U.S. government had fought World War II, the Korean War, the Cold War, the Vietnam War, and two Gulf Wars, had carried out numerous social welfare programs, and had sent a man to the moon, but had accumulated only a total of $5 trillion in debt in the process. What did Fannie and Freddie and the ABS issuers do with all the money they borrowed? They lent it to the household sector in the form of mortgages and consumer credit. Between 1982 and 2007, the mortgage debt of the household sector rose ten times to $10.5 trillion. Consumer credit increased six times over the same period to $2.5 trillion. (See Exhibit 3.4.) EXHIBIT 3.4 Home Mortgages and Consumer Credit Source: Federal Reserve, Flow of Funds Accounts of the United States, second quarter 2011 Relative to the overall size of the economy, the financial sector’s debt rose from 21 percent of GDP in 1980 to 116 percent in 2007.

Former Fed Chairman Alan Greenspan wrote about household sector debt in his autobiography, which went to print in June 2007. He began by quoting from an article published in Fortune magazine in 1956: “Consumer short-term debt . . . is approaching a historical turning point . . . It must soon adjust itself to the nation’s capacity for going in hock, which is not limitless,” declared Fortune in March 1956. A month later, the magazine added, “The same general observations apply to mortgage debt—but with double force.” Greenspan then added, “Today, nearly fifty years later, the ratio of household debt to income is still rising, and critics are still wringing their hands. In fact, I do not recall a decade free of surges in angst about the mounting debt of households and businesses. Such fears ignore a fundamental fact of modern life: in a market economy, rising debt goes hand in hand with progress.”2 Exhibit 6.3 puts Greenspan’s comments into perspective.

Such fears ignore a fundamental fact of modern life: in a market economy, rising debt goes hand in hand with progress.”2 Exhibit 6.3 puts Greenspan’s comments into perspective. It shows household debt as a ratio of household disposable income from 1946 to 2010. EXHIBIT 6.3 Ratio of Household Debt to Disposable Personal Income Source: Federal Reserve, Flow of Funds Accounts of the United States, second quarter 2011, Table B.100 Notice that this ratio had hit 53 percent and was rising rapidly at the time Fortune expressed concern about mortgage debt in 1956. Then, from the mid-1960s to the mid-1980s it flattened out around 70 percent. Alan Greenspan became Fed chairman in August 1987. Soon thereafter, household debt relative to disposable income began to rise sharply. That ratio peaked at nearly 140 percent in 2007, just as Greenspan was expounding on the role of rising debt and the facts of life. Unfortunately, American households were incapable of repaying so much debt.


pages: 160 words: 6,876

Shaky Ground: The Strange Saga of the U.S. Mortgage Giants by Bethany McLean

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Affordable Care Act / Obamacare, collateralized debt obligation, housing crisis, mortgage debt, obamacare, race to the bottom

The United States was historically a pioneer, and an outlier in a global context, in putting into practice such democratic ideas as universal voting, universal public education, and nearly universal land or homeownership. In all these cases, American society’s big reach also generates big controversies, and in the business of homeownership the controversies are both domestic policy battles—why do we need the government in our mortgage markets at all?—and potential international policy issues, because many billions of dollars of U.S. mortgage debt are owned by other governments that very much want to see it as a stable investment. Most people who weren’t paying close attention probably date the beginning of the global financial crisis at September BETHANY McLEAN COLUMBIA GLOBAL REPORTS 15, 2008, the day Lehman Brothers declared bankruptcy. But a few days earlier, on September 6, the U.S. Treasury put Fannie Mae and Freddie Mac into a status called “conservatorship,” a kind of government life support system hooked up because the rapidly swooning mortgage markets had arguably put Fannie and Freddie in mortal peril, and their failure would have caused global economic chaos.

In large part because of their perceived safety as an investment, American mortgages became catnip to global investors. By the 1990s, it wasn’t just Boston bankers investing in Arizona mortgages, but Chinese workers and their savings accounts enabling Americans in Kansas to buy homes. By the 2000s, foreign central banks and other foreign investors were financing over a trillion dollars of American mortgage debt via their ownership of GSE securities. It was Hank Paulson, the former Goldman Sachs executive who served as Treasury Secretary from 2006 until January 20, 2009, who orchestrated the government takeover of Fannie 21 SHAKY GROUND 22 INTRODUCTION and Freddie during the financial crisis. Something that he says “took his breath away” happened during the summer of 2008, when he was at the Beijing Olympics.

The analysis was very similar to that in a paper called “Fannie Mae Insolvency and Its Consequences” that was circulating among senior o∞cials at the National Economic Council and the Treasury. Even the language was similar. “A government seizure is inevitable,” it began. It noted the same accounting concerns, and even ended with a version of the same conclusion: “A fully government owned guarantor of mortgage debt might be exactly what is called for given the current housing crisis . . . without the need to satisfy a fiduciary duty to shareholders, BETHANY McLEAN COLUMBIA GLOBAL REPORTS Fannie might finally be able to perform its a≠ordable housing mission in a helpful and proactive manner.” The Monday a◊er the Barron’s story ran, Fannie’s stock fell 13 percent. Then, in mid-July, stories appeared in both the Wall Street Journal and the New York Times.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

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accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, Bretton Woods, British Empire, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, joint-stock company, Kenneth Rogoff, labour market flexibility, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, Plutocrats, plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce

Incredibly, products like option adjustable rate mortgages (ARMs) effectively allowed US homebuyers to borrow more than the value of the house; borrowers were allowed to pick their own interest rate, with any shortfall being added to the size of the loan. Potential homebuyers were allowed to borrow greater multiples of their income and, in some cases, not required to provide any proof of their income at all (so-called ‘liar loans’). There was a rapid rise in mortgage debt after the 1980s; in both the UK and the US, mortgage debt rose from a little over 30 per cent of GDP in 1983 to around 80 per cent by 2006. Surprisingly, mortgage debt-to-GDP ratios were even higher, at nearly 100 per cent of GDP, in Denmark and the Netherlands. Meanwhile, the world of unsecured credit changed irrevocably with the advent of the credit card. As we have already seen, consumer credit developed steadily through the nineteenth and early twentieth centuries. It was not until the late 1950s that credit cards emerged, giving consumers the ability to pay for a wide range of goods and services.

My father refused to have a credit card, cutting up an unsolicited version that arrived in the mail and returning it with a stern lecture on inflation. My favourite (possibly apocryphal) story of the 1930s was of the lady who bought a washing machine on hire purchase and refused to use it until all the instalments had been paid. Economists generally agree that consumer credit is very useful for the economy. Some countries have too little consumer debt. In Russia, for example, mortgage debt is just 3 per cent of GDP. The ability to borrow allows people to smooth consumption over their lifetime; families can borrow money when the children are young, and pay off the debt when they leave home. This should mean that consumption is less prone to sudden swings, and thus recessions less severe. The big change in the modern era has been for consumer credit to be supplied through the banking system.

So when the newly elected Obama administration reacted to the crisis in classic Keynesian fashion, unveiling a near $800 billion stimulus plan, it faced a wave of public opposition. The ‘tea party’ campaign took its name from the revolutionary movement that protested against British taxes by dumping tea in Boston harbour. It seems to have started with a rant by Rick Santelli, a correspondent for the CNBC financial channel, about a US government plan to help those with mortgage debts. The movement channelled a number of areas of public discontent. Apart from the unpopularity of the bank bailout, there was a general feeling that it was ‘un-American’ to use public money to bail out businesses, even the auto companies with their hundreds of thousands of employees, on the grounds that people should stand on their own two feet. In addition, the tea party members saw the bailout as a further sign of government intrusion into the economy – a trend that was exemplified by the Obama healthcare plan.


pages: 369 words: 94,588

The Enigma of Capital: And the Crises of Capitalism by David Harvey

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accounting loophole / creative accounting, anti-communist, Asian financial crisis, bank run, banking crisis, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business climate, call centre, capital controls, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, deskilling, equal pay for equal work, European colonialism, failed state, financial innovation, Frank Gehry, full employment, global reserve currency, Google Earth, Guggenheim Bilbao, illegal immigration, indoor plumbing, interest rate swap, invention of the steam engine, Jane Jacobs, joint-stock company, Joseph Schumpeter, Just-in-time delivery, land reform, liquidity trap, Long Term Capital Management, market bubble, means of production, megacity, microcredit, moral hazard, mortgage debt, new economy, New Urbanism, Northern Rock, oil shale / tar sands, peak oil, place-making, Ponzi scheme, precariat, reserve currency, Ronald Reagan, sharing economy, Silicon Valley, special drawing rights, special economic zone, statistical arbitrage, structural adjustment programs, the built environment, the market place, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, Thorstein Veblen, too big to fail, trickle-down economics, urban renewal, urban sprawl, white flight, women in the workforce

.: Limits to Growth 72 meat-based diets 73, 74 Medicare 28–9, 224 Mellon, Andrew 11, 98 mercantilism 206 merchant capitalists 40 mergers 49, 50 forced 261 Merrill Lynch 12 Merton, Robert 100 methane gas 73 Mexico debt crisis (1982) 10, 19 northern Miexico’s proximity to the US market 36 peso rescue 261 privatisation of telecommunications 29 and remittances 38 standard of living 10 Mexico City 243 microcredit schemes 145–6 microeconomics 237 microenterprises 145–6 microfinance schemes 145–6 Middle East, and oil issue 77, 170, 210 militarisation 170 ‘military-industrial complex’ 91 minorities: colonisation of urban neighbourhoods 247, 248 Mitterrand, François 198 modelling of markets 262 modernism 171 monarchy 249 monetarism 237 monetisation 244 money centralised money power 49–50, 52 a form of social power 43, 44 limitlessness of 43, 47 loss of confidence in the symbols/quality of money 114 universality of 106 monoculture 186 Monopolies Commission 52 monopolisation 43, 68, 95, 113, 116, 221 Monsanto 186 Montreal Protocol (1989) 76, 187 Morgan Stanley 19 Morishima, Michio 70 Morris, William 160 mortgages annual rate of change in US mortgage debt 7 mortgage finance for housing 170 mortgage-backed bonds futures 262 mortgage-backed securities 4, 262 secondary mortgage market 173, 174 securitisation of local 42 securitisation of mortgage debt 85 subprime 49, 174 Moses, Robert 169, 171, 177 MST (Brazil) 257 multiculturalism 131, 176, 231, 238, 258 Mumbai, India anti-Muslim riots (early 1990s) 247 redevelopment 178–9 municipal budgets 5 Museum of Modern Art, New York 21 Myrdal, Gunnar 196 N Nandigram, West Bengal 180 Napoleon III, Emperor 167, 168 national debt 48 National Economic Council (US) 11, 236 national-origin quotas 14 nationalisation 2, 4, 8, 224 nationalism 55–6, 143, 194, 204 NATO 203 natural gas 188 ‘natural limits’ 47 natural resources 30, 71 natural scarcity 72, 73, 78, 80, 83, 84, 121 nature and capital 88 ‘first nature’ 184 relation to 121, 122 ‘the revenge of nature’ 185 ‘second nature’ 184, 185, 187 as a social product 188 neocolonialism 208, 212 neoliberal counter-revolution 113 neoliberalism 10, 11, 19, 66, 131, 132, 141, 172, 175, 197, 208, 218, 224, 225, 233, 237, 243, 255 Nepal: communist rule in 226 Nevada, foreclosure wave in 1 New Deal 71 ‘new economy’ (1990s) 97 New Labour 45, 255 ‘new urbanism’ movement 175 New York City 11 September 2001 attacks 41 fiscal crisis (1975) 10, 172, 261 investment banks 19, 28 New York metropolitan region 169, 196 Nicaragua 189 Niger delta 251 non-governmental organisations (NGOs) 35, 253–4 non-interventionism 10 North Africa, French import of labour from 14 North America, settlement in 145 North American Free Trade Association (NAFTA) 200 Northern Ireland emergency 247 Northern Rock 2 Norway: Nordic cris (1992) 8 nuclear power 188 O Obama, Barack 11, 27, 34, 210 Obama administration 78, 121 O’Connor, Jim 77, 78 offshoring 131 Ogoni people 251 oil cheap 76–7 differential rent on oil wells 83 futures 83, 84 a non-renewable resource 82 ‘peak oil’ 38, 73, 78, 79, 80 prices 77–8, 80, 82–3, 261 and raw materials prices 6 rents 83 United States and 76–7, 79, 121, 170, 210, 261 OPEC (Organisation of Oil-Producing Countries) 83, 84 options markets currency 262 equity values 262 unregulated 99, 100 Orange County, California bankruptcy 100, 261 Organisation for Economic Cooperation and Development (OECD) 51 organisational change 98, 101 organisational forms 47, 101, 121, 127, 134, 238 Ottoman Empire 194 ‘over the counter’ trading 24, 25 overaccumulation crises 45 ozone hole 74 ozone layer 187 P Pakistan: US involvement 210 Palley, Thomas 236 Paris ‘the city of light’ 168 epicentre of 1968 confrontations 177, 243 Haussmann’s rebuilding of 49, 167–8, 169, 171, 176 municipal budget crashes (1868) 54 Paris Commune (1871) 168, 171, 176, 225, 243, 244 Partnoy, Frank: Ubfectious Greed 25 patents 221 patent laws 95 patriarchy 104 pensions pension funds 4, 5, 245 reneging on obligations 49 Péreire brothers 49, 54, 98, 174 pesticides 185, 186, 187 petty bourgeois 56 pharmaceutical sector 129, 245 philanthropy 44 Philippines: excessive urban development 8 Phillips, Kevin 206 Pinochet, General Augusto 15, 64 plant 58 Poland, lending to 19 political parties, radical 255–6 politics capitalist 76 class 62 co-revolutionary 241 commodified 219 depoliticised 219 energy 77 identity 131 labour organizing 255 left 255 transformative 207 pollution air 77 oceanic 74 rights 21 ‘Ponts et Chaussées’ organisation 92 Ponzi schemes 21, 114, 245, 246 pop music 245–6 Pope, Alexander 156 population growth 59, 72, 74, 121, 167 and capital accumulation 144–7 populism 55–6 portfolio insurance 262 poverty and capitalism 72 criminalisation and incarceration of the poor 15 feminisation of 15, 258 ‘Great Society’ anti-poverty programmes 32 Prague 243 prices commodity 37, 73 energy 78 food grain 79–80 land 8, 9, 182–3 oil 8, 28, 37–8, 77–8, 80, 82–3, 261 property 4, 182–3 raw material 37 reserve price 81–2 rising 73 share 7 primitive accumulation 58, 63–4, 108, 249 private consortia 50 private equity groups 50 private property and radical egalitarianism 233, 234 see also property markets; property rights; property values privatisation 10, 28, 29, 49, 251, 256, 257 pro-natal policies 59 production expansion of 112, 113 inadequate means of 47 investment in 114 liberating the concept 87 low-profit 29 offshore 16 production of urbanisation 87 reorganisation and relocation of 33 revolutionising of 89 surplus 45 technologies 101 productivity agreements 14, 60, 96 agricultural 119 cotton industry 67 gains 88, 89 Japan and West Germany 33 rising 96, 186 products development 95 innovation 95 new lines 94, 95 niches 94 profit squeeze 65, 66, 116 profitability constrains 30 falling 94, 131 of the financial sector 51 and wages 60 profits easy 15 excess 81, 90 falling 29, 72, 94, 116, 117 privatising 10 rates 70, 94, 101 realisation of 108 proletarianisation 60, 62 property markets crash in US and UK (1973–75) 8, 171–2, 261 overextension in 85 property market-led Nordic and Japanese bank crises 261 property-led crises (2007–10) 10, 261 real estate bubble 261 recession in UK (after 1987) 261 property rights 69, 81–2, 90, 122, 179, 198, 233, 244, 245 Property Share Price Index (UK) 7 property values 171, 181, 197, 248 prostitution 15 protectionism 31, 33, 43, 211 punctuated equilibrium theory of natural evolution 130 Putin, Vladimir 29, 80 Q Q’ing dynasty 194 quotas 16 R R&D (research and development) 92, 95–6 race issues 104 racism 61, 258 radical egalitarianism 230–34 railroads 42, 49, 191 Railwan, rise of (1970s) 35 rare earth metals 188 raw materials 6, 16, 37, 58, 77, 101, 113, 140, 144, 234 RBS 20 Reagan, Ronald 15, 64, 131, 141 Reagan-Thatcher counter revolution (early 1980s) 71 Reagan administration 1, 19 Reagan recession (1980–82) 60, 261 Real Estate Investment Trusts (US) 7 recession 1970s 171–2 language of 27 Reagan (1980–82) 60, 261 Red Brigade 254 reforestation 184 refrigeration 74 reinvestment 43, 45, 66–7, 110–12, 116 religious fundamentalism 203 religious issues 104 remittances 38, 140, 147 rentiers 40 rents differential rent 81, 82, 83 on intellectual property rights 221 land 182 monetisation of 48, 109 monopoly 51, 81–2, 83 oil 83 on patents 221 rising 181 reproduction schemas 70 Republican Party (US) 11, 141 reserve price 81 resource values 234 Ricardo, David 72, 94 risks, socialising 10 robbery 44 Robinson, Joan 238 robotisation 14, 136 Rockefeller, John D. 98 Rockefeller brothers 131 Rockefeller foundation 44, 186 Roman Empire 194 Roosevelt, Franklin D. 71 Rothschild family 98, 163 Royal Society 91, 156 royalties 40 Rubin, Robert 98 ‘rule of experts’ 99, 100–101 Russia bankruptcy (1998) 246, 261 capital flight crisis 261 defaults on its debt (1998) 6 oil and natural gas flow to Ukraine 68 oil production 6 oligarchs 29 see also Soviet Union S Saddam Hussein 210 Saint-Simon, Claude Henri de Rouvroy, Comte de 49 Saint-Simonians 87, 168 Salomon Brothers 24 Samuelson, Robert 235, 239 Sandino, Augusto 189 Sanford, Charles 98 satellites 156 savings 140 Scholes, Myron 100 Schumer, Charles 11 Schumpeter, Joseph 46 Seattle battle of (1999) 38, 227 general strike (1918) 243 software development in 195 Second World War 32, 168–70, 214 sectarianism 252 securitisation 17, 36, 42 Sejong, South Korea 124–6 service industries 41 sexism 61 sexual preferences issues 104, 131, 176 Shanghai Commune (1967) 243 shark hunting 73, 76 Shell Oil 79, 251 Shenzhen, China 36 shop floor organisers (shop stewards) 103 Silicon Valley 162, 195, 216 Singapore follows Japanese model 92 industrialisation 68 rise of (1970s) 35 slavery 144 domestic 15 slums 16, 151–2, 176, 178–9 small operators, dispossession of 50 Smith, Adam 90, 164 The Wealth of Nations 35 social democracy 255 ‘social democratic’ consensus (1960s) 64 social inequality 224 social relations 101, 102, 104, 105, 119, 121, 122, 123, 126, 127, 135–9, 152, 240 loss of 246 social security 224 social services 256 social struggles 193 social welfarism 255 socialism 136, 223, 228, 242, 249 compared with communism 224 solidarity economy 151, 254 Soros, George 44, 98, 221 Soros foundation 44 South Korea Asian Currency Crisis 261 excessive urban development 8 falling exports 6 follows Japanese model 92 rise of (1970s) 35 south-east Asia: crash of 1997–8 6, 8, 49, 246 Soviet Union in alliance with US against fascism 169 break-up of 208, 217, 227 collapse of communism 16 collectivisation of agriculture 250 ‘space race’ (1960s and 1970s) 156 see also Russia space domination of 156–8, 207 fixed spaces 190 ‘space race’ (1960s and 1970s) 156 Spain property-led crisis (2007–10) 5–6, 261 unemployment 6 spatial monopoly 164–5 special drawing rights 32, 34 special economic zones 36 special investment vehicles 36, 262 special purpose entities 262 speculation 52–3 speculative binges 52 speed-up 41, 42 stagflation 113 stagnation 116 Stalin, Joseph 136, 250 Standard Oil 98 state formation 196, 197, 202 state-corporate nexus 204 ‘space race’ (1960s and 1970s) 156 state-finance nexus 204, 205, 237, 256 blind belief in its corrective powers 55 ‘central nervous system’ for capital accumulation 54 characteristics of a feudal institution 55 and the current crisis 118 defined 48 failure of 56–7 forms of 55 fusion of state and financial powers 115 innovation in 85 international version of 51 overwhelmed by centralised credit power 52 pressure on 54 radical reconstruction of 131 role of 51 and state-corporate research nexus 97 suburbanisation 171 tilts to favour particular interests 56 statistical arbitrage strategies 262 steam engine, invention of 78, 89 Stiglitz, Joseph 45 stimulus packages 261 stock markets crash (1929) 211, 217 crashes (2001–02) 261 massive liquidity injections (1987) 236, 261 Stockton, California 2 ’structural adjustment’ programmes vii, 19, 261 subcontracting 131 subprime loans 1 subprime mortgage crisis 2 substance abuse 151 suburbanisation 73, 74, 76–7, 106–7, 169, 170, 171, 181 Summers, Larry 11, 44–5, 236 supermarket chains 50 supply-side theory 237 surveillance 92, 204 swaps credit 21 Credit Default 24, 262 currency 262 equity index 262 interest rate 24, 262 Sweden banking system crash (1992) 8, 45 Nordic crisis 8 Yugoslav immigrants 14 Sweezey, Paul 52, 113 ‘switching crises’ 93 systematic ‘moral hazard’ 10 systemic risks vii T Taipei: computer chips and household technologies in 195 Taiwan falling exports 6 follows Japanese model 92 takeovers 49 Taliban 226 tariffs 16 taxation 244 favouring the rich 45 inheritance 44 progressive 44 and the state 48, 145 strong tax base 149 tax rebates 107 tax revenues 40 weak tax base 150 ‘Teamsters for Turtles’ logo 55 technological dynamism 134 technologies change/innovation/new 33, 34, 63, 67, 70, 96–7, 98, 101, 103, 121, 127, 134, 188, 193, 221, 249 electronic 131–2 ‘green’ 188, 221 inappropriate 47 labour fights new technologies 60 labour-saving 14–15, 60, 116 ‘rule of experts’ 99, 100–101 technological comparative edge 95 transport 62 tectonic movements 75 territorial associations 193–4, 195, 196 territorial logic 204–5 Thailand Asian Currency Crisis 261 excessive urban development 8 Thatcher, Margaret, Baroness 15, 38, 64, 131, 197, 255 Thatcherites 224 ‘Third Italy’, Bologna 162, 195 time-space compression 158 time-space configurations 190 Toys ‘R’ Us 17 trade barriers to 16 collapses in foreign trade (2007–10) 261 fall in global international trade 6 increase in volume of trading 262 trade wars 211 trade unions 63 productivity agreements 60 and US auto industry 56 trafficking human 44 illegal 43 training 59 transport costs 164 innovations 42, 93 systems 16, 67 technology 62 Treasury Bill futures 262 Treasury bond futures 262 Treasury instruments 262 TRIPS agreement 245 Tronti, Mario 102 Trotskyists 253, 255 Tucuman uprising (1969) 243 Turin: communal ‘houses of the people’ 243 Turin Workers Councils 243 U UBS 20 Ukraine, Russian oil and natural gas flow to 68 ultraviolet radiation 187 UN Declaration of Human Rights 234 UN development report (1996) 110 Un-American Activities Committee hearings 169 underconsumptionist traditions 116 unemployment 131, 150 benefits 60 creation of 15 in the European Union 140 job losses 93 lay-offs 60 mass 6, 66, 261 rising 15, 37, 113 and technological change 14, 60, 93 in US 5, 6, 60, 168, 215, 261 unionisation 103, 107 United Fruit Company 189 United Kingdom economy in serious difficulty 5 forced to nationalise Northern Rock 2 property market crash 261 real average earnings 13 train network 28 United Nations 31, 208 United States agricultural subsidies 79 in alliance with Soviet Union against fascism 169 anti-trust legislation 52 auto industry 56 blockbusting neighbourhoods 248 booming but debt-filled consumer markets 141 and capital surplus absorption 31–2 competition in labour markets 61 constraints to excessive concentration of money power 44–5 consumerism 109 conumer debt service ratio 18 cross-border leasing with Germany 142–3 debt 158, 206 debt bubble 18 fiscal crises of federal, state and local governments 261 health care 28–9 heavy losses in derivatives 261 home ownership 3 housing foreclosure crises 1–2, 4, 38, 166 industries dependent on trade seriously hit 141 interventionism in Iraq and Afghanistan 210 investment bankers rescued 261 investment failures in real estate 261 lack of belief in theory of evolution 129 land speculation scheme 187–8 oil issue 76–7, 79, 80, 121, 170, 210, 261 population growth 146 proletarianisation 60 property-led crisis (2007–10) 261 pursuit of science and technology 129 radical anti-authoritarianism 199 Reagan Recession 261 rescue of financial institutions 261 research universities 95 the reversing origins of US corporate profits (1950–2004) 22 the right to the city movement 257 ‘right to work’ states 65 savings and loan crisis (1984–92) 8 secondary mortgage market 173 ‘space race’ (1960s and 1970s) 156 suburbs 106–7, 149–50, 170 train network 28 unemployment 5, 6, 60, 168, 215, 261 unrestricted capitalist development 113 value of US stocks and homes, as a percentage of GDP 22 and Vietnam War 171 wages 13, 62 welfare provision 141 ‘urban crisis’ (1960s) 170 urban ‘heat islands’ 77 urban imagineering 193 urban social movements 180 urbanisation 74, 85, 87, 119, 131, 137, 166, 167, 172–3, 174, 240, 243 US Congress 5, 169, 187–8 US Declaration of Independence 199 US National Intelligence Council 34–5 US Senate 79 US Supreme Court 179 US Treasury and Goldman Sachs 11 rescue of Continental Illinois Bank 261 V Vanderbilt family 98 Vatican 44 Veblen, Thorstein 181–2 Venezuela 256 oil production 6 Vietnam War 32, 171 Volcker, Paul 2, 236 Volcker interest rate shock 261 W wage goods 70, 107, 112, 162 wages and living standards 89 a living wage 63 national minimum wage 63 rates 13, 14, 59–64, 66, 109 real 107 repression 12, 16, 21, 107, 110, 118, 131, 172 stagnation 15 wage bargaining 63 Wal-Mart 17, 29, 64, 89 Wall Street, New York 35, 162, 200, 219, 220 banking institutions 11 bonuses 2 ‘Party of Wall Street’ 11, 20, 200 ‘War on Terror’ 34, 92 warfare 202, 204 Wasserstein, Bruce 98 waste disposal 143 Watt, James 89 wealth accumulation by capitalist class interests 12 centralisation of 10 declining 131 flow of 35 wealth transfer 109–10 weather systems 153–4 Weather Underground 254 Weill, Sandy 98 Welch, Jack 98 Westphalia, Treaty of (1648) 91 Whitehead, Alfred North 75 Wilson, Harold 56 wind turbines 188 women domestic slavery 15 mobilisation of 59, 60 prostitution 15 rights 176, 251, 258 wages 62 workers’ collectives 234 working hours 59 World Bank 36, 51, 69, 192, 200, 251 ‘Fifty Years is Enough’ campaign 55 predicts negative growth in the global economy 6 World Bank Development Report (2009) 26 World Trade Organisation (WTO) 200, 227 agreements 69 street protests against (Seattle, 1999) 55 TRIPS agreement 245 and US agricultural subsidies 79 WorldCom 8, 100, 261 worldwide web 42 Wriston, Walter 19 X X-rays 99 Y Yugoslavia dissolution of 208 ethnic cleansings 247 Z Zapatista revolutionary movement 207, 226, 252 Zola, Émile 53 The Belly of Paris 168 The Ladies’ Paradise 168

The rest of the world, hitherto relatively immune (with the exception of the United Kingdom, where analogous problems in the housing market had earlier surfaced such that the government had been forced to nationalise a major lender, Northern Rock, early on), was dragged precipitously into the mire generated primarily by the US financial collapse. At the epicentre of the problem was the mountain of ‘toxic’ mortgage-backed securities held by banks or marketed to unsuspecting investors all around the world. Everyone had acted as if property prices could rise for ever. By autumn 2008, near-fatal tremors had already spread outwards from banking to the major holders of mortgage debt. United States government-chartered mortgage institutions Fannie Mae and Freddie Mac had to be nationalised. Their shareholders were destroyed but the bondholders, including the Chinese Central Bank, remained protected. Unsuspecting investors across the world, from pension funds, small regional European banks and municipal governments from Norway to Florida, who had been lured into investing in pools of ‘highly rated’ securitised mortgages, found themselves holding worthless pieces of paper and unable to meet their obligations or pay their employees.

And capital invested in such projects has to be prepared to wait for returns over the long haul. This means either state involvement or a financial system robust enough to assemble the capital and deploy it with the desired long-term effects and wait patiently for the returns. This has usually meant radical innovations in the state–finance nexus. Since the 1970s, financial innovations such as the securitisation of mortgage debt and the spreading of investment risks through the creation of derivative markets, all tacitly (and now, as we see, actually) backed by state power, have permitted a huge flow of excess liquidity into all facets of urbanisation and built environment construction worldwide. In each instance innovation in the state–finance nexus has been a necessary condition for channelling surpluses into urbanisation and infrastructural projects (e.g. dams and highways).


pages: 440 words: 108,137

The Meritocracy Myth by Stephen J. McNamee

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affirmative action, Affordable Care Act / Obamacare, Bernie Madoff, British Empire, collective bargaining, computer age, conceptual framework, corporate governance, deindustrialization, delayed gratification, demographic transition, desegregation, deskilling, equal pay for equal work, estate planning, failed state, fixed income, gender pay gap, Gini coefficient, glass ceiling, helicopter parent, income inequality, informal economy, invisible hand, job automation, joint-stock company, labor-force participation, low-wage service sector, marginal employment, Mark Zuckerberg, mortgage debt, mortgage tax deduction, new economy, New Urbanism, obamacare, occupational segregation, pink-collar, Plutocrats, plutocrats, Ponzi scheme, post-industrial society, prediction markets, profit motive, race to the bottom, random walk, school choice, Scientific racism, Steve Jobs, The Bell Curve by Richard Herrnstein and Charles Murray, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, upwardly mobile, We are the 99%, white flight, young professional

In other words, mortgaged “home owners” don’t really “own” their homes until they pay off their mortgages, and almost one-third (30.9 percent) of mortgage holders now owe more on their homes than they are worth in today’s depressed housing market (Humphries 2012). In 1890, 72 percent of American home owners owned their own homes outright. By 1990, the corresponding figure had dropped to only 35 percent (Devaney 1994), then shrank again to only 29.3 percent by 2012 (Hopkins 2013). In short, more Americans live in “owner-occupied housing,” but a higher portion of them have gone into debt to do so. Mortgage debt reached crisis proportions in 2008, precipitating a general financial meltdown, record numbers of foreclosures and bankruptcies, as well as a series of bank failures leading to a massive $700 billion federal bailout. The uptick in home-ownership rates, as it turned out, was largely an illusion fueled by the housing bubble that produced unrealistic and unsustainable debt levels. Better Opportunities for the Next Generation Another aspect of the American Dream is the idea that each new generation will have a higher standard of living and better opportunities than the previous one.

The Great Recession With rapidly mounting public and private debt, the paper tiger eventually became a house of cards. By late 2007, the financial sector was on the edge of economic collapse, reminiscent of the banking collapse that triggered the Great Depression in 1929. The full explanation of the causes of the subsequent Great Recession is still being debated (Davies 2010; Fligstein and Goldstein 2011), but there is widespread consensus that it was immediately triggered by a massive mortgage debt crisis. Following the structural shifts in the economy associated with globalization and deindustrialization, the U.S. economy was kept partially afloat by the dot-com bubble of the 1980s and 1990s, which crashed in 2000, driving stock market prices down sharply. To help stimulate the economy in the aftermath of this downturn, the Federal Reserve reduced interest rates (the costs of money to lenders) to practically zero.

., 1.1-1.2 , 2.1-2.2 , 3 Countrywide financial corporation, 1 , 2 Creating a Class: College Admissions and the Education of Elites (Stevens), 1 credentials credential underemployment, 1 cultural credentials, 1 , 2 , 3 , 4 , 5 , 6 importance of, 1.1-1.2 , 2 , 3 inflation of, 1 , 2.1-2.2 , 3 nonvalidated, 1 opportunities to earn, 1 cultural capital acquisition of, 1.1-1.2 defined, 1 , 2 , 3 discrimination and, 1 , 2 educational inequalities, 1 , 2 , 3.1-3.2 , 4 , 5 , 6 , 7 elite circles, acceptance into, 1 employers impressed with, 1.1-1.2 government programs leveling field, 1 information access, 1 inheritance and, 1 , 2 media portrayals, 1 nouveau riche, 1 right attitude, 1 social climbing, 1.1-1.2 , 2 transmission settings, 1.1-1.2 U.S. presidents, exemplifying, 1.1-1.2 culture-of-poverty theory, 1.1-1.2 , 2 D debt as a coping strategy, 1.1-1.2 Great Recession, during, 1 , 2 , 3 housing/mortgage debt, 1 , 2 as a liability, 1 student loans, 1 , 2.1-2.2 democracy, 1 , 2.1-2.2 , 3.1-3.2 , 4 , 5 , 6 , 7 , 8.1-8.2 Democracy in America (de Tocqueville), 1.1-1.2 disabled Americans, 1.1-1.2 , 2 , 3 discrimination affirmative action as a remedy, 1.1-1.2 ageism, 1.1-1.2 , 2 American Dream, affecting, 1.1-1.2 , 2 , 3.1-3.2 , 4 , 5 , 6 , 7 , 8.1-8.2 , 9.1-9.2 , 10.1-10.2 , 11 continuing effects of, 1.1-1.2 , 2 the disabled, experiences of, 1.1-1.2 , 2 , 3 in education, 1 , 2.1-2.2 , 3.1-3.2 , 4.1-4.2 , 5 , 6 expansion of opportunity and, 1 heterosexist prejudices, 1.1-1.2 , 2 , 3 in-group solidarity, 1.1-1.2 institutional favoritism, 1.1-1.2 , 2 , 3.1-3.2 legal and political injustice, 1.1-1.2 , 2 , 3.1-3.2 occupational unfairness, 1 , 2 , 3.1-3.2 , 4 , 5 , 6 , 7 , 8 the physically attractive as favored, 1.1-1.2 racial bigotry, 1 , 2.1-2.2 , 3.1-3.2 , 4 , 5.1-5.2 , 6 , 7 , 8 reform movements combating, 1.1-1.2 , 2 religious intolerance, 1.1-1.2 , 2 , 3 , 4 residential inequity, 1.1-1.2 , 2 women, experiences of, 1 , 2 , 3 , 4 , 5.1-5.2 , 6.1-6.2 , 7.1-7.2 , 8.1-8.2 , 9.1-9.2 Domhoff, William, 1 , 2 Duncan, Otis Dudley, 1 E education affirmative action and, 1 , 2 African Americans, educational issues of, 1.1-1.2 , 2.1-2.2 , 3 American Dream, as part of, 1 , 2.1-2.2 , 3 , 4 , 5 , 6 cognitive elite and educational attainment, 1 credentials, importance of, 1.1-1.2 , 2 , 3 , 4.1-4.2 discrimination affecting, 1 , 2.1-2.2 , 3.1-3.2 , 4.1-4.2 , 5 , 6 educational endogamy, 1 government spending on, 1.1-1.2 , 2 human capital theory, 1 , 2 income affected by, 1 individualism, aiding in, 1 inequalities and, 1 , 2.1-2.2 , 3.1-3.2 , 4 , 5 , 6 , 7 , 8 , 9 occupational opportunities, linked to, 1 , 2.1-2.2 , 3.1-3.2 , 4.1-4.2 , 5 , 6.1-6.2 , 7.1-7.2 , 8.1-8.2 , 9.1-9.2 , 10 , 11.1-11.2 , 12 , 13.1-13.2 parental circumstances affecting, 1 , 2 , 3 , 4 , 5 , 6 school completion, 1 school quality and school funding, 1.1-1.2 social/cultural capital and, 1 , 2 , 3 , 4 , 5 , 6 , 7.1-7.2 , 8 , 9 , 10 , 11 success, as a factor in, 1 , 2 , 3 , 4 teacher salary discrepancies, 1 , 2 women and, 1.1-1.2 , 2 See also college T The Education-Jobs Gap (Livingstone), 1 E employment See occupations endogamy, 1.1-1.2 entrepreneurs and entrepreneurialism American respect for, 1 , 2 , 3 , 4 education vs., 1 , 2.1-2.2 entrepreneurial capitalists, 1 , 2 , 3 entrepreneurial traits, 1 , 2 franchisees not considered as entrepreneurs, 1 irregular economy, participation in, 1.1-1.2 luck as part of success, 1 , 2 random-walk hypothesis, 1 social capital, use of, 1 , 2 , 3 upward mobility, aiming for, 1 , 2 See also self-employment Etcoff, Nancy, 1.1-1.2 ethics See moral character F Forbes magazine income listings, 1.1-1.2 , 2.1-2.2 , 3 franchises, 1.1-1.2 , 2 free-market economy, 1.1-1.2 , 2 T The Frontier in American History (Turner), 1.1-1.2 F frontier influence in America, 1 , 2 , 3 , 4 functional theory of inequality, 1 G gambling, 1 , 2 , 3 , 4.1-4.2 , 5 Gates, Bill, 1 , 2 , 3 , 4.1-4.2 , 5 Gendall, Murray, 1 Gilded Age, 1 , 2 , 3 Gini coefficient, 1.1-1.2 Gladwell, Malcolm, 1 , 2 glass ceiling, 1 , 2 , 3.1-3.2 , 4 government programs education funding, 1 , 2 , 3 health care, 1 , 2 highway subsidies and suburb development, 1 , 2 home ownership, encouraging, 1 , 2 land giveaways, 1 the poor as targets of, 1 , 2 , 3 proposed asset-building policies, 1.1-1.2 “thousand points of light” as alternative, 1 transfer payment, 1 Granovetter, Mark, 1.1-1.2 Great Depression, 1 , 2 , 3 Great Recession African Americans affected by, 1 , 2 age discrimination during, 1 class issues resulting from, 1 debt and bankruptcies, rise of, 1.1-1.2 factors leading to, 1.1-1.2 home ownership during, 1.1-1.2 , 2 mortgage debt as contributor, 1 retirement delays caused by, 1 self-employment increase, 1 white-collar crime leading to, 1 H Hamermesh, Daniel S., 1.1-1.2 , 2 hard work beauty achieved through, 1 capitalism, associated with, 1 , 2 consumption as reward, 1 as determinant of inequality, 1 increased work hours as a coping strategy, 1.1-1.2 modest effects of, 1 self-made men and, 1 as a success factor, 1 , 2 , 3.1-3.2 , 4 , 5 , 6 health health care plans, 1.1-1.2 , 2 , 3 , 4.1-4.2 , 5 , 6 older workers, 1 wealth affecting, 1 , 2 , 3.1-3.2 , 4 , 5 Herrnstein, Richard, 1.1-1.2 , 2 hierarchy-of-needs theory, 1 , 2 higher education See college hiring practices, 1.1-1.2 , 2 , 3 Hispanics, 1 , 2 , 3 , 4 , 5 , 6 , 7 Hochschild, Jennifer, 1 hockey player success, 1.1-1.2 Home Advantage (Lareau), 1.1-1.2 home ownership, 1.1-1.2 , 2.1-2.2 , 3 , 4.1-4.2 homosexuality and discriminatory practices, 1.1-1.2 , 2 human capital, 1 , 2.1-2.2 , 3 , 4 , 5 , 6 I IBM, 1.1-1.2 immigrants, 1.1-1.2 , 2 , 3 , 4 , 5 , 6 , 7 individualism as culturally dominant, 1 democracy, expressed through, 1 , 2.1-2.2 as greatly valued, 1 , 2 immigrants and, 1.1-1.2 as part of the entrepreneurial personality, 1 pioneer spirit reinforcing, 1 through self-employment, 1 self-help books promoting, 1 inequalities charitable giving as a means of reducing, 1.1-1.2 conflict and functional theories of, 1.1-1.2 economic inequalities, 1 , 2 , 3 , 4.1-4.2 , 5 , 6 , 7 , 8 educational system and, 1 , 2.1-2.2 , 3.1-3.2 , 4 , 5 , 6 , 7 , 8 , 9 gender inequality, 1.1-1.2 government spending as a factor, 1 , 2 ideologies of, 1.1-1.2 labor unions working to reduce, 1 matrix of domination, 1 residential inequalities, 1 , 2 taxes and, 1.1-1.2 , 2 in wages and income, 1.1-1.2 , 2.1-2.2 , 3.1-3.2 , 4 , 5 , 6.1-6.2 in wealth, 1 , 2 , 3.1-3.2 , 4 , 5 , 6 , 7 , 8 , 9 inheritance advantages of wealth inheritance, 1 , 2.1-2.2 , 3 attitudes towards, 1 , 2 baby boomers and, 1.1-1.2 , 2 conflict theories, within, 1 cultural capital and, 1 , 2.1-2.2 , 3 , 4 domestic partnerships and, 1 estate and inheritance taxes, 1.1-1.2 , 2 of estates, 1 , 2 Forbes magazine, heirs listed in, 1.1-1.2 inequalities, perpetuating, 1 , 2 , 3 luck and, 1 as a natural right, 1 nepotism and, 1.1-1.2 as a nonmerit factor, 1.1-1.2 , 2 , 3 , 4 , 5 , 6 , 7 , 8 old money and, 1.1-1.2 parental motivation, 1.1-1.2 , 2 primogeniture, 1 relay race, compared to, 1 , 2.1-2.2 , 3 , 4 , 5 wealth distribution through, 1 women and inheritance of wealth, 1 In Praise of Nepotism: A Natural History (Bellow), 1.1-1.2 A An Inquiry into the Nature and Causes of the Wealth of Nations (Smith), 1 I integrity, 1 , 2.1-2.2 inter vivo transfers, 1.1-1.2 , 2 , 3 , 4 investments, economic, 1 , 2 , 3 , 4 , 5 , 6 , 7 , 8 , 9 , 10 , 11.1-11.2 , 12 , 13 IQ and IQ tests, 1.1-1.2 , 2.1-2.2 , 3 , 4 , 5 , 6 irregular economy, 1 , 2.1-2.2 , 3 , 4 J Jencks, Christopher, 1 , 2 jobs See occupations Jones, Janelle, 1.1-1.2 K Kildall, Gary, 1.1-1.2 Kozol, Jonathan, 1 L labor unions, 1 , 2 , 3.1-3.2 Lareau, Annette, 1.1-1.2 Lears, Jackson, 1 Lewis, Oscar, 1.1-1.2 Livingstone, David W., 1 , 2 lookism, 1 , 2 , 3 , 4 , 5 , 6 lottery, 1 , 2 , 3.1-3.2 , 4 lower class See working class luck denial of, 1.1-1.2 , 2 with gambling, 1 getting ahead, as a factor in, 1 , 2 , 3.1-3.2 lottery and, 1 , 2 as a nonmerit factor, 1 as part of capitalism, 1 in striking it rich, 1 , 2 wealth attainment and, 1 , 2.1-2.2 , 3 M marriage career interruptions due to, 1 marrying into money, 1 , 2 the poor and, 1 , 2.1-2.2 sexual discrimination and, 1.1-1.2 , 2 trailing partners and hiring practices, 1 upper class and, 1 , 2 , 3 , 4.1-4.2 , 5 Marx, Karl, 1 Maslow, Abraham, 1 , 2 Massey, Douglas S., 1 , 2 Matthew effect, 1 , 2 matrix of domination, 1.1-1.2 Medicare, 1 , 2.1-2.2 mentors, 1 , 2.1-2.2 , 3 , 4 , 5.1-5.2 meritocracy affirmative action and, 1 American promotion of merit, 1.1-1.2 , 2 , 3.1-3.2 , 4 , 5 , 6 coping strategies, 1 , 2 credentials, lack of as a barrier, 1.1-1.2 as a desired outcome, 1 discrimination as the antithesis of merit, 1.1-1.2 , 2.1-2.2 , 3 , 4 , 5 , 6 , 7.1-7.2 , 8 , 9.1-9.2 , 10 , 11 education as a merit filter, 1 , 2 , 3 , 4 , 5 , 6 , 7 , 8 , 9 , 10 , 11 , 12 employment opportunities, 1.1-1.2 , 2.1-2.2 , 3 entrepreneurial success, 1 fairness of the system, 1 , 2.1-2.2 , 3 , 4 , 5 folklore of, 1 government spending and, 1.1-1.2 , 2 in the hiring process, 1.1-1.2 , 2 human capital factors, 1 , 2 , 3 income based on merit, 1 inheritance as a nonmerit factor, 1 , 2.1-2.2 , 3 , 4 , 5.1-5.2 , 6 , 7.1-7.2 , 8 , 9 , 10 , 11 , 12 , 13.1-13.2 intergenerational wealth transfers, 1.1-1.2 legacy preferences as nonmerit based, 1.1-1.2 , 2 luck as a nonmerit factor, 1 , 2 , 3 , 4 , 5.1-5.2 market trends, 1.1-1.2 meritocratic aristocracy, 1.1-1.2 nepotism as nonmeritorious, 1.1-1.2 the new elite as extra-meritorious, 1 noblesse oblige increasing potential for, 1 nonmerit factors suppressing merit, 1 , 2 , 3 , 4 , 5 Barack Obama as example of, 1.1-1.2 , 2 the past, reverence for, 1 physical attractiveness as a nonmerit factor, 1 , 2 pure merit system, 1.1-1.2 reform movements and, 1 , 2 self-employment as an expression of, 1 social and cultural capital as nonmerit factors, 1.1-1.2 , 2 , 3 , 4.1-4.2 , 5.1-5.2 , 6 , 7 , 8.1-8.2 , 9 , 10 , 11 structural mobility and, 1.1-1.2 talents and abilities of the merit formula, 1 , 2 , 3 , 4 , 5 , 6 taxes and nonmerit advantages, 1.1-1.2 Mexican Americans and Mexican immigrants, 1 , 2 , 3 , 4 Microsoft, 1.1-1.2 middle class America as not middle class, 1 asset building, 1 cultural capital, 1.1-1.2 deferment of gratification, 1 education and, 1 , 2 , 3 Great Recession affecting, 1 home ownership, 1 inner cities, flight from, 1 , 2 Barack Obama, background of, 1.1-1.2 old class vs. new, 1.1-1.2 precarious status of, 1.1-1.2 sports choices of, 1 upper-middle class, 1 , 2 T The Millionaire Mind (Stanley), 1 M millionaires, 1 , 2 , 3 minority groups affirmative action, 1.1-1.2 , 2.1-2.2 asset accumulation, 1.1-1.2 core employment, underrepresentation in, 1 disadvantages of, 1 discrimination experiences, 1 , 2.1-2.2 , 3 , 4.1-4.2 , 5 , 6.1-6.2 , 7 , 8 , 9 , 10 education issues, 1.1-1.2 as inner city dwellers, 1 opportunities expanding, 1 , 2 , 3 self-employment and, 1 social capital, lack of, 1 , 2 , 3 moral character, 1.1-1.2 , 2 Mormons, 1 Murray, Charles, 1.1-1.2 , 2 , 3.1-3.2 Muslims, 1.1-1.2 N National College Athletic Association (NCAA), 1 nepotism, 1.1-1.2 , 2 net worth affirmative action and, 1 defined, 1 by income group, 1 of minority groups, 1 of Barack Obama family, 1 of one percenters, 1 , 2 , 3 of Walton heirs, 1.1-1.2 wealth scale, 1.1-1.2 new elite, 1 , 2.1-2.2 noblesse oblige, 1.1-1.2 O Obama, Barack, 1.1-1.2 , 2 , 3 , 4 Obama, Michelle, 1.1-1.2 occupations attitude as a factor, 1 , 2 blue-collar jobs, 1 , 2 , 3 , 4 , 5 CEO salaries, 1.1-1.2 , 2 changes in opportunities, 1.1-1.2 , 2 cultural capital and, 1.1-1.2 , 2 the disabled and employment difficulties, 1 discrimination, 1 , 2 , 3.1-3.2 , 4 , 5 , 6 , 7 downsizing, 1.1-1.2 , 2 , 3 , 4 , 5 , 6 education linked to, 1 , 2.1-2.2 , 3.1-3.2 , 4.1-4.2 , 5 , 6.1-6.2 , 7.1-7.2 , 8 , 9.1-9.2 , 10.1-10.2 , 11 , 12.1-12.2 , 13 , 14.1-14.2 fastest growing jobs, 1.1-1.2 , 2.1-2.2 health hazards, 1 nepotism and, 1 , 2 occupational mobility, 1.1-1.2 , 2 occupational segregation, 1 , 2.1-2.2 outsourcing, 1.1-1.2 , 2 , 3 , 4 , 5 , 6 physical attraction and occupational success, 1 self-employment and, 1 self-made men, 1.1-1.2 social capital and occupational opportunities, 1 , 2 , 3 , 4 wages, 1.1-1.2 , 2 , 3 , 4 , 5.1-5.2 , 6.1-6.2 , 7.1-7.2 , 8 white-collar jobs, 1 , 2 , 3 , 4 , 5 , 6 Occupy Wall Street (OWS), 1 old boy networks, 1 , 2 , 3.1-3.2 old money, 1.1-1.2 , 2.1-2.2 Outliers: The Story of Success (Gladwell), 1 , 2 outsourcing, 1.1-1.2 , 2 , 3 , 4 , 5 , 6 ownership class, 1 , 2 , 3 , 4 P Paterson, Tim, 1 Peale, Norman Vincent, 1.1-1.2 pensions, 1.1-1.2 , 2 , 3 , 4 , 5 , 6 pink-collar ghetto, 1.1-1.2 poverty children affected by, 1 , 2 culture-of-poverty theory, 1.1-1.2 , 2 full-time work below poverty level, 1 as a matter of attitude, 1 meritocracy and, 1 , 2 minority rates of, 1 , 2 poverty threshold, 1 regional variations in poverty rates, 1.1-1.2 , 2 senior citizens and poverty rates, 1 U.S. poverty rates, 1 T The Power of Positive Thinking (Peale), 1.1-1.2 P Protestants and the Protestant ethic, 1.1-1.2 , 2 , 3 , 4 , 5 Puritan values, 1.1-1.2 R racism and racial issues affirmative action, 1.1-1.2 athletes and, 1 crime and the legal system, 1.1-1.2 disabilities, disproportionate experience of, 1 discrimination and, 1 , 2.1-2.2 , 3.1-3.2 , 4 , 5.1-5.2 , 6 , 7 , 8 in education, 1.1-1.2 employment, affecting, 1 Great Recession worsening racial equality, 1 home ownership, 1 ideologies of inequality, as part of, 1 income gaps, 1 language skills and, 1 Obama, election of, 1 , 2 scientific racism, 1.1-1.2 segregation, 1 , 2.1-2.2 , 3 social capital and, 1 , 2 , 3 , 4 white flight, 1 , 2 random-walk hypothesis, 1 recession See Great Recession references, 1 , 2 , 3 retirement as part of the American Dream, 1 , 2 delayment as a coping strategy, 1 , 2.1-2.2 , 3 home ownership and funding of, 1 as jeopardized, 1 , 2.1-2.2 proposed supplementation, 1 self-employment and, 1 , 2 , 3 right attitude, 1 , 2.1-2.2 , 3 , 4 , 5 , 6 , 7 T The Rise of Meritocracy, 1870–2033:An Essay on Education and Equality (Young), 1 , 2 R Rivera, Lauren, 1 Rosenau, Pauline Vaillancourt, 1.1-1.2 S Schmitt, John, 1.1-1.2 schools See education segregation educational, 1 , 2 , 3 occupational, 1 , 2 , 3 , 4.1-4.2 racial, 1 , 2.1-2.2 , 3 , 4 , 5 residential, 1 , 2 , 3.1-3.2 of the wealthy, 1.1-1.2 white flight, 1 See also discrimination self-employment American Dream, as exemplifying, 1 franchises, 1 freelancing, 1 , 2 income, 1.1-1.2 irregular economy and, 1.1-1.2 , 2 , 3 , 4 petty bourgeoisie and, 1 psychological characteristics, 1 rates of, diminished, 1 , 2 , 3 , 4.1-4.2 , 5 , 6 , 7.1-7.2 , 8 risk, 1 , 2 , 3.1-3.2 , 4 subcontractors, 1 taxes, 1.1-1.2 , 2 women and minorities, 1.1-1.2 self-help books, 1 , 2 self-made individuals, 1 , 2 , 3 , 4.1-4.2 , 5 , 6 sexual harassment, 1.1-1.2 Shapiro, Thomas, 1 , 2.1-2.2 slaves and slavery, 1 , 2 , 3 , 4 , 5 , 6 , 7 small businesses, 1 , 2 , 3 , 4 , 5.1-5.2 , 6 , 7.1-7.2 , 8 , 9 Smith, Adam, 1 social capital benefits of, 1.1-1.2 , 2 defined, 1 , 2 , 3 discrimination and, 1 , 2 economic opportunities, having access to, 1 , 2 , 3 education and, 1 , 2 , 3 , 4 , 5 , 6 , 7 , 8 , 9 , 10 mentorship as a form of, 1 nepotism and, 1.1-1.2 , 2 racism and lack of, 1 , 2 , 3 , 4 restricted access, effects of, 1.1-1.2 , 2.1-2.2 social climbing, 1 , 2 , 3.1-3.2 , 4 of U.S. presidents, 1.1-1.2 weak ties, 1.1-1.2 social climbing, 1 , 2 , 3.1-3.2 , 4 social clubs, 1 , 2 , 3.1-3.2 social mobility athletic and artistic abilities, associated with, 1 , 2.1-2.2 , 3 cultural capital as a factor in, 1 education link, 1 , 2 , 3 hard work as a factor, 1 individual merit, 1 integrity hindering, 1.1-1.2 marrying for money, 1 reduction of opportunities, 1 , 2 during Republican administrations, 1 role of government, 1 , 2 social climbing, 1.1-1.2 , 2 status attainment, 1 through self-employment, 1 social reform movements, 1.1-1.2 Social Register, 1 social reproduction theory, 1.1-1.2 , 2 Social Security, 1.1-1.2 , 2 , 3 , 4 , 5.1-5.2 Something for Nothing: Luck in America (Lears), 1.1-1.2 T the South, 1 , 2.1-2.2 , 3 , 4 , 5 S Stanley, Thomas, 1 status-attainment theory, 1.1-1.2 Stevens, Mitchell, 1 stock market, 1 , 2 , 3 , 4 student loans, 1 , 2.1-2.2 success athletic success, 1 , 2.1-2.2 attitudes associated with, 1 , 2 , 3.1-3.2 birth timing and, 1.1-1.2 , 2 cultural capital, 1 , 2 , 3 , 4 discrimination, achieving success through, 1 education, as a factor in, 1 , 2 , 3 , 4 , 5 entrepreneurial success, 1 , 2 , 3 God’s grace, success as sign of, 1 , 2 hard work and, 1 , 2 , 3.1-3.2 , 4 , 5 human capital factors, 1 individualism as key to, 1 intelligence as a determinant, 1 luck as important, 1 meritocracy myth and, 1 mind-power ethic as success formula, 1.1-1.2 moral character and, 1 , 2 , 3.1-3.2 , 4 parental involvement, 1.1-1.2 , 2 , 3.1-3.2 the right stuff, being made of as key, 1.1-1.2 , 2.1-2.2 , 3 , 4 small businesses and, 1 social capital increasing likelihood of, 1 , 2 , 3 suburban living as marker of, 1 10,000 hour rule, 1 women and, 1 , 2 supply side, 1 , 2 , 3 , 4 , 5 , 6.1-6.2 Survival of the Prettiest (Etcoff), 1.1-1.2 Swift, Adam, 1.1-1.2 T talent and abilities American aristocracy, 1 American Dream, leading to, 1 of athletes and celebrities, 1 education enhancing, 1 , 2 , 3.1-3.2 functional theory of inequality, 1 jobs matched to talent, 1 success achieved through, 1 , 2 , 3 , 4 , 5 , 6 talent-use gap, 1 upward mobility and, 1 , 2.1-2.2 , 3.1-3.2 taxes capital gains, 1.1-1.2 estate taxes, 1 , 2 , 3.1-3.2 government policies linked with, 1 , 2 incentives and credits, 1.1-1.2 income taxes, lowered by Republicans, 1 irregular economy, avoiding, 1.1-1.2 progressive taxation, 1.1-1.2 , 2 , 3 , 4 property taxes and school funding, 1.1-1.2 self-employment and, 1.1-1.2 , 2 Social Security affected by, 1 , 2 the South and lower taxes, 1 tax breaks for the wealthy, 1 , 2 , 3 , 4.1-4.2 of urban areas, 1 , 2 Thurow, Lester, 1 , 2.1-2.2 Tocqueville, Alexis de, 1.1-1.2 , 2 tracking, 1 , 2.1-2.2 , 3 , 4 Turner, Frederick Jackson, 1.1-1.2 U Unequal Childhoods (Lareau), 1 upper class charitable giving and, 1 cultural capital, holders of, 1 , 2 , 3.1-3.2 , 4.1-4.2 , 5 deferred gratification, capability of, 1 distinctive lifestyle, 1.1-1.2 , 2 education, 1 , 2 endogamy, tendency towards, 1.1-1.2 as exclusive, 1.1-1.2 , 2 as isolated, 1.1-1.2 one percenters as members, 1 Plymouth Puritans as wellspring, 1 political power, 1.1-1.2 social clubs, frequenting, 1.1-1.2 virtues found in, 1 WASP background of, 1 women of, 1 , 2 , 3 upward mobility attitudes as affecting, 1 barriers to, 1 through college education, 1 credentialism and, 1 downward mobility, vs., 1 through entrepreneurialism, 1 glass ceiling as limiting, 1 integrity as suppressing, 1.1-1.2 irregular economy, as avenue, 1 marriage as a means of, 1.1-1.2 Michelle Obama as example, 1 slowing rates of, 1 See also social climbing See also social mobility V Vedder, Richard, 1 , 2 virtue, 1.1-1.2 , 2 , 3 , 4 , 5 , 6 , 7 W Walmart, 1 Walton, Sam, 1 , 2 , 3 wealth accumulation gaps, 1 , 2 , 3 advantages of wealth inheritance, 1 , 2.1-2.2 capital investments, 1 charitable giving and the wealthy, 1 , 2.1-2.2 culture of, 1 , 2 discrimination and, 1 , 2 distribution as skewed, 1.1-1.2 Forbes magazine listings, 1.1-1.2 gambling, attainment through, 1 government intervention, 1.1-1.2 , 2 Great Recession affecting, 1 guilt feelings, 1.1-1.2 hard work as negligible, 1 inequalities of, 1 , 2 , 3.1-3.2 , 4 , 5 , 6 , 7 , 8 , 9 lottery, wealth attainment through, 1 luck as a factor, 1 , 2.1-2.2 , 3 marriage rates, affecting, 1 nepotism aiding in transference of, 1 old money, 1.1-1.2 , 2.1-2.2 one percenters, 1 , 2 , 3 , 4 , 5 ostentatious displays of, 1 political power, 1.1-1.2 property ownership producing, 1 , 2 pursuit of as a moral issue, 1.1-1.2 , 2 race affecting, 1 social and cultural capital, converted to, 1 , 2 the superwealthy, 1 , 2 , 3 , 4.1-4.2 tax breaks for the wealthy, 1 taxes on, 1.1-1.2 transfers of, 1.1-1.2 , 2 , 3.1-3.2 women and, 1 See also inheritance See also self-employment Weber, Max, 1.1-1.2 welfare, 1 , 2 , 3 , 4 , 5 , 6 , 7 white Anglo-Saxon Protestants (WASPs), 1.1-1.2 , 2 white-collar crime, 1.1-1.2 , 2 Wilson, William Julius, 1 , 2 Winfrey, Oprah, 1.1-1.2 Wisconsin school, 1.1-1.2 women attractiveness as a success factor, 1 , 2 , 3.1-3.2 discrimination against, 1 , 2 , 3 , 4 , 5.1-5.2 , 6.1-6.2 , 7.1-7.2 , 8.1-8.2 , 9.1-9.2 , 10 economic disparities, 1 , 2 , 3.1-3.2 educational attainment, 1.1-1.2 , 2 family concerns, 1.1-1.2 , 2.1-2.2 , 3.1-3.2 glass ceiling, experiencing, 1 , 2 , 3.1-3.2 , 4 inferiority, feelings of, 1.1-1.2 labor force participation, increasing, 1.1-1.2 , 2 mentorships, access to, 1 , 2.1-2.2 occupational disparities, 1 , 2 , 3.1-3.2 , 4.1-4.2 , 5.1-5.2 political underrepresentation, 1.1-1.2 self-employment and, 1.1-1.2 as trailing partners, 1 of the upper class, 1 , 2 , 3 working class American Dream and, 1 cultural capital, lack of, 1.1-1.2 , 2 economic instability, 1.1-1.2 education issues, 1 , 2 , 3 hard work and, 1 health risks, 1 home ownership, 1 lower class value stretch, 1 nepotism, effect of, 1 the new lower class, 1 women and incomes, 1 work See hard work See occupations Y Young, Michael, 1 , 2 About the Authors Stephen J.


pages: 586 words: 159,901

Wall Street: How It Works And for Whom by Doug Henwood

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accounting loophole / creative accounting, affirmative action, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, capital asset pricing model, capital controls, central bank independence, corporate governance, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, dematerialisation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, interest rate swap, Internet Archive, invisible hand, Isaac Newton, joint-stock company, Joseph Schumpeter, kremlinology, labor-force participation, late capitalism, law of one price, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, Louis Bachelier, market bubble, Mexican peso crisis / tequila crisis, microcredit, minimum wage unemployment, moral hazard, mortgage debt, mortgage tax deduction, oil shock, payday loans, pension reform, Plutocrats, plutocrats, price mechanism, price stability, prisoner's dilemma, profit maximization, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

Official statisticians argue that they are trying to separate the consumption and investment aspects of housing; though people do speculate in primary residences, hoping to make a killing on a well-timed purchase or sale, most of these gains are rolled into the acquisition of a new house. FoF accountants, free of the prejudice that only businesses invest, continue to treat housing purchases as investment, but shift most activity to the household sector. One practical advantage of this is to expose the sharp increase in mortgage debt relative to the underlying value of the housing. In 1945, home mortgages outstanding were 14% of the value of all owner-occupied housing; this rose steadily to 34% in 1965, fell gently into the high 20s in the late 1970s and early 1980s, and then rose with hardly a pause to a record 43% in 1997. Almost certainly, this long rise helped bring about the steady inflation in housing prices — though rising house prices are, in mainstream discourse, taken as a sign of a healthy market; in the words of the late FNN credit market analyst Ed Hart, "housing inflation is the American national religion."

WALL STREET But unless people are willing to sell their houses, or turn them over to the bank, that equity is even more purely fictitious than a stock option, especially if house prices are stagnant or declining. If the owner-occupier loses his or her job, the inadequacy of the home as capital asset comes quickly clear: it demands cash without producing any in return. You can't pay the mortgage banker with imputed rent. Or as the Fed puts it, the increase in mortgage debt has been "unrelated to new capital formation" (Federal Reserve Board 1980, p. 31), a formulation that if carried to the extreme suggests inflation, insolvency, or some unpleasant combination of both as its ultimate resolution. Carried short of that apocalyptic resolution, it suggests strains on personal housing budgets for all but the most affluent. Another officially defined asset of the household sector that looks less impressive on closer scrutiny is private pension funds.

But because of the decline in real hourly wages, and the stagnation in household incomes, the middle and lower classes have borrowed more to stay in place; they've borrowed from the very rich who PLAYERS have gotten richer. The rich need a place to earn interest on their surplus funds, and the rest of the population makes a juicy lending target. Just how this works out can be seen in data from the 1983 survey, unfortunately, the Fed didn't publish the 1995 survey data in sufficient detail. In 1983, leaving aside the primary residence and mortgage debt on it, over half of all families were net debtors, and fewer than 10% accounted for 85% of the household sector's net lending (Avery et al. 1984). As William Greider (1987, p. 39) put it, the few lend to the many. At the end of 1997, U.S. households spent $1 trillion, or 17% of their after-tax incomes, on debt service — just a smidgen below 1989's record of 17.4% (unpublished Federal Reserve staff estimates).


pages: 393 words: 115,263

Planet Ponzi by Mitch Feierstein

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Affordable Care Act / Obamacare, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Bernie Madoff, centre right, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, disintermediation, diversification, Donald Trump, energy security, eurozone crisis, financial innovation, financial intermediation, Flash crash, floating exchange rates, frictionless, frictionless market, high net worth, High speed trading, illegal immigration, income inequality, interest rate swap, invention of agriculture, Long Term Capital Management, moral hazard, mortgage debt, Northern Rock, obamacare, offshore financial centre, oil shock, pensions crisis, Plutocrats, plutocrats, Ponzi scheme, price anchoring, price stability, purchasing power parity, quantitative easing, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, too big to fail, trickle-down economics, value at risk, yield curve

I’m not going to reprint Cayne’s outburst here, but unshockable readers can expand their vocabulary by checking out Heidi Moore, ‘Bear Stearns’ Jimmy Cayne’s profane tirade against Treasury’s Geithner,’ Wall Street Journal, March 4, 2009. For Cayne’s compensation, see Forbes, ‘CEO compensation for James E. Cayne,’ May 3, 2007. 8 Data available from the Federal Reserve. Go to the website (www.federalreserve.gov) and search for ‘Mortgage debt outstanding.’ 9 John Gittelsohn, ‘Shiller says U.S. home-price declines of 10% to 25% “wouldn’t surprise me”,’ Bloomberg, June 9, 2011. 10 ‘Rooms with a view,’ The Economist, July 7, 2011. 11 Mortgage data from European Mortgage Federation. Go to the website (www.hypo.org), click on ‘Facts and figures,’ then look for ‘Value of mortgage debt.’ The data in the table are for 2009, the most recent figures available. I’ve used an exchange rate of €1 = $1.371 to convert to US dollars. 12 Tracy Alloway, ‘Under-reported – and non-performing – assets at US banks,’ Financial Times, ‘Alphaville’ blog, June 17, 2011.

On the contrary, any sane person in 1990 would have wondered why the heck government debt in America stood at 57% of GDP. We’d just won the Cold War, the economy was on a roll: debt should have been trending down to zero. Likewise, at the end of the 1980s, a decade when leveraged buyouts were all the rage on Wall Street, people were anxious that corporations had taken on so much debt that investment and growth would be inevitably impaired. People were worried about the incessant increases in credit card and mortgage debt, and the changes in culture that went along with that increase. These worries were neither flippant nor ill-founded. They were the right ones to have. Trouble is, our policymakers and regulators didn’t respond when it would have been easy and relatively costless to do so. They were too toothless, too inert, too dumb, too cowardly. The result: a train which could have been braked gently to a halt can now only be halted by blowing up the track, with all the ugly consequences that will involve.

The financial sector in Britain wasn’t as utterly out of control as its counterpart in the US‌—‌no subprime horrors, no CDOs of CDOs‌—‌but being ‘better managed than Wall Street’ is hardly a badge of managerial excellence. On pretty much every metric you care to look at, Britain has too much debt. Too much government debt. Too much household debt. Too many large and leveraged banks. Way too much mortgage debt. Even its corporations are too ready to borrow. Having said all that, however, Britain is still in better shape than the troubled economies of southern Europe. It doesn’t have the hideous government debt of Greece or Italy. It doesn’t have the structural rigidities of Spain. It’s still Europe’s chief magnet for inward investment. It remains a good place to do business, ranking tenth in the World Economic Forum’s annual competitiveness survey (neck and neck with the US, Germany, and Japan).3 What’s more, the country isn’t in the eurozone.


pages: 288 words: 16,556

Finance and the Good Society by Robert J. Shiller

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bank run, banking crisis, barriers to entry, Bernie Madoff, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, cognitive dissonance, collateralized debt obligation, collective bargaining, computer age, corporate governance, Daniel Kahneman / Amos Tversky, Deng Xiaoping, diversification, diversified portfolio, Donald Trump, Edward Glaeser, eurozone crisis, experimental economics, financial innovation, full employment, fundamental attribution error, George Akerlof, income inequality, invisible hand, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, land reform, loss aversion, Louis Bachelier, Mahatma Gandhi, Mark Zuckerberg, market bubble, market design, means of production, microcredit, moral hazard, mortgage debt, Occupy movement, passive investing, Ponzi scheme, prediction markets, profit maximization, quantitative easing, random walk, regulatory arbitrage, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, self-driving car, shareholder value, Sharpe ratio, short selling, Simon Kuznets, Skype, Steven Pinker, telemarketer, The Market for Lemons, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, Vanguard fund, young professional, Zipcar

Another puzzle also presented itself in those days: why did the RMBS market become so important, when people had seen no need for it before the 1970s? We know that securitizers were creating new investment vehicles based on mortgages. But what is the di erence, really, whether one invests in RMBSs or in shares in banks that own mortgages, as was the practice before Freddie and Fannie started issuing these? Securitization was indeed never really popular in most parts of the world. The movement toward securitization of home mortgage debt became particularly strong in the United States thanks to powerful impetus from government support. But, lacking the subsidy e ectively given by the U.S. government via Fannie Mae and Freddie Mac, mortgage securitization has not been common anywhere else.6 Before the crisis of 2007 nance theorists saw clear innovation in mortgage securitization. Securitized mortgages are, in the abstract, a way of solving an information asymmetry problem—more particularly the problem of “lemons.”

Claire Hill, in her article “Securitization: A Low-Cost Sweetener for Lemons,” written before the crisis, argued persuasively that an important reason the securitization and CDO market can function well is that it helps solve the lemons problem.9 Bundling mortgages into securities that are evaluated by independent rating agencies, and dividing up a company’s securities into tranches that allow specialized evaluators to do their job, e ciently lowers the risk to investors of getting stuck with lemons. They should be able to trust the higher-tranche CDOs more than any pool of mortgages or any share in a complex and difficult-to-understand mortgage-lending institution. So there was a valid theory as to why the splitting of securitized mortgage debt into tranches was a good idea. Of course it turns out not to have worked superbly well in practice, but this is largely because of the erroneous assumption noted earlier—that everyone, including the rating agencies, thought home prices just couldn’t fall. That mistake, and not any flaw in the logic of Claire Hill’s theory, was the real problem. And that is the problem that so often plagues nance.

The extent to which they can advertise and the kind of lending schemes that regulators allow di er signi cantly from one country to another. Hence there are massive di erences across countries in average levels of indebtedness, and in propensity to save and build wealth. Leverage in the U.S. Financial Crisis of 2007 During the boom in the United States just prior to the severe nancial crisis, between 2001 and 2007, household debt, including mortgage debt and credit card debt, doubled from $7 trillion to $14 trillion. Household debt as a fraction of income rose to a level not seen since the onset of the Great Depression. After the decline in home prices began, strapped households began to curtail their consumption, setting a course toward a severe recession. The United States has in recent decades had a low savings rate, and in the years just before the crisis the personal savings rate was just about zero.


pages: 222 words: 70,559

The Oil Factor: Protect Yourself-and Profit-from the Coming Energy Crisis by Stephen Leeb, Donna Leeb

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Buckminster Fuller, diversified portfolio, fixed income, hydrogen economy, income per capita, index fund, mortgage debt, North Sea oil, oil shale / tar sands, oil shock, peak oil, profit motive, reserve currency, rising living standards, Ronald Reagan, shareholder value, Silicon Valley, Vanguard fund, Yom Kippur War, zero-coupon bond

This will be a tremendous push toward further inflation. In essence, inflation will beget further inflation as policymakers find their hands tied by the existence of so much consumer debt. Home Sweet Home A major portion of total consumer debt—about 70 percent—is in the form of home mortgages, whose growth is displayed in figure 5c, “Mortgage Debt Outstanding.” According to the Federal Reserve, nonmortgage debt (credit cards, bank loans, etc.) payment as a percentage of disposable income has declined since 1980. During the same period, mortgage debt payments, as figure 5c shows, have risen by over 40 percent. There’s a good reason why homes account for so much of overall consumer debt—banks are more willing to lend money for a home than for almost anything else. That’s because a home is a tangible and enduring piece of property, one, in fact, whose value is likely to increase over time.

List of Figures Oil in the 1990s (figure 1a) Oil Prices and the S&P 500 (figure 2a) Following Oil vs. Holding the S&P 500 (figure 2b) Oil’s Buy and Sell Signals (figure 2c) Our Ongoing Oil Habit (figure 2d) Declining Domestic Oil Production (figure 3a) Declining Saudi GDP (figure 3b) Real Oil Prices, 1949-2002 (figure 4a) Debt as Percentage of GDP (figure 5a) Soaring Bankruptcy Petitions (figure 5b) Mortgage Debt Outstanding (figure 5c) Natural Gas Prices (figure 6a) Government Spending and the CPI, 1901-2002 (figure 8a) Energy and Inflation (figure 9a) Inverse Relationship (figure 9b) Inflation and Markets (figure 10a) Sailing Through the 1970s (figure 10b) Silver (figure 13a) Palladium (figure 13b) Defense Expenditures (figure 14a) Weather-Related Woes (figure 15a) Bonds in the Depression (figure 17a) Defying the Market Portfolio Performance (figure 18a) Model Portfolios (figure 18b) Preface Investing is a tough business, whether you do it simply for your own account or professionally.

J.K. Lasser's New Tax Law Simplified: Tax Relief From the HIRE Act, Health Care Reform, and More by Barbara Weltman

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Affordable Care Act / Obamacare, Bernie Madoff, employer provided health coverage, estate planning, Home mortgage interest deduction, mortgage debt, Ponzi scheme

Alert This break does not apply after 2009 unless Congress extends it; check the Supplement for details. 7 P1: OTA/XYZ P2: ABC c01 JWBT413/Weltman 8 October 14, 2010 14:0 Printer Name: Yet to Come NEW RULES FOR YOUR HOME AND FAMILY Emergency Responders Volunteer firefighters and emergency medical responders can exclude from their income state or local property tax benefits up to $30 per month (a maximum of $360 per year). The benefit can be in the form of a tax reduction or tax rebate. In most places, the tax break is tied to home ownership in the form of a property tax reduction or rebate. Alert This break runs only for 2008, 2009, and 2010, unless it is extended; check the Supplement for details. Cancellation of Mortgage Debt You may be “underwater” with your mortgage (what you owe is more than your home is now worth). If some or all of the remaining balance on the loan is forgiven because of a foreclosure, a mortgage workout, or a short sale (which avoids the need for foreclosure), the amount forgiven usually is treated as taxable income. However, under a special rule for a principal residence, such debt forgiveness is not taxable.

See High-deductible health plan (HDHP) Head of household, tax rate schedule, 114 Health care, expiring tax laws, 166–167 Health coverage: children under 27, 23–24 displaced workers, credit, 35 enhanced credit, 166 health insurance premium assistance credit, 23 mandatory, 21–22 planning strategies, 22–23 on W-2 form, 24 Health coverage credit, displaced workers, 35–36 Health reimbursement accounts (HRAs), 29–30 Health savings accounts (HSAs): eligibility for, 28 HDHP limits for 2010/2011, 28 online planning tools, 171 planning strategies, 28–29 triple tax benefit, 27 High-deductible health plan (HDHP), 27, 28 High-income taxpayers: additional Medicare tax, 100, 148–149 itemized deductions and, 168 personal and dependency exemptions, 10 High-low substantiation rates, 137 Hiring incentives, 139–143 Home: energy credits, 6–7 energy improvements, 165–166 expiring tax laws, 165–166 loss on sale of residence, 9 mortgage debt cancellation, 8–9 online planning tools, 171 Homebuyers’ tax credit: amount/expiration date of, 165 claiming of, 4–5 conditions to meet, 2 deadline/occupancy dates, 1–2 MAGI and, 2–3 planning strategies, 6 recapture, 5 types of, 2 Home office deduction, 139 Hope credit, 36, 37 Household employees, 18–19 HSAs. See Health savings accounts (HSAs) Hybrid cars. See Plug-in electric vehicles Incentives for hiring new employees: D.C. enterprise zone credit, 142 empowerment zone credit, 142 Indian employment credit, 142–143 payroll tax holiday, 140 renewal community employment credit, 142 retained worker business credit, 140–141 tax credit for, 139–140 wage differential payments credit, 143 work opportunity credit, 141–142 Incentive stock options (ISOs), 118–119 Incidental travel.

See also Flexible spending accounts (FSAs) adjusted gross income and, 24 cosmetic surgery, 25 deductible, examples of, 25 long-term care insurance/riders, 26–27 medical driving, 25–26 nondeductible, examples of, 25 pretax basis (see Flexible spending accounts (FSAs)) Medicare Part B coverage: itemized deductions and, 32 planning strategies, 31–33 premiums for, 31 Medicare tax. See also FICA additional, in 2013, 18, 91, 100, 148–149 paying additional tax, 100–101 planning strategies, 101 self-employment tax and, 150 Mid-quarter convention, 130–131 Mileage. See Standard mileage rate Military personnel, combat pay exclusion, 12 Modified adjusted gross income (MAGI), 2–3 Mortgage debt: debt, cancellation of, 8–9 insurance premiums, 165 Moving expenses, 9–10 Multiyear items, deduction for, 125 “Nanny tax,” 18–19 Net operating loss, 86 Net operating loss (NOL), 128, 129, 131 NOL. See Net operating loss (NOL) Nondeductible IRAs, 49 Office supplies, 124–125 Online planning tools: business, 173 estate tax, 174 health care/education, 172 home/family, 171 investment opportunities, 172 job, 173 miscellaneous, 173 retirement planning, 172 PAL.


pages: 287 words: 81,970

The Dollar Meltdown: Surviving the Coming Currency Crisis With Gold, Oil, and Other Unconventional Investments by Charles Goyette

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bank run, banking crisis, Ben Bernanke: helicopter money, Berlin Wall, Bernie Madoff, Bretton Woods, British Empire, Buckminster Fuller, California gold rush, currency manipulation / currency intervention, Deng Xiaoping, diversified portfolio, Elliott wave, fiat currency, fixed income, Fractional reserve banking, housing crisis, If something cannot go on forever, it will stop, index fund, Lao Tzu, margin call, market bubble, McMansion, money: store of value / unit of account / medium of exchange, mortgage debt, oil shock, peak oil, pushing on a string, reserve currency, rising living standards, road to serfdom, Ronald Reagan, Saturday Night Live, short selling, Silicon Valley, transaction costs

Despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government’s policy of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing. Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary, but painful market corrections will only deepen the inevitable fall.

The debt grows from year to year with no expectation that it will ever be paid off. There is only the expectation that payment for today’s consumption can be rolled forward interminably. No one who buys a government bond today expects that it will be paid at maturity except by the issuance of another bond tomorrow. In fact, this facile dismissal—“we owe it to ourselves”—could have been made about America’s escalating mortgage debt before the house of cards collapsed. In any event, it can’t be said we owe the national debt to ourselves any longer. We are increasingly dependent on foreigners whose holdings are now more than 25 percent of our national debt, double what it was twenty years ago. On average, a family of four is paying more than $130 per month just in interest to foreign holders of American debt. Meanwhile “We owe it to ourselves” is being supplanted by a new talking point.

With perfect knowledge these technocrats could allocate resources and labor in the most efficient means possible, much like managing the power output of a hydroelectric dam or maximizing the speed of a steam locomotive. One need only remember the fabled Goldilocks economy of previous Federal Reserve chairman Alan Greenspan, the Maestro: “It was not too hot and not too cold, but just right!” Of course, Greenspan also admits he didn’t “get it” about the housing bubble until very late, in 2005 and 2006, despite home mortgage debt growing from $1.8 trillion to $8 trillion during his tenure. Nor did he foresee the stock market bubble before it popped in 2000. And he somehow missed the recession of the early 1990s. Greenspan’s successor, Ben Bernanke, didn’t get it either. As chairman of the President’s Council of Economic Advisers in October 2005, he told Congress that he wasn’t concerned about a housing bubble. A year and a half later, in March 2006, deep into the mortgage meltdown, he testified as Fed chairman that problems in the subprime market were “contained.”


pages: 471 words: 124,585

The Ascent of Money: A Financial History of the World by Niall Ferguson

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Admiral Zheng, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, Corn Laws, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, German hyperinflation, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, interest rate swap, Isaac Newton, iterative process, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour mobility, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Naomi Klein, Nick Leeson, Northern Rock, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, structural adjustment programs, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, too big to fail, transaction costs, value at risk, Washington Consensus, Yom Kippur War

Even if they run away, the house can’t. As the Germans say, land and buildings are ‘immobile’ property. So it is no coincidence that the single most important source of funds for a new business in the United States is a mortgage on the entrepreneur’s house. Correspondingly, financial institutions have become ever less inhibited about lending money to people who want to buy property. Since 1959, the total mortgage debt outstanding in the US has risen seventy-five fold. Altogether, American owner-occupiers owed a sum equivalent to 99 per cent of US gross domestic product by the end of 2006, compared with just 38 per cent fifty years before. This upsurge in borrowing helped to finance a boom in residential investment, which reached a fifty-year peak in 2005. For a time, the supply of new housing seemed unable to keep pace with accelerating demand.

Because these changes tended to reduce the average monthly payment on a mortgage, the FHA made home ownership viable for many more Americans than ever before. Indeed, it is not too much to say that the modern United States, with its seductively samey suburbs, was born here. From the 1930s onwards, then, the US government was effectively underwriting the mortgage market, encouraging lenders and borrowers to get together. That was what caused property ownership - and mortgage debt - to soar after the Second World War, driving up the home ownership rate from 40 per cent to 60 per cent by 1960. There was only one catch. Not everyone in American society was entitled to join the property-owning party. In 1941 a real estate developer built a six-foot high wall right across Detroit’s 8 Mile district. He had to build it to qualify for subsidized loans from the Federal Housing Administration.

For the majority of mortgages continued to enjoy an implicit guarantee from the government-sponsored trio of Fannie, Freddie or Ginnie, meaning that bonds which used those mortgages as collateral could be represented as virtually government bonds, and hence ‘investment grade’. Between 1980 and 2007 the volume of such GSE-backed mortgage-backed securities grew from $200 million to $4 trillion. With the advent of private bond insurers, firms like Salomon could also offer to securitize so-called non-conforming loans not eligible for GSE guarantees. By 2007 private pools of capital sufficed to securitize $2 trillion in residential mortgage debt.52 In 1980 only 10 per cent of the home mortgage market had been securitized; by 2007 it had risen to 56 per cent.ar It was not only human vanities that ended up on the bonfire that was 1980s Wall Street. It was also the last vestiges of the business model depicted in It’s a Wonderful Life. Once there had been meaningful social ties between mortgage lenders and borrowers. Jimmy Stewart knew both the depositors and the debtors.


pages: 363 words: 107,817

Modernising Money: Why Our Monetary System Is Broken and How It Can Be Fixed by Andrew Jackson (economist), Ben Dyson (economist)

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bank run, banking crisis, banks create money, Basel III, Bretton Woods, call centre, capital controls, cashless society, central bank independence, credit crunch, David Graeber, debt deflation, double entry bookkeeping, eurozone crisis, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, informal economy, land reform, London Interbank Offered Rate, market bubble, market clearing, Martin Wolf, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Northern Rock, price stability, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, risk-adjusted returns, seigniorage, shareholder value, short selling, South Sea Bubble, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, unorthodox policies

As Steve Keen (2011) puts it: “Population dynamics – even immigration dynamics – have nothing to do with house prices. What determines house prices is not the number of babies being born, or immigrants – illegal or otherwise – arriving, but the number of people who have taken out a mortgage, and the dollar value of those mortgages … For changes in house prices, what matters is the acceleration of mortgage debt.” In response to the suggestion that mortgage lending increases house prices some may argue that an increase in the price of an asset acts as a signal (in the housing market) to developers to build more houses: increasing house prices lead to an increase in the number of houses being built, increasing their supply and so leading to a fall in their price. However, this argument falls down on two fronts.

Globally the situation is similar – Figure 4.4 shows the percentage of countries in a banking crisis between 1800 and 2007 (so excluding the most recent financial crisis) fig. 4.4 - Percentage of Countries affected by Banking Crises Source: Reinhart and Rogoff, 2008 Box 4.F - The house price bubble In the years preceding the most recent financial crisis, bank lending created a bubble in the property market in several countries. For example, Keen (2012) calculates that 78% of the change in American house prices over the past 25 years and 60% of the change in Australian house prices over the past 30 years can be explained by the acceleration in mortgage debt. Meanwhile, in the UK house prices increased threefold between 1995 and 2007 (Nationwide, 2012). Contrary to popular belief, the increase in house prices was not fuelled by there being ‘too many people and not enough houses’. As Figure 4.5 shows, between 1997 and 2007, the number of housing units actually grew by 8%, while the population only grew by 5%. Meanwhile mortgage lending increased by 370% over its 1997 level.

As an example, if an individual on an average salary of £25,200 took out a 25 year mortgage on an average house in 2007, the repayments would account for 47% of their salary over that period (assuming the unlikely scenario that average interest rates on mortgages remain at the historically low level of 4.5%). In contrast, the same person buying the same house in 1995 would only spend 24% of their salary servicing their mortgage debt. Today, most young people have effectively been priced out of ever being able to own their own home because of excessive money creation by the banking sector. fig. 4.5 - UK property prices, 1997 – 2010 (Indexed, 1997 = 100) Source: Nationwide house price survey 2012, Bank of England Statistical Database The flip side of this is people that owned or purchased property in the run up to the crisis now feel much wealthier.


pages: 353 words: 88,376

The Investopedia Guide to Wall Speak: The Terms You Need to Know to Talk Like Cramer, Think Like Soros, and Buy Like Buffett by Jack (edited By) Guinan

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Albert Einstein, asset allocation, asset-backed security, Brownian motion, business process, capital asset pricing model, clean water, collateralized debt obligation, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, equity premium, fixed income, implied volatility, index fund, interest rate swap, inventory management, London Interbank Offered Rate, margin call, market fundamentalism, mortgage debt, passive investing, performance metric, risk tolerance, risk-adjusted returns, risk/return, shareholder value, Sharpe ratio, short selling, statistical model, time value of money, transaction costs, yield curve, zero-coupon bond

Mortgages also are known as liens against property and claims on property. Investopedia explains Mortgage In a residential mortgage, a home buyer pledges his or her house to the bank. The bank has a claim on the house if the home buyer defaults on paying the mortgage. In the case of a foreclosure, the bank may evict the home’s tenants and sell the house, using the income from the sale to pay off the mortgage debt. Related Terms: • Debt • Fannie Mae—Federal National Mortgage Association (FNMA) • Interest • Liability • Mortgage-Backed Security The Investopedia Guide to Wall Speak 187 Mortgage Forbearance Agreement What Does Mortgage Forbearance Agreement Mean? An agreement made between a mortgage lender and a delinquent borrower by which the lender agrees not to exercise its legal right to foreclose on a mortgage and the borrower agrees to a mortgage plan that will, over a specified period, bring the borrower current on his or her payments.

Investopedia explains Net Worth For a company, this is known as shareholders’ (or owners’) equity and is determined by subtracting liabilities on the balance sheet from assets. For example, if a company has $45 million worth of liabilities and $65 million in assets, the company’s net worth (shareholders’ equity) is $20 million ($65 million – $45 million). Alternatively, say an individual has three assets—$100,000 of common stock, $30,000 worth of bonds, and title to a $190,000 house—and only one liability—$150,000 in mortgage debt. This individual’s net worth would be $170,000 ([$100,000 + $30,000 + $190,000] – $150,000). Related Terms: • Asset • Debt • Mortgage • Balance Sheet • Liabilities • Shareholders’ Equity The Investopedia Guide to Wall Speak 201 New York Stock Exchange (NYSE) What Does New York Stock Exchange (NYSE) Mean? Located in New York City, it is considered the largest equities-based exchange in the world, based on the total market capitalization of its listed securities.

See Nominal GDP Current liabilities, 4, 6-7, 8, 61, 321 Current ratio, 61, 62, 242-243 Current yield, 62-63, 323. See also Dividend yield CUSIP number, 63 CV. See Coefficient of variation (CV); Convertible bond DCA. See Dollar cost averaging (DCA) DCF. See Discounted cash flow (DCF) DD. See Due diligence (DD) DDM. See Dividend discount model (DDM) Dead cat bounce, 65 Dealer. See Broker-dealer Debenture, 65-66 Debt, 66, 167-168 Debt financing, 66-67. See also Leverage; Liability; Mortgage Debt ratio, 67, 117-118 Debt/equity ratio, 67-68, 118, 168 Debt-to-capital ratio, 68-69 Default, 4, 58, 289 Default risk. See Counterparty risk Defined-benefit plan, 69-70, 153-154, 241 Defined-contribution plan, 70, 153-154, 241 Deflation, 70 Deleverage, 71 Delta, 71-72, 117 Delta hedging, 72 Demand, 73, 156 Depreciation, 73-74 Depression, 29, 120, 131-132 Derivative, 74, 319, 366. See also Option Diluted earnings per share (diluted EPS), 74-75 Dilution, 31, 75, 112, 262 Discount broker, 76 Discount rate, 76-77, 143, 227 Discounted cash flow (DCF), 77 Discounted value.

Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America by Matt Taibbi

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affirmative action, Affordable Care Act / Obamacare, Bernie Sanders, Bretton Woods, carried interest, clean water, collateralized debt obligation, collective bargaining, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, desegregation, diversification, diversified portfolio, Donald Trump, financial innovation, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, illegal immigration, interest rate swap, laissez-faire capitalism, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, medical malpractice, moral hazard, mortgage debt, obamacare, passive investing, Ponzi scheme, prediction markets, quantitative easing, reserve currency, Ronald Reagan, Sergey Aleynikov, short selling, sovereign wealth fund, too big to fail, trickle-down economics, Y2K, Yom Kippur War

Greenspan’s frantic deregulation of the financial markets in the late nineties had led directly to the housing bubble; in particular, the deregulation of the derivatives market had allowed Wall Street to create a vast infrastructure for chopping up mortgage debt, disguising bad loans as AAA-rated investments, and selling the whole mess off on a secondary market as securities. Once Wall Street perfected this mechanism, it was suddenly able to create hundreds of billions of dollars in crap mortgages and sell them off to unsuspecting pension funds, insurance companies, unions, and other suckers as grade-A investments, as I’ll detail in the next chapter. The amount of new lending was mind-boggling: between 2003 and 2005, outstanding mortgage debt in America grew by $3.7 trillion, which was roughly equal to the entire value of all American real estate in the year 1990 ($3.8 trillion). In other words, Americans in just two years had borrowed the equivalent of two hundred years’ worth of savings.

“The difference between that 5 percent and the 1 percent just gets tacked on later on in the form of a negative amortization,” Andy explains. Here’s how that scenario looks: You buy a $500,000 house, with no money down, which means you take out a mortgage for the full $500,000. Then instead of paying the 5 percent monthly interest payment, which would be $2,500 a month, you pay just $500 a month, and that $2,000 a month you’re not paying just gets added to your mortgage debt. Within a couple of years, you don’t owe $500,000 anymore; now you owe $548,000 plus deferred interest. “If you’re making the minimum payment, you could let your mortgage go up to 110 percent, 125 percent of the loan value,” says Andy. “Sometimes it went as high as 135 percent or 140 percent. It was crazy.” In other words, in the early years of this kind of mortgage, you the homeowner are not actually paying off anything—you’re really borrowing more.


pages: 265 words: 93,231

The Big Short: Inside the Doomsday Machine by Michael Lewis

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Asperger Syndrome, asset-backed security, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, facts on the ground, financial innovation, fixed income, forensic accounting, Gordon Gekko, high net worth, housing crisis, illegal immigration, income inequality, index fund, interest rate swap, London Interbank Offered Rate, Long Term Capital Management, medical residency, moral hazard, mortgage debt, pets.com, Ponzi scheme, Potemkin village, quantitative trading / quantitative finance, short selling, Silicon Valley, too big to fail, value at risk, Vanguard fund

"The thinking in subprime," says Jacobs, "was there was this social stigma to being a second mortgage borrower and there really shouldn't be. If your credit rating was a little worse, you paid a lot more--and a lot more than you really should. If we can mass market the bonds, we can drive down the cost to borrowers. They can replace high interest rate credit card debt with lower interest rate mortgage debt. And it will become a self-fulfilling prophecy." The growing interface between high finance and lower-middle-class America was assumed to be good for lower-middle-class America. This new efficiency in the capital markets would allow lower-middle-class Americans to pay lower and lower interest rates on their debts. In the early 1990s, the first subprime mortgage lenders--The Money Store, Greentree, Aames--sold shares to the public, so that they might grow faster.

Of course, Eisman was paid to see the sense in subprime lending: Oppenheimer quickly became one of the leading bankers to the new industry, in no small part because Eisman was one of its leading proponents. "I took a lot of subprime companies public," says Eisman. "And the story they liked to tell was that 'we're helping the consumer. Because we're taking him out of his high interest rate credit card debt and putting him into lower interest rate mortgage debt.' And I believed that story." Then something changed. Vincent Daniel had grown up in Queens, without any of the perks Steve Eisman took for granted. And yet if you met them you might guess that it was Vinny who had grown up in high style on Park Avenue and Eisman who had been raised in the small duplex on Eighty-second Avenue. Eisman was brazen and grandiose and focused on the big kill. Vinny was careful and wary and interested in details.

Back in July 2003, he'd written them a long essay on the causes and consequences of what he took to be a likely housing crash: "Alan Greenspan assures us that home prices are not prone to bubbles--or major deflations--on any national scale," he'd said. "This is ridiculous, of course.... In 1933, during the fourth year of the Great Depression, the United States found itself in the midst of a housing crisis that put housing starts at 10% of the level of 1925. Roughly half of all mortgage debt was in default. During the 1930s, housing prices collapsed nationwide by roughly 80%." He harped on the same theme again in January 2004, then again in January 2005: "Want to borrow $1,000,000 for just $25 a month? Quicken Loans has now introduced an interest only adjustable rate mortgage that gives borrowers six months with both zero payments and a 0.03% interest rate, no doubt in support of that wholesome slice of Americana--the home buyer with the short term cash flow problem."


pages: 142 words: 45,733

Utopia or Bust: A Guide to the Present Crisis by Benjamin Kunkel

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anti-communist, Bretton Woods, capital controls, Carmen Reinhart, David Graeber, declining real wages, full employment, Hyman Minsky, income inequality, late capitalism, liquidity trap, means of production, money: store of value / unit of account / medium of exchange, mortgage debt, Occupy movement, peak oil, price stability, profit motive, savings glut, Slavoj Žižek, The Wealth of Nations by Adam Smith, transatlantic slave trade, War on Poverty, We are the 99%, women in the workforce, Works Progress Administration

In the case of real estate, it might happen—as it has—that more building and selling of houses has been financed than can actually be paid for with income deriving, in the last instance, from production. So the credit system that had seemed to insure against one kind of overaccumulation (of commodity capital) by advancing money against future production now seems to have fostered another kind of overaccumulation (of fictitious capital) by promising more production than has occurred. More housing has been created than builders can sell at a profit; more mortgage debt has been issued than can be repaid, through wage income, to ensure the lenders’ profit; homeowners who took out loans against the rising value of their property find that prices are instead plummeting; and with the collapse of the housing sector more money capital now lies in the hands of its owners than they can see a way to invest profitably. “The onset of a crisis is usually triggered by a spectacular failure which shakes confidence in fictitious forms of capital,” Harvey writes, and everyone knows what happens next.

After listing several of the more spectacular property-market collapses of the long downturn (worldwide in 1973–75; Japanese in 1990; Thai and Indonesian in 1997), Harvey added that the most important prop to the US and British economies after the onset of general recession in all other sectors from mid-2001 onwards was the continued speculative vigor in the property and housing markets and construction. In a curious backwash effect, we find that some 20 percent of GDP growth in the United States in 2002 was attributable to consumers refinancing their mortgage debt on the inflated values of their housing and using the extra money they gained for immediate consumption (in effect, mopping up overaccumulating capital in the primary circuit). British consumers borrowed $19 billion in the third quarter of 2002 alone against the value of their mortgages to finance consumption. What happens if and when this property bubble bursts is a matter for serious concern.


pages: 1,104 words: 302,176

The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War (The Princeton Economic History of the Western World) by Robert J. Gordon

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3D printing, Affordable Care Act / Obamacare, airline deregulation, airport security, Apple II, barriers to entry, big-box store, blue-collar work, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, deindustrialization, Detroit bankruptcy, discovery of penicillin, Donner party, Downton Abbey, Edward Glaeser, en.wikipedia.org, Erik Brynjolfsson, everywhere but in the productivity statistics, feminist movement, financial innovation, full employment, George Akerlof, germ theory of disease, glass ceiling, high net worth, housing crisis, immigration reform, impulse control, income inequality, income per capita, indoor plumbing, industrial robot, inflight wifi, interchangeable parts, invention of agriculture, invention of air conditioning, invention of the telegraph, invention of the telephone, inventory management, James Watt: steam engine, Jeff Bezos, jitney, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, labor-force participation, Loma Prieta earthquake, Louis Daguerre, Louis Pasteur, low skilled workers, manufacturing employment, Mark Zuckerberg, market fragmentation, Mason jar, McMansion, Menlo Park, minimum wage unemployment, mortgage debt, mortgage tax deduction, new economy, Norbert Wiener, obamacare, occupational segregation, oil shale / tar sands, oil shock, payday loans, Peter Thiel, pink-collar, Productivity paradox, Ralph Nader, Ralph Waldo Emerson, refrigerator car, rent control, Robert X Cringely, Ronald Coase, school choice, Second Machine Age, secular stagnation, Skype, stem cell, Steve Jobs, Steve Wozniak, Steven Pinker, The Market for Lemons, Thomas Malthus, total factor productivity, transaction costs, transcontinental railway, traveling salesman, Triangle Shirtwaist Factory, Unsafe at Any Speed, Upton Sinclair, upwardly mobile, urban decay, urban planning, urban sprawl, washing machines reduced drudgery, Washington Consensus, Watson beat the top human players on Jeopardy!, We wanted flying cars, instead we got 140 characters, working poor, working-age population, Works Progress Administration, yield management

“While only about $150 million worth had been sold before the war, total investment in real estate bonds is thought to have been approximately $10 billion by the early thirties.”39 One reason homeownership rates soared in the 1920s as part of the massive building boom of that decade was a widespread loosening of credit conditions that allowed families to take out second and third mortgages. The value of outstanding mortgages soared from about $12 billion in 1919 to $43 billion in 1930 (i.e., from 16% to 41% of nominal GDP). Figure 9–2 plots the ratio of mortgage debt to GDP against the non-structures consumer debt ratio already examined in figure 9–1. The differing left-hand and right-hand axes indicate that mortgage debt for structures during the 1920s was consistently seven times higher than for non-structures consumer debt. The longer view in figure 9–2 shows that the value of outstanding mortgages was roughly 20 percent of GDP from 1900 to 1922.40 Figure 9–2. Ratios to GDP of Non-Structures Consumer Credit and Residential Structures Credit, 1896–1952.

Another confirmation that mortgage finance of residential structures exploded in the 1920s is provided by figure 9–3. The ratio of residential mortgage debt to residential wealth increased from 14.3 percent in 1916 to 27.2 percent in 1929. The sharp decrease evident in figure 9–3 between 1916 and 1920 is a result of wartime and postwar inflation, and the sharp increase between 1929 and 1932 is a result of deflation in the Great Contraction of 1929–32. The rise in prices after 1933, together with the near disappearance of residential construction during the 1930s and the years of World War II, helps account for the decline in the debt/wealth ratio between 1932 and 1948. Figure 9–3. Ratio of Nonfarm Residential Mortgage Debt to Nonfarm Residential Wealth, 1890–1952. Source: Grebler, Blank, and Winnick (1956, Table L-6, p. 451).

Then a first mortgage would be obtained from a savings bank or mortgage dealer for 40 percent of the sales price ($1,200) at an interest rate of 5 to 6 percent, and a second mortgage for $300 was obtained from a real estate agent. Interest was paid semiannually over three to eight years, and the lump sum of principal was due at the end of the loan period. The details of mortgage contracts differed between and within cities, with some loans extending for as long as twenty years. The largest holders of mortgage debt were individuals, savings banks, and building and loan associations. The latter pioneered amortized loans, in which the monthly payment included both interest and repayment of principal, so that no lump-sum payment was due when the loan matured. Though the inclusion of principal repayment raised the size of the monthly payment, this was in many cases offset by extending the length of the repayment period.


pages: 823 words: 206,070

The Making of Global Capitalism by Leo Panitch, Sam Gindin

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accounting loophole / creative accounting, airline deregulation, anti-communist, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Basel III, Big bang: deregulation of the City of London, bilateral investment treaty, Branko Milanovic, Bretton Woods, BRICs, British Empire, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collective bargaining, continuous integration, corporate governance, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, dark matter, Deng Xiaoping, disintermediation, ending welfare as we know it, eurozone crisis, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, full employment, Gini coefficient, global value chain, guest worker program, Hyman Minsky, imperial preference, income inequality, inflation targeting, interchangeable parts, interest rate swap, Kenneth Rogoff, land reform, late capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, manufacturing employment, market bubble, market fundamentalism, Martin Wolf, means of production, money: store of value / unit of account / medium of exchange, Monroe Doctrine, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, Northern Rock, oil shock, precariat, price stability, quantitative easing, Ralph Nader, RAND corporation, regulatory arbitrage, reserve currency, risk tolerance, Ronald Reagan, seigniorage, shareholder value, short selling, Silicon Valley, sovereign wealth fund, special drawing rights, special economic zone, structural adjustment programs, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, very high income, Washington Consensus, Works Progress Administration, zero-coupon bond

The conversion of the individual mortgage into (in effect) a security has broadened the range of investors in mortgages far beyond the savings and loan industry that originally was created to finance home ownership. Today, pension funds, insurance companies, banks, and mutual funds—and not only American ones, but also many financial institutions and investors based abroad—hold mortgage-backed securities in their portfolios. Mortgage borrowers are the beneficiaries of what amounts to a global competition to lend to American home buyers.104 Indeed, by the mid 1990s household consumer and mortgage debt surpassed the total debt of nonfinancial corporations, and it also exceeded the debt of federal, state, and municipal governments combined. The global competition to lend to American workers combined with the global competition that free trade represented to integrate as well as weaken American labor. The main goal of the reform leadership slate elected to the AFL-CIO in 1995, committed to increasing the density of union organization, was to try to get “progressive competitiveness” back on the agenda: “We want to increase productivity,” the AFL-CIO’s new president declared in 1996.

The apparent guarantee of forever-rising housing prices led to an increase in the share of consumption financed in this way—from 1.1 percent in the 1990s to 3 percent in 2000–05 (with a similar trend occurring in the growth of investments in “home improvements”).20 It is significant that this went so far as to include poor African-American communities, so long the Achilles heel of working-class integration into the American Dream. The roots of the subprime mortgage crisis thus lay in the way the anti-inflation commitment had since the 1970s ruled out the public expenditures that would have been required just to start addressing the crisis of inadequate housing in US cities. As we saw earlier, a key factor in the steady expansion of Americans’ consumer and mortgage debt since the 1970s had been reformers’ faith that private finance could be used by the state in the public interest—in other words, that financial institutions could be so regulated and reformed as to ensure their functioning in the interest of social groups that they had hitherto excluded. The rising demand for home-ownership at lower income levels had been encouraged by government support for meeting housing needs through financial markets backed by mortgage tax deductions.

The rising demand for home-ownership at lower income levels had been encouraged by government support for meeting housing needs through financial markets backed by mortgage tax deductions. Of course, the desire to realize the American dream of home-ownership on the part of so many of those who had previously been excluded was one thing; actual access to residential finance markets was another. Access for such unprecedented numbers by the turn of the century was only possible because financial intermediaries were frantically creating domestic mortgage debt in order to package and resell it in the market for structured credit. Already well underway during the 1990s, this trend was given a great fillip not only by the Fed’s low interest rates but also by the Bush administration’s determination to expand the scope for “entrepreneurs” in the business of selling home mortgages, although it was mainly long-established private mortgage companies like Countrywide, and new ones that specialized in subprime loans like New Century Financial, that benefited from this.


pages: 267 words: 71,123

End This Depression Now! by Paul Krugman

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airline deregulation, Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, capital asset pricing model, Carmen Reinhart, centre right, correlation does not imply causation, credit crunch, Credit Default Swap, currency manipulation / currency intervention, debt deflation, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, full employment, German hyperinflation, Gordon Gekko, Hyman Minsky, income inequality, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low skilled workers, Mark Zuckerberg, moral hazard, mortgage debt, paradox of thrift, price stability, quantitative easing, rent-seeking, Robert Gordon, Ronald Reagan, Upton Sinclair, We are the 99%, working poor, Works Progress Administration

By that I mean that we found ourselves in a world in which lack of sufficient demand had become the key economic problem, and in which narrow technocratic solutions, like cuts in the Federal Reserve’s interest rate target, were not adequate to that situation. To deal effectively with the crisis, we needed more activist government policies, in the form both of temporary spending to support employment and of efforts to reduce the overhang of mortgage debt. One might think that these solutions could still be considered technocratic, and separated from the broader question of income distribution. Keynes himself described his theory as “moderately conservative in its implications,” consistent with an economy run on the principles of private enterprise. From the beginning, however, political conservatives—especially those most concerned with defending the position of the wealthy—fiercely opposed Keynesian ideas.

There’s also the debt overhang—the excessive private debt that set the stage for the Minsky moment and the slump that followed. Deflation, said Fisher, can depress the economy by raising the real value of debt. Inflation, conversely, can help by reducing that real value. Right now, markets seem to expect the U.S. price level to be around 8 percent higher in 2017 than it is today. If we could manage 4 or 5 percent inflation over that stretch, so that prices were 25 percent higher, the real value of mortgage debt would be substantially lower than it looks on current prospect—and the economy would therefore be substantially farther along the road to sustained recovery. There’s one more argument for higher inflation, which isn’t particularly important for the United States but is very important for Europe: wages are subject to “downward nominal rigidity,” which is econospeak for the fact, overwhelmingly borne out by recent experience, that workers are very unwilling to accept explicit pay cuts.


pages: 189 words: 64,571

The Cheapskate Next Door: The Surprising Secrets of Americans Living Happily Below Their Means by Jeff Yeager

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asset allocation, carbon footprint, delayed gratification, dumpster diving, index card, job satisfaction, late fees, mortgage debt, new economy, payday loans, Skype, upwardly mobile, Zipcar

Our addiction to borrowing, the mechanism through which we’re able to spend more than we earn, and our aversion to saving some of what we earn for the proverbial rainy day, are both fairly recent trends in America. Total consumer debt grew nearly eight times in size from 1980 ($355 billion) to 2008 ($2.6 trillion). During that same period, the share of disposable income each household spent servicing its consumer debt and mortgage debt increased by 35 percent. Once upon a time in America, the way we accumulated savings was by, well, spending less than we made and banking the difference. In 1982, the average household put 11 percent of its disposable income into savings; twenty-five years later that figure had dropped to less than 1 percent. In those years, we came to accept as gospel (at least up until recently) that the way smart people build wealth is through the appreciation of their assets, particularly their homes.

And when they do borrow, the retirement of that debt in full, as quickly as possible, is an overriding priority for the cheapskate next door. More than 80 percent of those cheapskates polled who own homes reported that they have already paid off or plan to pay off their home mortgages sooner than required under the terms of the loan. That’s a shocker, given that roughly half of all Americans will never—during their lifetimes—be entirely free of a home mortgage debt and/or debt secured against their home. “Every minute of every day that I owe someone else money is sheer agony for me,” Alice Wilson told me. “It’s like I’m in prison, and the only thing I can think about is getting out as quickly as possible.” Alice definitely exhibits no warning signs of debtor dementia. 15. Cheapskates, Know and Trust Thyself Spend a little time with the cheapskates next door, and I guarantee you’ll find that we’re full of ourselves.


pages: 237 words: 64,411

Humans Need Not Apply: A Guide to Wealth and Work in the Age of Artificial Intelligence by Jerry Kaplan

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Affordable Care Act / Obamacare, Amazon Web Services, asset allocation, autonomous vehicles, bank run, bitcoin, Brian Krebs, buy low sell high, Capital in the Twenty-First Century by Thomas Piketty, combinatorial explosion, computer vision, corporate governance, crowdsourcing, en.wikipedia.org, Erik Brynjolfsson, estate planning, Flash crash, Gini coefficient, Goldman Sachs: Vampire Squid, haute couture, hiring and firing, income inequality, index card, industrial robot, invention of agriculture, Jaron Lanier, Jeff Bezos, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, Loebner Prize, Mark Zuckerberg, mortgage debt, natural language processing, Own Your Own Home, pattern recognition, Satoshi Nakamoto, school choice, Schrödinger's Cat, Second Machine Age, self-driving car, sentiment analysis, Silicon Valley, Silicon Valley startup, Skype, software as a service, The Chicago School, Turing test, Watson beat the top human players on Jeopardy!, winner-take-all economy, women in the workforce, working poor, Works Progress Administration

Another way to arrive at these figures is to look at how the financial markets value all public companies and bonds. At the end of 2011, the value of the U.S. bond market was just under $37 trillion, with U.S. stocks at $21 trillion, for a total of $58 trillion.35 But only about two-thirds of that is owned domestically, so let’s use $39 trillion. (Contrary to popular perception, China owns only about 8 percent of the national debt.)36 Adding the $25 trillion of value stored in homes and subtracting mortgage debt of $13 trillion, that works out to $51 trillion, or about $450,000 per household.37 But that doesn’t include the value of all privately held companies, or loans to companies and individuals, which probably accounts for a portion of the difference between this estimate and the $625,000 above. That’s now, but let’s talk about the future. Data for the last thirty years shows a GDP growth rate per person, after inflation, of approximately 1.6 percent.38 Assuming this trend is to continue, the total increase in real wealth per person in forty years would be 90 percent.

“World Capital Markets—Size of Global Stock and Bond Markets,” QVM Group LLC, April 2, 2012, http://qvmgroup.com/invest/2012/04/02/world-capital-markets-size-of-global-stock-and-bond-markets/. 36. http://finance.townhall.com/columnists/politicalcalculations/2013/01/21/who-really-owns-the-us-national-debt-n1493555/page/full, last modified January 21, 2013. 37. Cory Hopkins, “Combined Value of US Homes to Top $25 Trillion in 2013,” December 19, 2013, http://www.zillow.com/blog/2013-12-19/value-us-homes-to-top-25-trillion/; and “Mortgage Debt Outstanding,” Board of Governors of the Federal Reserve System, last modified December 11, 2014, http://www.federalreserve.gov/econresdata/releases/mortoutstand/current.htm. 38. “International Comparisons of GDP per Capita and per Hour, 1960–2011,” Bureau of Labor Statistics, table 1b, last modified November 7, 2012, http://www.bls.gov/ilc/intl_gdp_capita_gdp_hour.htm#table01. 39. https://www.energystar.gov, accessed December 31, 2014. 40.


pages: 305 words: 69,216

A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression by Richard A. Posner

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Andrei Shleifer, banking crisis, Bernie Madoff, collateralized debt obligation, collective bargaining, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, diversified portfolio, equity premium, financial deregulation, financial intermediation, Home mortgage interest deduction, illegal immigration, laissez-faire capitalism, Long Term Capital Management, market bubble, moral hazard, mortgage debt, oil shock, Ponzi scheme, price stability, profit maximization, race to the bottom, reserve currency, risk tolerance, risk/return, Robert Shiller, Robert Shiller, savings glut, shareholder value, short selling, statistical model, too big to fail, transaction costs, very high income

Low interest rates, aggressive and imaginative marketing of home mortgages, auto loans, and credit cards, diminishing regulation of the banking industry, and perhaps the rise of a speculative culture —an increased appetite for risk, illustrated by a decline in the traditional equity premium (the margin by which the average return on an investment in stocks exceeds that of an investment in bonds, which are less risky than stocks)—spurred speculative lending, especially on residential real estate, which is bought mainly with debt. As in 1929, the eventual bursting of the bubble endangered the solvency of banks and other financial institutions. Residential-mortgage debt is huge ($11 trillion by the end of 2006), and many defaults were expected as a result of the bubble's collapse. The financial system had too much risk in its capital structure to take these defaults in stride. The resulting credit crisis —a drastic reduction in borrowing and lending, indeed a virtual cessation of credit transactions, for long enough to disrupt the credit economy seriously—precipitated a general economic downturn.

Roubini was not the only prophet without honor in his own country. In a March 2006 article in The Economists' Voice entitled "The Menace of an Unchecked Housing Bubble," another economist, Dean Baker, had written: "When the downturn in house prices occurs, many homeowners will have mortgages that exceed the value of their homes, a situation that is virtually certain to send default rates soaring. This will put lenders that hold large amounts of mortgage debt at risk, and possibly jeopardize the solvency of Fannie Mae and Freddie Mac, since they guarantee much of this debt. If these mortgage giants faced collapse, a government bailout (similar to the S&L bailout), involving hundreds of billions of dollars, would be virtually inevitable." Baker, like Roubini, had hit the bull's eye. But no one in a position of authority in government, and very few in business, paid any attention, just as no one had paid attention to the warnings sounded years earlier by The Economist.


pages: 543 words: 147,357

Them And Us: Politics, Greed And Inequality - Why We Need A Fair Society by Will Hutton

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Andrei Shleifer, asset-backed security, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, capital controls, carbon footprint, Carmen Reinhart, Cass Sunstein, centre right, choice architecture, cloud computing, collective bargaining, conceptual framework, Corn Laws, corporate governance, credit crunch, Credit Default Swap, debt deflation, decarbonisation, Deng Xiaoping, discovery of DNA, discovery of the americas, discrete time, diversification, double helix, Edward Glaeser, financial deregulation, financial innovation, financial intermediation, first-past-the-post, floating exchange rates, Francis Fukuyama: the end of history, Frank Levy and Richard Murnane: The New Division of Labor, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, Hyman Minsky, I think there is a world market for maybe five computers, income inequality, inflation targeting, interest rate swap, invisible hand, Isaac Newton, James Dyson, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, labour market flexibility, Long Term Capital Management, Louis Pasteur, low-wage service sector, mandelbrot fractal, margin call, market fundamentalism, Martin Wolf, means of production, Mikhail Gorbachev, millennium bug, moral hazard, mortgage debt, new economy, Northern Rock, offshore financial centre, open economy, Plutocrats, plutocrats, price discrimination, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, railway mania, random walk, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, Rory Sutherland, shareholder value, short selling, Silicon Valley, Skype, South Sea Bubble, Steve Jobs, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, unpaid internship, value at risk, Washington Consensus, working poor, éminence grise

Northern Rock was far from the only bank willing to lend more than 100 per cent of a house’s value and six times the borrower’s income. The whole financial sector drowned the property market in credit, so by summer 2007 it had cumulatively issued £257 billion of residential mortgage-backed securities in the new markets for securitised assets to top up normal sources of funding. In other words, more than a fifth of the total £1.2 trillion stock of British mortgage debt was being funded through an avenue – asset-backed securities – that had not even existed a decade earlier. The competition between the lenders drove down credit-worthiness terms, as it always does. The research firm Data Monitor suggests that 7 per cent of mortgages just before the crash went to people with a poor credit history, and another 5–6 per cent required no proof of income.24 Mortgages to the buy-tolet market expanded ten times in a decade as lenders believed they were on to fail-safe lending.

The McKinsey researchers identify five countries that experienced a huge rise in their debt in the decade up to 2007 (and where, if history is any guide, the financial crisis will lead to a period of deleveraging) – the United States, the UK, Spain, South Korea and Canada. These are not economic minnows: together, they account for more than a third of the world’s GDP. The UK is particularly vulnerable. It had the biggest jump in residential mortgage debt, to reach 101 per cent of GDP in 2007 according to the institute’s calculations, the highest in the world. Moreover, UK mortgages are particularly sensitive to changes in interest rates. The financial sector grew phenomenally too, with borrowing reaching 194 per cent of GDP, although part of that represented the City’s position as a global hub. Net out foreign banks’ borrowing and the debt ratio falls to ‘just’ 112 per cent, although even this still represents a near doubling in a decade and is the highest in the world.

The institute then looks at the level of leverage, its growth, debt service ratios and the vulnerability of borrowers to shocks either to their income or to their capacity to refinance their borrowing. The results are collated into a ‘heat map’ of where in the world deleverage pressures will be most acute. In Britain it is plain that, by these criteria, households will try to reduce their £1.2 trillion of mortgage debt, while real estate companies will try to do the same with their £350 billion commercial property debt. Banks will also attempt to deleverage. Moreover, the British will be deleveraging at the same time as the other countries in the study. The chances of growing out of trouble through export will thus be small. Meanwhile, the option of default would wreck the country’s international financial standing (and it has not been adopted as a strategy in Britain since the fourteenth century).


pages: 500 words: 145,005

Misbehaving: The Making of Behavioral Economics by Richard H. Thaler

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Albert Einstein, Amazon Mechanical Turk, Andrei Shleifer, Apple's 1984 Super Bowl advert, Atul Gawande, Berlin Wall, Bernie Madoff, Black-Scholes formula, capital asset pricing model, Cass Sunstein, Checklist Manifesto, choice architecture, clean water, cognitive dissonance, conceptual framework, constrained optimization, Daniel Kahneman / Amos Tversky, delayed gratification, diversification, diversified portfolio, Edward Glaeser, endowment effect, equity premium, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, George Akerlof, hindsight bias, Home mortgage interest deduction, impulse control, index fund, invisible hand, Jean Tirole, John Nash: game theory, John von Neumann, late fees, law of one price, libertarian paternalism, Long Term Capital Management, loss aversion, market clearing, Mason jar, mental accounting, meta analysis, meta-analysis, More Guns, Less Crime, mortgage debt, Nash equilibrium, Nate Silver, New Journalism, nudge unit, payday loans, Ponzi scheme, presumed consent, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, random walk, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Silicon Valley, South Sea Bubble, statistical model, Steve Jobs, technology bubble, The Chicago School, The Myth of the Rational Market, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, ultimatum game, Walter Mischel

When the housing bubble arrived and drove up prices, homeowners were told they could lower their mortgage payment and take out a bit of extra cash too, to refinish the basement and buy a big-screen television. At this point, home equity ceased to be a “safe” mental account. This fact is illustrated by a change in the borrowing behavior of households with a head that is aged seventy-five or older. In 1989 only 5.8% of such families had any mortgage debt. By 2010, the fraction with debt rose to 21.2%. For those with mortgage debt, the median amount owed also rose over this period, from $35,000 to $82,000 (in 2010 dollars). During the housing boom in the early 2000s, homeowners spent the gains they had accrued on paper in home equity as readily as they would a lottery windfall. As documented in House of Debt, a book by economists Atif Mian and Amir Sufi, by 2000 increases in home equity had become a strong driver of consumption, especially of consumer durables.

This leakage can and should be addressed by making the option of rolling the account over into another retirement account as easy as possible, preferably the default. Home equity offers an interesting intermediate case. For decades people treated the money in their homes much like retirement savings; it was sacrosanct. In fact, in my parents’ generation, families strived to pay off their mortgages as quickly as possible, and as late as the early 1980s, people over sixty had little or no mortgage debt. In time this attitude began to shift in the United States, partly as an unintended side effect of a Reagan-era tax reform. Before this change, all interest paid, including the interest on automobile loans and credit cards, was tax deductible; after 1986 only home mortgage interest qualified for a deduction. This created an economic incentive for banks to create home equity lines of credit that households could use to borrow money in a tax-deductible way.


pages: 424 words: 121,425

How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy by Mehrsa Baradaran

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access to a mobile phone, affirmative action, asset-backed security, bank run, banking crisis, banks create money, barriers to entry, British Empire, call centre, Capital in the Twenty-First Century by Thomas Piketty, cashless society, credit crunch, David Graeber, disintermediation, diversification, failed state, fiat currency, financial innovation, financial intermediation, Goldman Sachs: Vampire Squid, housing crisis, income inequality, Internet Archive, invisible hand, Kickstarter, M-Pesa, McMansion, microcredit, mobile money, moral hazard, mortgage debt, new economy, Own Your Own Home, payday loans, peer-to-peer lending, price discrimination, profit maximization, profit motive, quantitative easing, race to the bottom, rent-seeking, Ronald Reagan, Ronald Reagan: Tear down this wall, savings glut, the built environment, the payments system, too big to fail, trade route, transaction costs, unbanked and underbanked, underbanked, union organizing, white flight, working poor

It considered that option, if only briefly. The debate centered on mortgage relief, and although both administrations decided to help the people through the banks, they ended up helping the banks instead of the people. They were not always clear about their intentions, however. In 2008, Treasury secretary Henry Paulson sold the TARP to Congress and the public as an undertaking that would help relieve average Americans’ mortgage debts through modifications and other direct relief. Paulson promised Congress that he would find ways to stem the tide of impending mortgage foreclosures. But after examining direct-relief plans, including a mortgage modification protocol developed by FDIC chairman Sheila Bair, Paulson concluded that these programs would “require substantial government subsidies” and “direct spending”43 that he ultimately felt were unjustified.44 This led one congressman to call the TARP “the second largest bait and switch scheme that history has ever seen, second only to the reasons given to us to vote for the invasion of Iraq.”45 Barney Frank also angrily cut off Henry Paulson during congressional testimony, saying that “the bill couldn’t have been clearer” in being aimed at reducing foreclosures.46 When President Obama took office, his administration also promised, but failed, to achieve meaningful mortgage relief.

As explained by one scholar, “The problem of loan-sharking was brushed aside by making [high interest rates], once typical only of organized crime, perfectly legal—and therefore, enforceable no longer by just hired goons and the sort of people who place mutilated animals on their victims’ doorsteps, but by judges, lawyers, bailiffs, and police.”34 Today, American society not only accepts credit as a way of life, we embrace it. The average American has $15,000 in credit card debt, $33,000 in student loan debt, and $156,000 in mortgage debt.35 Not only do the majority of the American public borrow their way up the income ladder, but federal mortgage and student loan markets and loose credit policies led to the creation of the American middle class. We, the people, have decided (through laws and policies enacted by our elected representatives) that as a society, we want access to affordable credit for both big wealth-building items like homes, education, and businesses and day-to-day smooth-out-the-bumps sorts of things via credit cards and car loans that would have even higher interest rates if not for government policies.

Unfortunately, the poor are also an easy target, and the theory of too much credit for the irresponsible poor tends to be a much more digestible storyline than the complex Wall Street web of products. The CRA myth allows the proponents of continued banking deregulation to flip the narrative. Instead of admitting that the banks’ high levels of debt were a central problem, they can claim that the irresponsible poor and middle-class—enabled by federal government largesse—brought down the banks with their mortgage debt. Subprime borrowers were certainly not always hapless victims, but they were also not the villains in this story.88 The debate over the CRA suggests two broader questions about providing banking for the poor: (1) whether mainstream commercial banks should be tasked with providing these services, and (2) whether they can do it in a way that benefits the poor. If it is even appropriate for regulators to impose social burdens on banks whose primary purpose is to maximize profits for their shareholders, will the products that result from this coerced exchange be of any use to the poor?


pages: 840 words: 202,245

Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present by Jeff Madrick

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accounting loophole / creative accounting, Asian financial crisis, bank run, Bretton Woods, capital controls, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, disintermediation, diversified portfolio, Donald Trump, financial deregulation, fixed income, floating exchange rates, Frederick Winslow Taylor, full employment, George Akerlof, Hyman Minsky, income inequality, index fund, inflation targeting, inventory management, invisible hand, laissez-faire capitalism, locking in a profit, Long Term Capital Management, market bubble, minimum wage unemployment, Mont Pelerin Society, moral hazard, mortgage debt, new economy, North Sea oil, Northern Rock, oil shock, price stability, quantitative easing, Ralph Nader, rent control, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Ronald Reagan: Tear down this wall, shareholder value, short selling, Silicon Valley, Simon Kuznets, technology bubble, Telecommunications Act of 1996, The Chicago School, The Great Moderation, too big to fail, union organizing, V2 rocket, value at risk, Vanguard fund, War on Poverty, Washington Consensus, Y2K, Yom Kippur War

In all, $7 trillion of mortgage debt was created between 2000 and 2007, more than the total debt of the federal government accumulated over fifty years. Some economists blamed Greenspan for cutting rates to such low levels, and keeping them there for so long. But the low rates could have been a constructive way to revitalize the economy had they been accompanied by adequate regulatory oversight. On the contrary, in one of the most remarkable episodes of government irresponsibility, Greenspan and other Washington regulators looked the other way. Regulatory failure was the open valve through which bad debt flowed. This regulatory failure, like Wall Street excess, was the product of the ideology that first took root in the 1970s. Ultimately, hundreds of billions of dollars of bad mortgage debt were bought by the world’s largest investment institutions.

As late as the fall of 2010, the Nasdaq was still 50 percent below its 2000 high. Overall, capital investment rose in the 1990s as a proportion of GDP, but many hundreds of billions of dollars of it turned out to be wasted. The collapse of housing eight years later followed the same pattern, but the bubble in terms of actual dollars was far bigger and the collapse of greater consequence. Six to seven trillion dollars of new mortgages had been written that decade; mortgage debt was now much greater in total than federal debt. Wall Street firms learned how to raise capital for new mortgages around the world by creating attractive securities that in fact disguised the real risk of the mortgages. The major banking firms not only “securitized” these mortgages but had consumer loan subsidiaries that wrote subprime and other risky mortgages aggressively. Citigroup was every bit as aggressive at originating subprime mortgages as was Countrywide; Bear Stearns, Lehman, Merrill, and JPMorgan Chase had subsidiaries that were subprime leaders as well.

Alyssa Katz, “The Dubious Birth of Mortgage-Backed Securities,” Slate, June 25, 2009, http://www.thebigmoney.com/articles/history-lesson/2009/06/25/dubious-birth-mortgage-backed-securities?page=0,2. 21 RANIERI WAS FIRED: Charles Gasparino, The Sellout: How Three Decades of Wall Street Greed and Government Mismanagement Destroyed the Global Financial System (New York: HarperCollins, 2009), p. 75. 22 IN 1988, HE LEFT TO RUN: Ibid., pp. 66–69, 82. 23 THE ANNUAL LENDING BY THE INCREASINGLY OUTDATED THRIFTS: “Mortgage debt outstanding,” U.S. Census Bureau, http://www.census.gov/compendia/ statab/2010/tables/10s1155.xls. The amount of mortgages outstanding at the thrifts contracted by $200 billion but expanded by nearly $300 billion at commercial banks. The GSEs increased their portfolio holdings by $100 billion. 24 WHEN STILL AN ENGINEER: Lewis, Liar’s Poker, p. 124. 25 TRADING BEGAN TO DOMINATE WALL STREET: Associated Press, “Ex-Merrill Trader Cited,” New York Times, April 11, 1989, http://www.nytimes.com/1989/04/11/business/ ex-merrill-trader-cited.html?


pages: 593 words: 189,857

Stress Test: Reflections on Financial Crises by Timothy F. Geithner

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Affordable Care Act / Obamacare, asset-backed security, Atul Gawande, bank run, banking crisis, Basel III, Bernie Madoff, Bernie Sanders, Buckminster Fuller, Carmen Reinhart, central bank independence, collateralized debt obligation, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, David Brooks, Doomsday Book, eurozone crisis, financial innovation, Flash crash, Goldman Sachs: Vampire Squid, housing crisis, Hyman Minsky, illegal immigration, implied volatility, London Interbank Offered Rate, Long Term Capital Management, margin call, market fundamentalism, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, Nate Silver, Northern Rock, obamacare, paradox of thrift, pets.com, price stability, profit maximization, pushing on a string, quantitative easing, race to the bottom, RAND corporation, regulatory arbitrage, reserve currency, Saturday Night Live, savings glut, short selling, sovereign wealth fund, The Great Moderation, The Signal and the Noise by Nate Silver, Tobin tax, too big to fail, working poor

I remember in August 2006, when I snuck out of the Fed’s annual economic summit in Jackson Hole, Wyoming, to go fly-fishing, my guide was a mortgage broker; his horror stories of sketchy loans to homeowners with sketchy credit were a stark real-world supplement to the academic debates at the central banking summit. Borrowing frenzies are prerequisites for financial crises, and too many Americans were using credit to finance lifestyles their salaries couldn’t support. From 2001 to 2007, the average mortgage debt per household increased 63 percent, while wages remained flat in real terms. The financial system provided this credit with enthusiasm, even to individuals with low or undisclosed incomes, then packaged the loans into securities that were also bought on credit. The financial sector now held $36 trillion worth of debt, a twelvefold increase over three decades. The federal government was also in the red; the unfunded Bush tax cuts, Medicare expansion, and wars in Iraq and Afghanistan had turned the large Clinton budget surpluses into larger budget deficits.

The FDIC’s approach to haircuts would inspire fierce debate when WaMu stumbled in the fall. For the time being, though, IndyMac’s indelible images of fear were just more evidence that things were going from bad to worse. THE FINANCIAL system could easily absorb the $30 billion collapse of IndyMac. There was no way it could absorb the collapse of Fannie Mae and Freddie Mac. The two government-sponsored enterprises held or guaranteed more than $5 trillion in mortgage debt. They were funding about three of every four new U.S. mortgages, propping up what was left of the housing market. But they were heading for the abyss. Fannie’s stock price plunged to $10.25 the day IndyMac failed, down 90 percent from its peak. Just about everyone except their captured regulator agreed they were woefully undercapitalized. One Wall Street analyst calculated that they had a capital shortfall of $75 billion.

Austan Goolsbee, a University of Chicago economist who had advised Obama ever since his original Senate campaign, then outlined our thinking on housing. It was a brutally complicated problem, affecting the profligate along with the merely unfortunate, and we felt intense pressure to do something big. There had been three million foreclosure filings in 2008, and, so far, federal efforts to ease the crisis had been limited in ambition and impact. One congressionally designed program known as Hope for Homeowners, an effort to reduce the mortgage debt of families in distress, had attracted only 312 applicants nationwide. And the futures markets suggested real estate prices still had a long way to sink, which meant a lot more suffering ahead—not just for speculators who had assumed the boom would never end and conspicuous consumers who had bought bigger houses than they could afford, but for hardworking homeowners who were underwater through absolutely no fault of their own.


pages: 375 words: 105,067

Pound Foolish: Exposing the Dark Side of the Personal Finance Industry by Helaine Olen

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asset allocation, Bernie Madoff, Cass Sunstein, Credit Default Swap, David Brooks, delayed gratification, diversification, diversified portfolio, Donald Trump, Elliott wave, en.wikipedia.org, estate planning, financial innovation, Flash crash, game design, greed is good, high net worth, impulse control, income inequality, index fund, London Whale, Mark Zuckerberg, mortgage debt, oil shock, payday loans, pension reform, Ponzi scheme, quantitative easing, Ralph Nader, RAND corporation, random walk, Richard Thaler, Ronald Reagan, Saturday Night Live, too big to fail, transaction costs, Unsafe at Any Speed, upwardly mobile, Vanguard fund, wage slave, women in the workforce, working poor, éminence grise

., 136 Ghilarducci, Teresa, 78, 85, 97–101, 234 Githler, Charles and Kim, 134, 136, 137 glide path, 89 Goldberg, Herb, 225–26, 227 governmental measures Community Reinvestment Act, 203 Dodd-Frank Wall Street Reform and Consumer Protection Act, 110, 198, 218 Employee Retirement Income Security Act (ERISA), 81 financial literacy initiatives, 197–98 Pension Protection Act, 89 Proposition 13 (California), 225 Senate Subcommittee on Deficits, Debt Management, and Long-Term Economic Growth, 76–78 Social Security, 58, 80, 81 Graziosi, Dean, 181 Grimaldi, Mark, 44–46 Hacker, Jacob, 234 Harter, Kathy, 10 Herbert, Joe, 169 Hill, Catey, 159 Hira, Tahira, 165 Holmes, Selina, 204–5 Holt, Lester, 51 home ownership. See also real estate attitudes toward mortgage debt, 174–75, 176 as automatic savings plan, 175, 176 easy access to mortgages, 176–77, 193 foreclosure, 175 G.I. Bill, 175 as leverage, 177–80, 184 as middle-class value, 174–75 rate of, 192–93 real estate crashes, 175, 180–81, 193 social issues linked to, 175–76 successful investors in, 193–95 How to Prosper During the Coming Bad Years (Ruff), 33, 140 Huddleston, Pat, 111 Hulbert, Mark, 45–46, 142 Humpage, Anthony, 189 income inequality current levels, 28 equities holdings and, 78–79 gender-based wage gap, 153–54, 158 growth in, 8, 21–22 Occupy Wall Street movement, 233 risk-taking and, 166 spending decisions and, 228–29 unconcern about, 22–23 individual investors age demographic, 135, 141–42, 148 appeal of doomsday scenarios, 139–40 classes for, 132–33 day trading, 130–32 fear of retirement shortfall, 132–34 frequent trading, 130–31, 135, 168 frustration with professional advisers, 132 gender differences, 167–68 investment errors, 129 marketing aimed at, 127–28, 133–34 options trading, 131, 133–34 overconfidence, 168–69 televised financial news for, 143–49 World MoneyShow, 127–28, 134–37 insurance.

., 200–201 Lloyd, Felix Brandon, 205–6 lobbying groups, 87–88, 99–100, 110, 200, 218 Lockyer, Bill, 100–101 Loibl, Cäzilia, 165 Lucas, Lori, 88 Lucht, Tracy, 16 Lundy, Jeff, 57 Lusardi, Annamaria, 159, 198 Mackay, Harvey, 34 Mad Money (CNBC), 143–47 Mahar, Maggie, 95 Malkiel, Burton, 33 Mamudi, Sam, 95 Mandell, Lew, 201, 207–8 Marquis, Milton, 83 marshmallow experiment, 211–12 Mathisen, Tyler, 82 McCarthy, Carolyn, 111 McGee, Micki, 33, 47 McGinn, Daniel, 179 McInturff, Bill, 75–76 McKenna, Laura, 27 medical expenses, 58, 59–60, 61 Mellan, Olivia, 227 Merrill Lynch, 162–63, 167, 213 Michelman, Kate, 59–60 Middle Class Millionaire, The (Prince and Schiff), 56 Miller, George, 100 Miller, Maurice Lim, 223 Millionaire Next Door, The (Stanley and Danko), 54 Mitchell, Olivia, 159, 198 Money Island game, 205–6 Money Makeover series, 1–2, 4 Money Navigator newsletter (Orman), 44–46 MoneyShow, 127–28, 134–37 Mooney, David, 109 Moore, Michael, 41 mortgage debt, 174–75, 176–77, 193 Mullainathan, Sendhil, 107–8, 116, 162, 166, 228 mutual funds. See stock and mutual fund markets Neasham, Glenn, 115 New York Stock Exchange, 15–16, 160–61 Nine Steps to Financial Freedom (Orman), 34–35 Nocera, Joe, 79 Noeth, Markus, 162, 166 Occupy Wall Street movement, 40, 233 Odean, Terrance, 128–29, 168 Odom, William E., 200 O’Donnell, John, 133 Online Trading Academy, 132–33 Onsite’s Healing Money Issues retreat, 226 options trading, 131, 133–34 Orman, Suze as antipoverty crusader, 41, 46 Approved Card prepaid debit card, 40–42 audience, 38 background, 29, 30–32 books, 34–35, 41 business deals and partnerships, 42–43 contradictory advice, 28, 38 Courage to Be Rich, The, 30, 35, 53 criticism of, 27–28, 35, 46 on Kiyosaki, 188 latte factor calculation, 53 Money Navigator newsletter, 44–46 New Age orientation, 31, 34 Nine Steps to Financial Freedom, 34–35 popularity, 27–30, 38–39 scolding and badgering, 36–38 spending habits, 32, 40 on variable annuities, 104 wealth and source of income, 40, 42, 47 on women’s financial incompetence, 153 You’ve Earned It, Don’t Lose It, 34 overspending by baby boomers, 141–42 celebration of, 57 Latte Factor, 48–53 wealth accumulation and, 54–55, 56–57 by women, 159–60 Palmer, Kimberly, 53 Parker, Richard, 23 Pastor, Lubos, 94–95 Pederson, Allen, 60 Pension Protection Act, 89 pension system.


pages: 576 words: 105,655

Austerity: The History of a Dangerous Idea by Mark Blyth

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accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, Black Swan, Bretton Woods, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, deindustrialization, disintermediation, diversification, en.wikipedia.org, ending welfare as we know it, Eugene Fama: efficient market hypothesis, eurozone crisis, financial repression, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, Gini coefficient, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, interest rate swap, invisible hand, Irish property bubble, Joseph Schumpeter, Kenneth Rogoff, liquidationism / Banker’s doctrine / the Treasury view, Long Term Capital Management, market bubble, market clearing, Martin Wolf, moral hazard, mortgage debt, mortgage tax deduction, Occupy movement, offshore financial centre, paradox of thrift, price stability, quantitative easing, rent-seeking, reserve currency, road to serfdom, savings glut, short selling, structural adjustment programs, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, unorthodox policies, value at risk, Washington Consensus

But there is no such insurance in the repo markets, so repo-market investors protect their cash by receiving collateral equivalent to the cash lent. If the borrower goes bust, the lender can still get the money back, so long as, and this is critical, the collateral doesn’t lose value. What counts as high-quality collateral? Back in the early 2000s, it included such things as Treasury bills, of course. But increasingly, AAA-rated mortgage-debt securities began to be used as collateral, since T-bills were in short supply, which is how mortgages ended up in the repo markets.7 A decline in house prices in 2006 hit the value of these bundled mortgage securities. If you were using mortgage securities as collateral for loans in the repo market, you needed to find more collateral (which people were increasingly less willing to hold) or higher-quality collateral (alternative assets that were in short supply), or you would have to take a “haircut” (a discount) on what you would get back, all of which affected your bottom line.

Add to this the fact that Spanish mortgages are recourse loans, meaning that the bank can come after the debtor for the original loan—forever—and not for just the current value of the property, and mortgagers have every incentive to sit tight and not allow the market to clear, thus making the situation worse by inches. In the United States you can walk away from a mortgage and the house is the bank’s problem. In Spain, when you walk away from the house, the mortgage debt is still your problem. Take Ireland and Spain together and you do not have a story of profligate states, feckless workers, and all the rest. Certainly, the Spanish regional governments have a few white elephant projects that have worsened the situation, airports that have no traffic, massive opera houses with no customers, and the like; but these are symptoms, not causes. Indeed, in the Basque country, where there was more political control of the cajas, investment in property was not allowed to the same extent and the result was investment in manufacturing.33 The underlying crisis is, once again, one of private, not public, finance.


pages: 394 words: 85,734

The Global Minotaur by Yanis Varoufakis, Paul Mason

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banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, business climate, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, declining real wages, deindustrialization, eurozone crisis, financial innovation, first-past-the-post, full employment, Hyman Minsky, industrial robot, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market fundamentalism, Mexican peso crisis / tequila crisis, mortgage debt, new economy, Northern Rock, paper trading, planetary scale, post-oil, price stability, quantitative easing, reserve currency, rising living standards, Ronald Reagan, special economic zone, Steve Jobs, structural adjustment programs, systematic trading, too big to fail, trickle-down economics, urban renewal, War on Poverty, Yom Kippur War

A little later, the RBS attempts to stave off bankruptcy by trying to raise £12 billion from its shareholders, while at the same time admitting to having lost almost £6 billion in CDOs and the like. Around this time house prices start falling in Britain, Ireland and Spain, precipitating more defaults (as homeowners in trouble can no longer even pay back their mortgages by selling their houses at a price higher than their mortgage debt). May – Swiss bank UBS is back in the news, with the announcement that it has lost $37 billion on duff mortgage-backed CDOs and that it intends to raise almost $16 billion from its shareholders. June – Barclays Bank follows the RBS and UBS in trying to raise £4.5 billion on the stock exchange. July – Gloom descends upon the City as the British Chamber of Commerce predicts a fierce recession and the stock exchange falls.

So, whereas prior to 2008 Wall Street created its synthetic financial products on its own (perhaps with the government turning a blind eye), following the 2008 meltdown it has done so with massive government (American and European) subsidies. In summary, as early as in February of 2009, the Obama administration filled Wall Street’s sails by engineering a new marketplace for the old derivatives (which were replete with poor people’s mortgage debts). The medium of exchange in this new marketplace was a mixture of the old (refloated) derivatives and new ones (based not on poor people’s mortgages but on the taxes of those who could not avoid paying them – often the very same poor people). Thus, many of the banks’ toxic assets were moved off their accounts, while the production of new private toxic money took another turn. A year and a half later, the Europeans, not to be outdone, followed suit with EFSF-style debt issues and bank bail-outs, making their own contribution to a new wave of highly toxic financial ‘products’.


pages: 391 words: 97,018

Better, Stronger, Faster: The Myth of American Decline . . . And the Rise of a New Economy by Daniel Gross

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2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Affordable Care Act / Obamacare, Airbnb, American Society of Civil Engineers: Report Card, asset-backed security, Bakken shale, banking crisis, BRICs, British Empire, business process, business process outsourcing, call centre, Carmen Reinhart, clean water, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, demand response, Donald Trump, Frederick Winslow Taylor, high net worth, housing crisis, hydraulic fracturing, If something cannot go on forever, it will stop, illegal immigration, index fund, intermodal, inventory management, Kenneth Rogoff, labor-force participation, LNG terminal, low skilled workers, Mark Zuckerberg, Martin Wolf, Maui Hawaii, McMansion, mortgage debt, Network effects, new economy, obamacare, oil shale / tar sands, oil shock, peak oil, Plutocrats, plutocrats, price stability, quantitative easing, race to the bottom, reserve currency, reshoring, Richard Florida, rising living standards, risk tolerance, risk/return, Silicon Valley, Silicon Valley startup, six sigma, Skype, sovereign wealth fund, Steve Jobs, superstar cities, the High Line, transit-oriented development, Wall-E, Yogi Berra, Zipcar

In March 2008 they helped JPMorgan Chase take over an ailing Bear Stearns, with the Fed lending $30 billion to a newly created investment partnership that would acquire dodgy assets from the listing Bear. It was called Maiden Lane I, after the narrow street in lower Manhattan that runs near the Fed’s New York branch.2 In the long, hot summer of 2008 Treasury and the Fed rushed to the aid of AIG, the massive insurer whose reckless extension of credit insurance on mortgage debt threatened to sink it, its counterparties, and the global financial system. In September 2008 Treasury formally assumed responsibility for the trillions of dollars of debt issued by the housing behemoths Fannie Mae and Freddie Mac, a move intended to shore up the banking system. In the weeks and months after Lehman Brothers collapsed in September 2008, the bailout machine kicked into higher gear.

According to the data provider RealtyTrac, the number of properties receiving foreclosure notices soared from 1.29 million in 2007 to 2.33 million in 2008, 2.81 million in 2009, and 2.87 million in 2010. Between 2007 and 2011 more than 4 million homes were repossessed by banks. After peaking at 69.1 percent in late 2005, the homeownership rate in the United States began to fall; it stood at 66.5 percent in mid-2011. Through a combination of default, pay-downs, and shifting to rentals, Americans have shucked nearly a trillion dollars in mortgage debt since the crisis. According to the New York Federal Reserve, by the third quarter of 2011 the outstanding totals of household mortgages and home equity lines of credit were off 9.6 percent and 10 percent, respectively, from their peaks. But housing was just the beginning. According to the credit card research firm Card Hub, the delinquency rate on credit cards rose from 3.9 percent in the second quarter of 2007 to 6.61 percent in the first quarter of 2009, leading the credit card companies to write off tens of billions of dollars in balances.

When the Money Runs Out: The End of Western Affluence by Stephen D. King

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Albert Einstein, Asian financial crisis, asset-backed security, banking crisis, Basel III, Berlin Wall, Bernie Madoff, British Empire, capital controls, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, congestion charging, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-subsidies, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, floating exchange rates, full employment, George Akerlof, German hyperinflation, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, market clearing, moral hazard, mortgage debt, new economy, New Urbanism, Nick Leeson, Northern Rock, Occupy movement, oil shale / tar sands, oil shock, price mechanism, price stability, quantitative easing, railway mania, rent-seeking, reserve currency, rising living standards, South Sea Bubble, sovereign wealth fund, technology bubble, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, trickle-down economics, Washington Consensus, women in the workforce, working-age population

They also were associated with substantial increases in debt: borrowers were happy to borrow more because their assets (housing, for example) had risen in value, while lenders were happy to lend – often at ridiculously low interest rates – confident that the loans were backed by suitable collateral (housing, again) and secure in the belief that the world economy was not about to fall off a cliff. After all, this is what politicians and central bankers had promised. The gains in asset price and debt were extraordinary, at least relative to underlying economic performance. In the US, the Case-­ Shiller house price index more than doubled between 2000 and 2006. American households took on vast amounts of additional debt. As a share of (rising) household income, mortgage debt rose more than 50 per cent over the same period. The UK’s experience was more or less identical. Yet, in policy-­making circles, these extraordinary changes were casually brushed to one side. In 2004, Charlie Bean, at the time the Bank of England’s chief economist, argued that there was nothing amiss: he regarded house price gains and the associated increase in household indebtedness as merely ‘a transfer of lifetime wealth from younger generations to their parents’.7 In his view, first-­time buyers and those trading up were both willing and able to take out larger mortgages, thanks to lower interest rates and an increase in available mortgage finance.

Pre-­crisis, confidence in financial alchemy manifested itself in all sorts of ways: strange innovations within capital markets; the huge expansion of carry trades as investors could borrow cheaply in, for example, Japanese yen and invest in sterling, the New Zealand dollar or the Turkish lira, all of which offered much higher interest rates; rapacious bankers who were happy to bet the house (or, more likely, their bank) on ever more outlandish deals; and, for the man and woman on the street, a massive increase in mortgage debt as dream homes became part of a new, credit-­frenzied, reality. At the height of the subprime boom, when investors were falling over themselves to purchase allegedly safe assets with returns higher than those available on low-­yielding government bonds, the connection between ultimate borrower and ultimate lender became increasingly tenuous: the homebuyer in Arizona had little idea that her mortgage had, ultimately, been provided by Norwegian savers putting money aside for their future pensions.

The Age of Turbulence: Adventures in a New World (Hardback) - Common by Alan Greenspan

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air freight, airline deregulation, Albert Einstein, asset-backed security, bank run, Berlin Wall, Bretton Woods, business process, call centre, capital controls, central bank independence, collateralized debt obligation, collective bargaining, conceptual framework, Corn Laws, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, currency peg, Deng Xiaoping, Dissolution of the Soviet Union, Doha Development Round, double entry bookkeeping, equity premium, everywhere but in the productivity statistics, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, full employment, Gini coefficient, Hernando de Soto, income inequality, income per capita, invisible hand, Joseph Schumpeter, labor-force participation, labour market flexibility, laissez-faire capitalism, land reform, Long Term Capital Management, Mahatma Gandhi, manufacturing employment, market bubble, means of production, Mikhail Gorbachev, moral hazard, mortgage debt, new economy, North Sea oil, oil shock, open economy, pets.com, Potemkin village, price mechanism, price stability, Productivity paradox, profit maximization, purchasing power parity, random walk, reserve currency, risk tolerance, Ronald Reagan, shareholder value, short selling, Silicon Valley, special economic zone, the payments system, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, total factor productivity, trade liberalization, trade route, transaction costs, transcontinental railway, urban renewal, working-age population, Y2K

Soon statisticians could see a bulge in consumer spending that matched the surge in capital gains. Some analysts estimated that 3 percent to 5 percent of the increase in housing wealth showed up annually in the demand for all manner of goods and services, from cars and refrigerators to vacations and entertainment. And, of course, people poured money into home modernization and expansion, further fueling the boom. This pickup in outlays was virtually all funded through increases in home mortgage debt, which financial institutions made particularly easy to tap.* The net effect was characterized neatly by economics columnist Robert Samuelson, who wrote in Newsweek on December 30, 2002: "The housing boom saved the economy.... Fed up with the stock market, Americans went on a real-estate orgy. We traded up, tore down and added on." Booms, of course, beget bubbles, as the owners of dot-com stocks had painfully learned.

*Many of our Founding Fathers feared that American majority rule without the first ten amendments to the Constitution of the United States of America—our Bill of Rights—would be tyranny. 345 More ebooks visit: http://www.ccebook.cn ccebook-orginal english ebooks This file was collected by ccebook.cn form the internet, the author keeps the copyright. E I G H T E E N CURRENT ACCOUNTS AND DEBT C onsumer short-term d e b t . . . is approaching a historical turning p o i n t . . . . It must soon adjust itself to the nation's capacity for going in hock ; which is not limitless/' declared Fortune in March 1956. A month later the magazine added, "The same general observations apply to mortgage debt—but with double force." Chief economist Sandy Parker and coauthor Gil Burck arrived at those dour conclusions after poring over detailed data on the money owed by U.S. households. (The data had been assembled by me, working as a Fortune consultant.) Their concern was hardly unique—many economists and policymakers were worried that the ratio of household debt to household income had risen to a point where the American family was in danger of delinquency and default.

Fred, Bates Gill, Nicholas Lardy, and Derek Mitchell. China: The Balance Sheet. N e w York: Public Affairs (Perseus Books), 2 0 0 6 . Breyer, Stephen. "The Uneasy Case for Copyright: A Study of Copyright in Books, Photocopies, and C o m p u t e r Programs." Harvard Law Review 84, no. 2 (December 1970): 2 8 1 - 3 5 5 . Burck, Gilbert, and Sanford Parker. "The Coming Turn in C o n s u m e r Credit." Fortune, March 1956. . "The Danger in Mortgage Debt." Fortune, April 1956. Burns, Arthur F., and Wesley C. Mitchell. Measuring Business Cycles. N e w York: National Bureau of Economic Research, 1946. C a n n o n , Lou. Reagan. N e w York: G. P. Putnam's Sons, 1982. Cardoso, Fernando Henrique, w i t h Brian Winter. The Accidental President of Brazil: A Memoir. N e w York: Public Affairs, 2006. Chernow, Ron. Alexander Hamilton. N e w York: Penguin Press, 2004. .


pages: 430 words: 140,405

A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers by Lawrence G. Mcdonald, Patrick Robinson

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asset-backed security, bank run, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, diversification, fixed income, high net worth, hiring and firing, if you build it, they will come, London Interbank Offered Rate, Long Term Capital Management, margin call, moral hazard, mortgage debt, naked short selling, new economy, Ronald Reagan, short selling, sovereign wealth fund, value at risk

But Wall Street had outsmarted everyone, and instead of the old-fashioned regular reliable bonds, investors now stampeded for residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), collateralized debt obligations (CDOs), collateralized loan obligations (CLOs), and structured investment vehicles (SIVs), paying around 5 to 8 percent. Securitization. What a stroke of pure genius. Turning those mortgage debts into tangible entities. Hardly anyone noticed the minor flaws that would, in time, bankrupt half the world. The year 2003 turned into 2004, and still the flame of my ambitions burned as strongly as ever. I still wanted a seat at Wall Street’s top table, right up there in the major leagues, and I thought I had what it took to make those final steps. And there I would prove my dad was wrong to be so gloomy, and so devoid of optimism.

Hell, we were the leaders in this property rampage; we’d helped invent the CDOs, and no one could sell these gold-edged derivatives better than us. I didn’t dare mention even a semblance of doubt, not to anyone. That would have been tantamount to high treason, as if the president of the United States had invited Osama bin Laden to Camp David for the weekend. Still, without one iota of reason, evidence, or fact, I wondered. Deep in the night I wondered. Sometimes I went to sleep trying to make sense of the billion-dollar mortgage debts against our breathtaking profits. And then, four days before Christmas something happened. Something that was a puzzle more than a truth, and it did not occur to anyone else. At least I don’t think it did. No one ever said anything. It occurred perhaps only to a guy like myself, a natural worrier, who had been lying awake at night, wondering. Four days before Christmas, December 21, 2004, the news flashed onto my screen.


pages: 484 words: 136,735

Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis by Anatole Kaletsky

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bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Black Swan, bonus culture, Bretton Woods, BRICs, Carmen Reinhart, cognitive dissonance, collapse of Lehman Brothers, Corn Laws, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, Edward Glaeser, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, F. W. de Klerk, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, global rebalancing, Hyman Minsky, income inequality, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, laissez-faire capitalism, Long Term Capital Management, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, moral hazard, mortgage debt, new economy, Northern Rock, offshore financial centre, oil shock, paradox of thrift, peak oil, pets.com, Ponzi scheme, post-industrial society, price stability, profit maximization, profit motive, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, statistical model, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, Washington Consensus

In particular, the genuine wealth created in the free market period is now perceived to have been much smaller than the wealth created by the government-led high-tax capitalism of the 1950s and 1960s. On this reading of history, even the apparent resolution of class conflicts in the 1980s was a conjuring trick, because the true living standards of working people fell for most of the free-market period, with their pauperization disguised by a fraudulent inflation of property values and buildup of mortgage debt. As this tower of debt collapses, the middle class and the poor will realize that they gained little or nothing from free-market reforms. And if, as the New Normal assumes, economic conditions turn out to be even worse after the crisis than they were in the precrisis period, then a fortiori, the middle class will conclude that the free-market reforms of the Thatcher-Reagan period have made them much worse off than they were in the Keynesian Golden Age.

After all the speculative bubbles and phony financial froth were blown away, the true wealth created from the 1980s onward turned out to be much smaller than the wealth created in the era of government-led, strictly regulated, high-tax capitalism from 1945 until the 1970s. On this reading of history, even the apparent resolution of class conflicts that was arguably the greatest achievement of the 1980s was a mirage. The living standards of working people had actually fallen and this pauperization had simply been disguised by the ultimately ruinous build-up of mortgage debt. As this illusion vanished, the middle class and the poor should have realize that they gained nothing from the reforms of the free-market period. Their prospects in an austere postcrisis New Normal would be even worse than they were in the 1980s and 1990s and, therefore, far worse than in the Keynesian Golden Age of the postwar decades. If this view of the world turns out to be right and the post-crisis decades turn out to be even tougher for working people than the 1980s and 1990s, free-market capitalism would seem to be doomed, the Thatcher-Reagan reforms would be seen as a failure, and a return to the big government approach would seem inevitable.


pages: 363 words: 28,546

Portfolio Design: A Modern Approach to Asset Allocation by R. Marston

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asset allocation, Bretton Woods, capital asset pricing model, capital controls, carried interest, commodity trading advisor, correlation coefficient, diversification, diversified portfolio, equity premium, Eugene Fama: efficient market hypothesis, family office, financial innovation, fixed income, German hyperinflation, high net worth, hiring and firing, housing crisis, income per capita, index fund, inventory management, Long Term Capital Management, mortgage debt, passive investing, purchasing power parity, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Sharpe ratio, Silicon Valley, superstar cities, transaction costs, Vanguard fund

It’s just P1: a/b c11 P2: c/d QC: e/f JWBT412-Marston T1: g December 20, 2010 Real Assets—Real Estate 17:3 Printer: Courier Westford 223 in comparisons between the NCREIF Index and the NAREIT Index that leverage has to be taken into account. HOME OWNERSHIP For many families in the United States, their home is their largest financial asset. In many cases, home ownership is leveraged with mortgage debt with the latter typically representing the largest financial liability of the family. But even taking into account mortgage debt, home ownership represents a substantial portion of net wealth for many families. So it’s important to study returns on homes as part of a larger study of investment returns. Many families believe that home ownership provides some of the highest returns that they earn in their lifetimes. One of the reasons for this belief is that families often suffer from money illusion.


pages: 543 words: 157,991

All the Devils Are Here by Bethany McLean

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Asian financial crisis, asset-backed security, bank run, Black-Scholes formula, call centre, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Exxon Valdez, fear of failure, financial innovation, fixed income, high net worth, Home mortgage interest deduction, interest rate swap, laissez-faire capitalism, Long Term Capital Management, margin call, market bubble, market fundamentalism, Maui Hawaii, moral hazard, mortgage debt, Northern Rock, Own Your Own Home, Ponzi scheme, quantitative trading / quantitative finance, race to the bottom, risk/return, Ronald Reagan, Rosa Parks, shareholder value, short selling, South Sea Bubble, statistical model, telemarketer, too big to fail, value at risk

Rosner’s eureka moment comes when he sees data showing that about 35 percent of the mortgages used to purchase homes in 2004 and 2005 are not for primary residences, but for second homes and investment properties. And as he has been saying for years, the number of people borrowing to buy an actual home is dwarfed by the number of people borrowing to refinance. The refis, in turn, are made possible by rising home values—which may not even be real, given all the inflated appraisals. (In fact, Alan Greenspan himself noted in a study he co-authored in 2007 that about four-fifths of the rise in mortgage debt from 1990 to 2006 was due to the “discretionary extraction of home equity.”) Like Ranieri, Rosner has become worried about the CDO market. Around the same time as Ranieri’s speech, Rosner approaches a finance professor at Drexel University, Joseph Mason, to co-author a paper with him. They deliver it in February 2007 at the Hudson Institute. The title is a mouthful: “How Resilient Are Mortgage Backed Securities to Collateralized Debt Obligation Market Disruptions?”

But they had never focused on credit risk—the risk that the mortgages Fannie and Freddie guaranteed or held would default. Maybe it was because they had been so blind over the years to all the credit risk in the system, from subprime originators to AIG, that they never saw it coming with Fannie and Freddie, either. Thus it was that in 2007 Fannie and Freddie would add $600 billion in net new mortgage debt to their books, debt that would wind up being highly destructive. They would continue to buy and guarantee mortgages well into 2008. And thus it was that the GSEs would lumber, slowly but inevitably, toward a cliff they didn’t see. The financial crisis came on in fits and starts, and all the while Fannie Mae and Freddie Mac were accumulating the very mortgage risk that would cause the long-dormant volcano to finally erupt.


pages: 497 words: 150,205

European Spring: Why Our Economies and Politics Are in a Mess - and How to Put Them Right by Philippe Legrain

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3D printing, Airbnb, Asian financial crisis, bank run, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, business process, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, cleantech, collaborative consumption, collapse of Lehman Brothers, collective bargaining, corporate governance, credit crunch, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, debt deflation, Diane Coyle, Downton Abbey, Edward Glaeser, Elon Musk, en.wikipedia.org, energy transition, eurozone crisis, fear of failure, financial deregulation, first-past-the-post, forward guidance, full employment, Gini coefficient, global supply chain, Growth in a Time of Debt, hiring and firing, hydraulic fracturing, Hyman Minsky, Hyperloop, immigration reform, income inequality, interest rate derivative, Irish property bubble, James Dyson, Jane Jacobs, job satisfaction, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, liquidity trap, margin call, Martin Wolf, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, North Sea oil, Northern Rock, offshore financial centre, oil shale / tar sands, oil shock, open economy, price stability, private sector deleveraging, pushing on a string, quantitative easing, Richard Florida, rising living standards, risk-adjusted returns, Robert Gordon, savings glut, school vouchers, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Skype, smart grid, smart meter, software patent, sovereign wealth fund, Steve Jobs, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, Tyler Cowen: Great Stagnation, working-age population, Zipcar

But being tied to a particular property prevents people from moving to take advantage of better job opportunities, while their unpayable debt burden depresses their spending. It would be better to write down debts across the board, in a way that allows families to remain in their homes and provides banks with an upside if house prices recover. One way is to create economy-wide mechanisms that allow banks to swap their bad mortgage debts for an equity stake, with mortgage-holders paying rent on the proportion of the property owned by the bank. Likewise, the IMF has advocated creating economy-wide mechanisms for writing down unpayable corporate debts while giving viable companies the scope to remain in business. While the failure to tackle the overhangs of household and corporate debt is impeding the recovery in many countries, so too is the failure to deal decisively with Greece’s unsustainable government debt, as subsequent chapters will explain.

But my pay has been cut and there has been on top of that a substantial amount of pension cuts.” She set up Irish Homeowners Unite, a campaigning group for distressed borrowers that advises households on their options. While the Irish government introduced new insolvency laws in 2013 that aim to make it easier for distressed homeowners to negotiate “sustainable” deals on their mortgages with lenders, that is not enough. Mortgage debts ought to be reduced through economy-wide debt-equity swaps. Where necessary, personal bankruptcy terms ought to be eased and the process streamlined. Corporate debt has continued to soar in Ireland and Portugal and remains high in Spain.327 The IMF reckons that up to 20 per cent of southern European companies’ debts may end up in default: some 30 per cent in Italy, 41 per cent in Spain and 47 per cent in Portugal.328 The Fund therefore proposes a move towards insolvency procedures along the lines of America’s Chapter 11, which allows companies to continue trading while restructuring their debts, as well as economy-wide write-downs.


pages: 406 words: 113,841

The American Way of Poverty: How the Other Half Still Lives by Sasha Abramsky

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2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Affordable Care Act / Obamacare, bank run, big-box store, collective bargaining, deindustrialization, Francis Fukuyama: the end of history, full employment, ghettoisation, Gini coefficient, housing crisis, illegal immigration, immigration reform, income inequality, indoor plumbing, job automation, Mark Zuckerberg, Maui Hawaii, microcredit, mortgage debt, mortgage tax deduction, new economy, Occupy movement, offshore financial centre, payday loans, Plutocrats, plutocrats, Ponzi scheme, Potemkin village, profit motive, Ronald Reagan, school vouchers, upwardly mobile, War on Poverty, Washington Consensus, women in the workforce, working poor, working-age population, Works Progress Administration

The additional tax burden imposed on Americans by this reform would more than be cancelled out by the long-term financial benefits accrued under an EOF regimen. All of this is important. In 2000, the total level of student debt nationwide was estimated to be around $200 billion.11 A mere twelve years later, that number had increased to an astonishing $870 billion—or $24,000 for each graduate who left college having taken out loans. And, while underwater homeowners could use the bankruptcy system to clear their mortgage debts, there was no legal mechanism in place to allow student-loans to be similarly discharged. In April 2012, when Michigan Congressman Hansen Clarke proposed HR 4170, a Student Loan Forgiveness Act that would allow people to discharge their debt if they had paid at least 10 percent of their discretionary income on student loans for at least ten years, more than 1 million people signed petitions in support of the legislation.12 Yet the GOP-led House didn’t pass it.

Several other community credit unions were established to provide similar help to homeowners elsewhere. There’s no good reason these models shouldn’t become a key part of state and federal housing strategy in the near future, with credit unions able to access low-interest federal startup loans in return for guaranteeing to keep given numbers of people in their homes. More ambitiously, given the amount of toxic mortgage debt that the federal government was forced to buy up in the months following the 2008 collapse, there’s no reason that it shouldn’t use its status as a de facto lender of last resort to create similar profit-sharing agreements of its own with homeowners underwater on their loans or already skidding along the foreclosure route. Why not allow these families to stay in their homes on hybrid rental-ownership agreements?


pages: 448 words: 142,946

Sacred Economics: Money, Gift, and Society in the Age of Transition by Charles Eisenstein

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Albert Einstein, back-to-the-land, bank run, Bernie Madoff, big-box store, Bretton Woods, capital controls, clean water, collateralized debt obligation, credit crunch, David Ricardo: comparative advantage, debt deflation, deindustrialization, delayed gratification, disintermediation, diversification, fiat currency, financial independence, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, global supply chain, happiness index / gross national happiness, hydraulic fracturing, informal economy, invisible hand, Jane Jacobs, land tenure, Lao Tzu, liquidity trap, lump of labour, McMansion, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, new economy, oil shale / tar sands, Own Your Own Home, peak oil, phenotype, Ponzi scheme, profit motive, quantitative easing, race to the bottom, Scramble for Africa, special drawing rights, spinning jenny, technoutopianism, the built environment, Thomas Malthus, too big to fail

Here is a typical pro-inflation argument by Dean Baker of the Center for Economic and Policy Research: If it is politically impossible to increase the deficit, then monetary policy provides a second potential tool for boosting demand. The Federal Reserve Board can go beyond its quantitative easing program to a policy of explicitly targeting a moderate rate of inflation (e.g., 3–4 percent) thereby making the real rate of interest negative. This would also have the benefit of reducing the huge burden of mortgage debt facing tens of millions of homeowners as a result of the collapse of the housing bubble.22 The problem is, in a deflationary environment when banks aren’t lending, how can the Fed create inflation? This is the biggest problem with the inflation solution in a situation of overleveraging and overcapacity. Quantitative easing exchanges a highly liquid asset (base money, reserves) for less liquid assets (e.g., various financial derivatives), but that won’t cause price or wage inflation if the new money doesn’t reach people who will spend it.23 Even if the Fed monetized all debt, public and private, the essential problem would remain.

No longer will greed, scarcity, the quantification and commoditization of all things, the “time preference” for immediate consumption, the discounting of the future for the sake of the present, the fundamental opposition between financial interest and the common good, or the equation of security with accumulation be axiomatic. THE DEBT CRISIS: OPPORTUNITY FOR TRANSITION A golden opportunity to transition to negative-interest money may be nigh in the form of the “debt bomb” that nearly brought down the global economy in 2008. Consisting of high levels of sovereign debt, mortgage debt, credit card debt, student loans, and other debts that can never be repaid, the debt bomb was never defused but just delayed. New loans were issued to enable borrowers to repay old ones, but of course unless the borrowers increase their income, which will only happen with economic growth, this only pushes the problem into the future and makes it worse. At some point, default is inevitable. Is there a way out?


pages: 421 words: 128,094

King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone by David Carey; John E. Morris; John Morris

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asset allocation, banking crisis, Bonfire of the Vanities, carried interest, collateralized debt obligation, corporate governance, credit crunch, diversification, diversified portfolio, fixed income, Gordon Gekko, margin call, Menlo Park, mortgage debt, new economy, Northern Rock, risk tolerance, Rod Stewart played at Stephen Schwarzman birthday party, Sand Hill Road, sealed-bid auction, Silicon Valley, sovereign wealth fund, The Predators' Ball, éminence grise

Many industry insiders predicted that, collectively, private equity funds raised in the mid-2000s would not break even, performing even worse than funds raised at the end of the 1990s that were invested during the last market high. The push by some firms like Apollo, KKR, and Carlyle to diversify away from LBOs into other asset classes by launching business development companies and publicly traded debt funds also proved calamitous. A $900 million mortgage debt fund that Carlyle raised on the Amsterdam exchange, shortly after KKR launched its $5 billion equity fund, was leveraged with more than $22 billion of debt and capsized in 2008 when its lenders issued margin calls and seized all its assets. It was a complete wipeout. KKR Financial, a leveraged mortgage and corporate debt vehicle in the United States, had to be propped up by KKR and barely survived.

Lee Partners: Vyvyan Tenorio, “It Could Have Been Worse,” Deal, Jan. 7, 2010; Vyvyan Tenorio, “The Fallen,” Deal, Feb. 19, 2009. 16 Forstmann Little: Tiffany Kary and Don Jeffrey, “Citadel Broadcasting Can Use Cash During Bankruptcy,” Bloomberg News, Dec. 21, 2009. 17 In Britain, Terra Firma Capital Partners: Devin Leonard, “Battle of the Bands: Citigroup Is up Next,” NYT, Feb. 6, 2010. 18 The deals done: David Carey, “Buyouts and Banks,” Deal, Nov. 30, 2008. 19 The rescue of Washington Mutual: Geraldine Fabrikant, “WaMu Tarnishes Star Equity Firm,” NYT, Sept. 27, 2008. 20 Executives at two other: Background interviews. 21 One of Blackstone’s coinvestors: SVG Capital plc Interim Report 2009, 13. 22 TXU, the record-breaking buyout: David Carey, “Future Shock,” Deal, Nov. 24, 2009; Jenny Anderson and Julie Creswell, “For Buyout Kingpins, the TXU Utility Deal Gets Tricky,” NYT, Feb. 27, 2010. 23 A $900 million mortgage debt fund: Peter Lattman, Randall Smith, and Jenny Strasburg, “Carlyle Fund in Free Fall as Its Banks Get Nervous,” WSJ, Mar. 14, 2008; Henny Sender, “Leverage Levels a Fatal Flaw in Carlyle Fund,” Financial Times, Nov. 30, 2009; home page of Carlyle Capital, www.carlylecapitalcorp.com. 24 KKR Financial: KKR Financial Holdings LLC press releases, Sept. 24, 2007, and Mar. 31, 2008. 25 Apollo Investment Corporation: Apollo Investment Corporation Annual Report 2009, 24. 26 The steady profits: Craig Karmin and Susan Pulliam, “Big Investors Face Deeper Losses,” WSJ, Mar. 5, 2009. 27 “By December [2007]”: Background interview with an adviser to limited partners. 28 CalSTRS, was so cash-strapped: Karmin and Pulliam, “Big Investors”; background interviews with an adviser to limited partners and an executive at a private equity firm. 29 More than $800 billion: “The Leveraged Finance Maturity Cycle,” Credit Sights, Apr. 29, 2009; “Refinancing the Buyout Boom,” Fitch Ratings special report, Oct. 29, 2009; Mike Spector, “Moody’s Warns on Deluge of Debt,” WSJ, Feb. 1, 2010. 30 Peterson felt so badly: Confirmed in e-mail from Peter Peterson, Feb. 25, 2010, in response to a query. 31 That month the firm announced: Blackstone annual report for 2008, Mar. 3, 2009, 158. 32 Motorola’s cell phones were eclipsed: Freescale and Motorola annual reports. 33 “In every fund”: Stephen Schwarzman interview. 34 In early 2008: Freescale press release, Feb. 8, 2008; background interviews with two sources familiar with the change. 35 Chip sales … nose-dived: Freescale financial reports. 36 “The game on a deal”: Schwarzman interview. 37 Harry Macklowe: Jennifer S.


pages: 524 words: 143,993

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

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air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, Bretton Woods, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy

This was true for many institutions and countries, but it was dramatically true of the UK. The balance sheet of the UK banking system grew from about 50 per cent of GDP for the century prior to 1970, to a little over 200 per cent in the late 1980s and over 500 per cent of GDP immediately before the crisis of 2007.26 This partly reflected the increased debt within the UK economy, particularly household mortgage debt. But between the late 1990s and 2008, the consolidated foreign claims of UK headquartered banks also rose from less than $500bn to $4tn, or about 150 per cent of GDP.27 Part of this was because of increased trading activity and part of it was because of mergers, particularly the 2007 takeover of the Dutch banking group ABN AMRO by the Royal Bank of Scotland. Ben Broadbent, a member of the UK’s monetary policy committee, remarked in 2012 that ‘the major UK-owned banks have lost around 15 times on non-UK mortgages what they have in the domestic market.

In addition to these changes, as Andrew Smithers has argued, there is a powerful case for attacking the bonus culture, which leads management to under-invest in capital goods and over-invest in share buybacks.17 The fourth area is changes in financial contracts. The idea would be to create debt contracts that automatically adjust to circumstances. Index-linked debt is an example: the nominal value depends on the rate of inflation. Similarly, the nominal value of mortgage debt could be indexed to house prices: if house prices rose above a certain amount, lenders would share in the gain and similarly, if house prices fell, lenders would share in the losses. Such contracts might be an attractive way for investors to gain from rising house prices without having to put together portfolios of houses. They would also reduce the need for foreclosures. The fifth area is income redistribution.

Investment: A History by Norton Reamer, Jesse Downing

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Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Berlin Wall, Bernie Madoff, Brownian motion, buttonwood tree, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, equity premium, estate planning, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, family office, Fellow of the Royal Society, financial innovation, fixed income, Gordon Gekko, Henri Poincaré, high net worth, index fund, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, joint-stock company, Kenneth Rogoff, labor-force participation, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, margin call, means of production, Menlo Park, merger arbitrage, moral hazard, mortgage debt, Network effects, new economy, Nick Leeson, Own Your Own Home, pension reform, Ponzi scheme, price mechanism, principal–agent problem, profit maximization, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Sand Hill Road, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spinning jenny, statistical arbitrage, technology bubble, The Wealth of Nations by Adam Smith, time value of money, too big to fail, transaction costs, underbanked, Vanguard fund, working poor, yield curve

Economic agents knew 224 Investment: A History enough not to view the equity of technology firms as low risk, and therefore agents generally did not assemble their balance sheets in such a way so as to have their financial obligations depend fundamentally on the value of those stocks. For the rational agent, then, the shock produced by the precipitous decline in the stock of tech companies did not induce severe distress. This was quite different than the highly rated tranches of mortgage debt (often having AA and AAA ratings), where agents believed in the soundness of the asset and often constructed their liabilities to depend fundamentally on their valuation not declining substantially. Agents thought, in short, that these mortgage assets involved their low-risk capital and as such could build more liabilities against them, and when that turned out not to be true, disaster struck.

., 214 Mises, Ludwig von, 205 Mitchell, Charles, 164 Mit Ghamr Savings Bank, 38 Modigliani, Franco, 121–22, 233 Moley, Raymond, 211 momentum investing strategies, 314 monetarist school, 206–7, 212 428 Investment: A History Monetary History of the United States, 1867–1960, A (Friedman and Schwartz), 206 money: Aristotle on, 33, 59; expanding supply of, 176; sterility of, 23; time value of, 32 moneylenders (doso), 31 money market mutual funds, 143 Monte, 83 moral hazard, 219 Mores, Edward Rowe, 132 Morgan Stanley, 294 Morgenthau, Henry, 209–10 mortality risk, 132, 145 mortgages, 321–23; insurance, 321; mortgage-backed securities, 217, 266, 323; mortgage debt, highly rated tranches of, 224; subprime-mortgage lending, 223 mudaraba contract, 35, 53, 55 mufawada contract, 55 Muhammad, 37 Murlyn Corporation, 190 Murphy, Thomas, 7 Muscovy Company, 65–66 musharaka contract, 53 Muth, Richard, 207 mutual funds, 139–44; closedend, 140, 141; 401(k) and, 144; Great Depression and open-ended, 141–42; industry today, 144; money market, 143; opportunities with, 92; during postwar period, 142–44; precursors to, 140; in retirement accounts, 295; shares through, 93 mutual life insurance companies, 133–34 mutual savings banks, 134–37 Napoleon, 74 Napoleonic Wars, 87 naruqqum investment partnerships, 52 Nasser Social Bank, 38 National Conference of Commissioners on Uniform State Laws, 124 National Housing Act of 1934, 321–22 national or international exchange, 94 National School Lunch Program, 167 National Venture Capital Association (NVCA), 278 Natomas Company, 186 natural catastrophe, 332; raising funds by selling, 162; “safe,” 1; selling and purchasing, 165; Treasury, 252 natural resources, commodities and, 281–82 NBC Reports, 111 Needham & Co., 187 negotiable bills of exchange, 83–84 nemulum (net profit), 52 net present value (NPV), 231–32 net profit (nemulum), 52 new asset classes, 331–32 New Deal, 92, 108, 109 new elite, 10, 291, 304–5, 315, 318 New World, 65, 69 New York Curb Market Agency, 89, 97 New York Life, 102 New York Stock Exchange (NYSE), 88, 191; closure of, 203; mergers and transformations, 95; “Own Your Share of American Business” campaign, 92; stock ticker network, 95; trading Index 429 volume, 89, 90; Whitney, R., and, 164–67 New York Stock Exchange Gratuity Fund, 165 New York Yacht Club, 165 Nicostratus, 24 no-arbitrage condition, 235–36 Nomos Nautikos, 52 nonnegotiable bills of exchange, 83 Norman, Montagu, 202 Nourse, Edwin, 207 NPV.


pages: 515 words: 132,295

Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

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3D printing, accounting loophole / creative accounting, additive manufacturing, Airbnb, algorithmic trading, Asian financial crisis, asset allocation, bank run, Basel III, bonus culture, Bretton Woods, British Empire, call centre, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, centralized clearinghouse, clean water, collateralized debt obligation, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, crowdsourcing, David Graeber, deskilling, Detroit bankruptcy, diversification, Double Irish / Dutch Sandwich, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial deregulation, financial intermediation, Frederick Winslow Taylor, George Akerlof, gig economy, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, High speed trading, Home mortgage interest deduction, housing crisis, Howard Rheingold, Hyman Minsky, income inequality, index fund, interest rate derivative, interest rate swap, Internet of things, invisible hand, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, knowledge economy, labor-force participation, labour mobility, London Whale, Long Term Capital Management, manufacturing employment, market design, Martin Wolf, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, offshore financial centre, oil shock, passive investing, pensions crisis, Ponzi scheme, principal–agent problem, quantitative easing, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, Rana Plaza, RAND corporation, random walk, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, Snapchat, sovereign wealth fund, Steve Jobs, technology bubble, The Chicago School, The Spirit Level, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, too big to fail, trickle-down economics, Tyler Cowen: Great Stagnation, Vanguard fund

And getting people to feel secure, and thus to spend more, is crucial to a sustainable recovery in an economy like America’s, where consumer spending accounts for 70 percent of GDP.9 Some economists have called on Americans to reconsider the model of home ownership as the cultural norm, arguing that it would make more economic sense for people to rent rather than own, since the former increases labor mobility and helps diversify investment risk. That may be true for some groups and in certain parts of the country—one thing we learned from the 2008 crisis was that heavy mortgage debts aren’t for everyone. But the American Dream of home ownership is deeply entrenched. Like it or not, a home, not stocks or savings, remains the chief financial asset for most Americans. And that’s likely to continue to be the case over the next several years, since returns from stocks are unlikely to match those of the recent past, for reasons covered in the previous chapters. Moreover, there’s ample proof that home ownership creates more economic and social stability in communities, since owners tend to be more civically engaged than renters and have a greater stake in the quality of local schools, parks, and playgrounds.10 Unfortunately, the economic climate and policy decisions taken since the 2008 crisis have resulted in a small group of rich investors—not American families—driving the real estate market and reaping most of the gains.

Everyone hunkers down and stops spending, and unemployment grows. The perverse cycle continues, as out-of-work people with even less spending power are buried under mounds of debt (no federally subsidized bailouts for them). Indeed, House of Debt paints a fascinating picture of how similar the periods leading up to the Great Depression and the Great Recession were in this regard. From 1920 to 1929 there was “an explosion in both mortgage debt and installment debt for purchasing automobiles and furniture,” a consumer spending spree based on easy credit that mirrors the doubling of consumer debt in America between 2000 and 2007 in the run-up to the housing crisis.23 Monetary policy of the sort we’ve had for the last several years—meaning superlow interest rates and big asset purchases by central bankers—can’t do much to help, since the people benefiting from it are those who actually own assets, not debt.


pages: 160 words: 46,449

The Extreme Centre: A Warning by Tariq Ali

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Affordable Care Act / Obamacare, Berlin Wall, bonus culture, BRICs, British Empire, centre right, deindustrialization, Edward Snowden, Fall of the Berlin Wall, financial deregulation, first-past-the-post, full employment, labour market flexibility, land reform, means of production, Mikhail Gorbachev, Monroe Doctrine, mortgage debt, North Sea oil, obamacare, offshore financial centre, reserve currency, Ronald Reagan, South China Sea, The Chicago School, The Wealth of Nations by Adam Smith, trade route, trickle-down economics, Washington Consensus, Wolfgang Streeck

Yes, we question this democracy because the parties in power do not look out for the collective good, but for the good of the rich. Because they understand growth as the growth of businessmen’s profits, not the growth of social justice, redistribution, public services, access to housing and other necessities. Because the parties in power are concerned only for their continuation in office … Because no politician has to live with what they legislate for their ‘subjects’: insecurity, mortgage debt, uncertainty. We question this democracy because it colludes with corruption, allowing politicians to hold a private post at the same time as public office, to profit from privileged information, to step into jobs as business advisors after leaving office, making it very profitable to be a politician. Yes, we question this democracy because it consists in an absolute delegation of decision-making into the hands of politicians that are nominated in closed lists and to whom we have no access of any kind.


pages: 322 words: 77,341

I.O.U.: Why Everyone Owes Everyone and No One Can Pay by John Lanchester

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asset-backed security, bank run, banking crisis, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black-Scholes formula, Celtic Tiger, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, George Akerlof, greed is good, hindsight bias, housing crisis, Hyman Minsky, interest rate swap, invisible hand, Jane Jacobs, John Maynard Keynes: Economic Possibilities for our Grandchildren, laissez-faire capitalism, liquidity trap, Long Term Capital Management, loss aversion, Martin Wolf, mortgage debt, mortgage tax deduction, mutually assured destruction, new economy, Nick Leeson, Northern Rock, Own Your Own Home, Ponzi scheme, quantitative easing, reserve currency, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, South Sea Bubble, statistical model, The Great Moderation, the payments system, too big to fail, tulip mania, value at risk

Contrast this to Britain, with our ridiculously crook-friendly libel law and huge cash awards—if anybody cared about the point of alleged honor, the cash wouldn’t be necessary.) Add this together, and you get an entirely different culture of money, borrowing, and debt, one which means that the French have dramatically lower levels of household debt than the Anglo-Saxon economies. In Britain, going into the credit crunch, the typical household owed more than 160 percent of its average income—an alarmingly high figure and one which reflects our high levels of mortgage debt, and general willingness to borrow, borrow, borrow in order to spend, spend, spend. In France the equivalent figure was 60 percent. Individually and collectively, French households are much less stretched and much less at risk from a downturn. Economists attribute this to the fact that Germany and France were the first countries to emerge officially from the current recession. Back in the days of my first mortgage, British loans were like European ones, in that the bank preferred not to lend you more than half, or at the most three-quarters, of the value of the property.


pages: 183 words: 17,571

Broken Markets: A User's Guide to the Post-Finance Economy by Kevin Mellyn

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banking crisis, banks create money, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, call centre, Carmen Reinhart, central bank independence, centre right, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, crony capitalism, currency manipulation / currency intervention, disintermediation, eurozone crisis, fiat currency, financial innovation, financial repression, floating exchange rates, Fractional reserve banking, global reserve currency, global supply chain, Home mortgage interest deduction, index fund, joint-stock company, Joseph Schumpeter, labor-force participation, labour market flexibility, liquidity trap, London Interbank Offered Rate, lump of labour, market bubble, market clearing, Martin Wolf, means of production, mobile money, moral hazard, mortgage debt, mortgage tax deduction, Ponzi scheme, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, rising living standards, Ronald Coase, seigniorage, shareholder value, Silicon Valley, statistical model, Steve Jobs, The Great Moderation, the payments system, Tobin tax, too big to fail, transaction costs, underbanked, Works Progress Administration, yield curve, Yogi Berra

The Agony of the Household Sector Up to 2008, with no significant financial wealth, debts in excess of their income—which was in any case stagnant—and diminished employment security, the great American “middle class” continued to drive the economy. Up until 2008, personal consumption accounted for 70 percent of US GDP. The largest positive item on the US household balance sheet was the value of residential property, and the largest negative item was mortgage debt. As long as house prices rose faster than consumer debt, household spending would continue to grow. But that depended on the great Wall Street leverage machine continuing to turn consumer credit into investments. When it became clear that it had gone too far and the machine seized up, so did demand for houses, and therefore their prices fell, especially in the most overheated and overbuilt real estate markets, such as California, Nevada, and Florida.


pages: 318 words: 77,223

The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse by Mohamed A. El-Erian

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Airbnb, balance sheet recession, bank run, barriers to entry, Bretton Woods, British Empire, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, collapse of Lehman Brothers, corporate governance, currency peg, Erik Brynjolfsson, eurozone crisis, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, Flash crash, forward guidance, friendly fire, full employment, future of work, Hyman Minsky, If something cannot go on forever, it will stop, income inequality, inflation targeting, Jeff Bezos, Kenneth Rogoff, Khan Academy, liquidity trap, Martin Wolf, megacity, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, oil shale / tar sands, price stability, principal–agent problem, quantitative easing, risk tolerance, risk-adjusted returns, risk/return, Second Machine Age, secular stagnation, sharing economy, sovereign wealth fund, The Great Moderation, The Wisdom of Crowds, too big to fail, University of East Anglia, yield curve

Indeed, as detailed by Atif Mian and Amir Sufi in their recent book, House of Debt, the phenomenon was a much broader one, with households (and, I would add, companies) also falling victim to it.6 Having access to new “exotic” lending vehicles that dismantled traditional barriers to expensive and, for some, hard-to-get credit—such exotic instruments as home mortgage loans and refinancing that required no income verification, involved no up-front fees or down payments, and whose repayment conditions could be structured in a very back-loaded manner—too many households embarked on financial activities that they could ill afford, taking risks that they really did not understand. In the process, they did more than mortgage future income that they would have difficulty generating. To capture a piece of what appeared as a housing market that could only go up in value, too many took on mortgage debt that they could not afford, fueling an unusual combination of subsequent foreclosures, bankruptcies, and poverty. Governments were not immune to this societal phenomenon. Many, including the least creditworthy ones that could ill afford commercial borrowing terms, were tempted by the easy availability of debt financing as creditors rushed to provide financing at ever more lenient terms. With the private sector credit factories working at feverish levels of activity, the notion of proper creditworthiness analysis gave way to an emphasis on driving lending volumes ever higher.


pages: 257 words: 64,763

The Great American Stickup: How Reagan Republicans and Clinton Democrats Enriched Wall Street While Mugging Main Street by Robert Scheer

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banking crisis, Bernie Madoff, Bernie Sanders, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, facts on the ground, financial deregulation, housing crisis, invisible hand, Long Term Capital Management, mortgage debt, new economy, Ponzi scheme, profit motive, Ralph Nader, Ronald Reagan, too big to fail, trickle-down economics

“This current financial crisis had many causes . . . in the widespread use of poorly understood financial instruments, in shortsightedness and excessive leverage at financial institutions. But it was also the product of basic failures in financial supervision and regulation.” What irony that Summers, who as Clinton’s Treasury secretary pushed through legislation guaranteeing “Legal Certainty for Swap Agreements” and banning the regulation of securitized mortgage debt, should now admit that “securitization led to an erosion of lending standards, resulting in market failure that fed the housing boom and deepened the housing bust.” According to Summers and Geithner, the Obama plan promised that all derivatives dealers would be “subject to supervision, and regulators will be empowered to enforce rules against manipulation and abuse.” If such language is ever passed into law, I hope that Brooksley Born is in the gallery and gets the standing ovation she deserves as the woman who, as head of the Commodity Futures Trading Commission, warned that the derivatives market needed to be regulated.


pages: 598 words: 172,137

Who Stole the American Dream? by Hedrick Smith

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Affordable Care Act / Obamacare, airline deregulation, anti-communist, asset allocation, banking crisis, Bonfire of the Vanities, British Empire, business process, clean water, cloud computing, collateralized debt obligation, collective bargaining, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, David Brooks, Deng Xiaoping, desegregation, Double Irish / Dutch Sandwich, family office, full employment, global supply chain, Gordon Gekko, guest worker program, hiring and firing, housing crisis, Howard Zinn, income inequality, index fund, informal economy, invisible hand, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, laissez-faire capitalism, late fees, Long Term Capital Management, low cost carrier, manufacturing employment, market fundamentalism, Maui Hawaii, mortgage debt, new economy, Occupy movement, Own Your Own Home, Peter Thiel, Plutonomy: Buying Luxury, Explaining Global Imbalances, Ponzi scheme, Ralph Nader, RAND corporation, Renaissance Technologies, reshoring, rising living standards, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, shareholder value, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, Steve Jobs, The Chicago School, The Spirit Level, too big to fail, transaction costs, transcontinental railway, union organizing, Unsafe at Any Speed, Vanguard fund, We are the 99%, women in the workforce, working poor, Y2K

But Lawrence Lindsey, Bush’s first chief economics adviser, said no Bush official wanted to raise the alarm. “No one wanted to stop that bubble,” said Lindsey. “It would have conflicted with the president’s own policies.” The Warnings Those were comments made in hindsight. But there were warnings ahead of time from outside economists. In 2003, Dean Baker and Mark Weisbrot of the Center for Economic and Policy Research in Washington cautioned that rising mortgage debt had reached dangerous levels and this was “especially scary” because housing prices “may be inflated by as much as 20 to 30 percent.” Other warnings that the housing market was dangerously overheated came from economists Stephen Roach of Morgan Stanley and Paul Krugman of Princeton. In 2004, Robert Shiller, whose book Irrational Exuberance had foretold a stock market bust in 2000, reported ominous housing bubbles in key regional markets, warning that speculative fever could bring widespread mortgage defaults.

The first raise on June 30, 2004, increased the rate to 1.25 percent, and the final one, on Greenspan’s last day as Fed chairman, on January 31, 2006, raised the rate to 4.5 percent. 33 Housing prices from the late 1990s Shiller, Irrational Exuberance, 13. 34 “The growth of housing prices” Johnson and Kwak, 13 Bankers, 112. 35 Massive defaults were inevitable Shiller, Irrational Exuberance, 13. 36 Gramlich cautioned Greenspan Gramlich, Subprime Mortgages, 6; Gramlich, “Booms and Busts: The Case of Subprime Mortgages,” lecture, Federal Reserve Bank of Kansas City symposium, August 30–September 1, 2007, 106, published in Economic Review (Fourth Quarter 2007), Federal Reserve Bank of Kansas City, http://​www.​kansascityfed.​org/​publicat/​econrev/​PDF/​4q07​Gramlich.​pdf. 37 51 percent of subprime loans Gramlich, Subprime Mortgages, 21; Greg Ip, “Did Greenspan Add to Subprime Woes?” The Wall Street Journal, June 9, 2007. 38 “Like a city with a murder law” Gramlich, “Booms and Busts.” 39 “What we forgot” Johnson and Kwak, 13 Bankers, 142–44. 40 No Bush official wanted Jo Becker, Sheryl Gay Stolberg, and Stephen Labaton, “White House Philosophy Stoked Mortgage Bonfire,” The New York Times, December 21, 2008. 41 Mortgage debt had reached dangerous levels David Cay Johnston, “Business; In Debate Over Housing Bubble, a Winner Also Loses,” The New York Times, April 11, 2004. 42 Shiller’s warning was more stark Robert J. Shiller, “Household Reactions to Changes in Housing Wealth,” Discussion Paper 1459 (New Haven, CT: Cowles Foundation, Yale University, April 2004), http://​cowles.​econ.​yale.​edu. 43 “May be the biggest bubble in U.S. history” Robert J.


pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

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affirmative action, Albert Einstein, algorithmic trading, Andy Kessler, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, financial independence, financial innovation, fixed income, full employment, global reserve currency, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, happiness index / gross national happiness, haute cuisine, high net worth, Hyman Minsky, index fund, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, job automation, Johann Wolfgang von Goethe, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, Kevin Kelly, labour market flexibility, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Martin Wolf, merger arbitrage, Mikhail Gorbachev, Milgram experiment, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Naomi Klein, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, pets.com, Plutocrats, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, Richard Thaler, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, savings glut, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond

Subprime lending contributed to increases in American home ownership rates to a high of 69.2 percent in 2004, up from 64 percent in 1994. Between 1997 and 2006 the higher overall demand caused average house prices to double. By late 2006, the average U.S. home cost four times the average family income, an increase from the historical two or three times. As house prices rose, Americans saved less and borrowed more. American home mortgage debt increased to 73 percent of American GDP in 2008, up from below 50 percent in the 1990s. High house prices put home ownership beyond the means of the people that the policy was meant to assist. Borrowers were forced to enter into expensive creative mortgages to purchase houses. Eventually a surplus of unsold homes and unsustainable levels of borrowings caused housing prices to decline from mid-2006, leaving homeowners with unsustainable levels of debt.

Jefferson County paid fixed rate and received a floating rate of, say, 67 percent of one-month LIBOR. Historical studies going back to 1986 showed that the notes typically trade at 67 percent of 1-month LIBOR. If the relationship did not change (known as basis risk), Jefferson County saved between 0.75 and 1.25 percent per annum. In January 2008, when monoline insurers were downgraded by rating agencies because of exposure to subprime mortgage debt, the ARSs guaranteed by them also got downgraded. Investors exited the ARS market and auctions failed. Where there is an auction failure, the rate increases to a pre-agreed maximum level, as high as 20 percent, to compensate investors unable to sell their investments. In February 2008, Jefferson County’s interest rate rose to 10 percent from 3 percent. The interest costs of Jefferson County’s sewer debt reached more than $250 million, against the $138 million in revenue the system produces.


pages: 829 words: 186,976

The Signal and the Noise: Why So Many Predictions Fail-But Some Don't by Nate Silver

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airport security, availability heuristic, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, big-box store, Black Swan, Broken windows theory, Carmen Reinhart, Claude Shannon: information theory, Climategate, Climatic Research Unit, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, computer age, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, Daniel Kahneman / Amos Tversky, diversification, Donald Trump, Edmond Halley, Edward Lorenz: Chaos theory, en.wikipedia.org, equity premium, Eugene Fama: efficient market hypothesis, everywhere but in the productivity statistics, fear of failure, Fellow of the Royal Society, Freestyle chess, fudge factor, George Akerlof, haute cuisine, Henri Poincaré, high batting average, housing crisis, income per capita, index fund, Internet Archive, invention of the printing press, invisible hand, Isaac Newton, James Watt: steam engine, John Nash: game theory, John von Neumann, Kenneth Rogoff, knowledge economy, locking in a profit, Loma Prieta earthquake, market bubble, Mikhail Gorbachev, Moneyball by Michael Lewis explains big data, Monroe Doctrine, mortgage debt, Nate Silver, new economy, Norbert Wiener, PageRank, pattern recognition, pets.com, prediction markets, Productivity paradox, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Rodney Brooks, Ronald Reagan, Saturday Night Live, savings glut, security theater, short selling, Skype, statistical model, Steven Pinker, The Great Moderation, The Market for Lemons, the scientific method, The Signal and the Noise by Nate Silver, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, transfer pricing, University of East Anglia, Watson beat the top human players on Jeopardy!, wikimedia commons

“The major difference between a thing that might go wrong and a thing that cannot possibly go wrong is that when a thing that cannot possibly go wrong goes wrong it usually turns out to be impossible to get at or repair,” wrote Douglas Adams in The Hitchhiker’s Guide to the Galaxy series.37 But how did the ratings agencies’ models, which had all the auspices of scientific precision, do such a poor job of describing reality? How the Ratings Agencies Got It Wrong We have to dig a bit deeper to find the source of the problem. The answer requires a little bit of detail about how financial instruments like CDOs are structured, and a little bit about the distinction between uncertainty and risk. CDOs are collections of mortgage debt that are broken into different pools, or “tranches,” some of which are supposed to be quite risky and others of which are rated as almost completely safe. My friend Anil Kashyap, who teaches a course on the financial crisis to students at the University of Chicago, has come up with a simplified example of a CDO, and I’ll use a version of this example here. Imagine you have a set of five mortgages, each of which you assume has a 5 percent chance of defaulting.

Benmelech and Dlugosz, “The Alchemy of CDO Credit Ratings.” 39. Barnett-Hart, “The Story of the CDO Market Meltdown: An Empirical Analysis.” 40. The 20 percent chance of default refers to the rate over a five-year period. 41. And it can get worse than that. These securities can also be combined into derivatives of one another, which are even more highly leveraged. For instance, five Alpha Pools of mortgage debt could be combined into a Super Alpha Pool, which would pay you out unless all five of the underlying Alpha Pools defaulted. The odds of this happening are just one in 336 nonillion (a one followed by thirty zeroes) if the mortgages are perfectly uncorrelated with one another—but 1 in 20 if they are perfectly correlated, meaning that it is leveraged by a multiple of 16,777,215,999,999,900,000,000,000,000,000. 42.


pages: 701 words: 199,010

The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal by Ludwig B. Chincarini

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affirmative action, asset-backed security, automated trading system, bank run, banking crisis, Basel III, Bernie Madoff, Black-Scholes formula, buttonwood tree, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, discounted cash flows, diversification, diversified portfolio, family office, financial innovation, financial intermediation, fixed income, Flash crash, full employment, Gini coefficient, high net worth, hindsight bias, housing crisis, implied volatility, income inequality, interest rate derivative, interest rate swap, labour mobility, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low skilled workers, margin call, market design, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, Northern Rock, Occupy movement, oil shock, price stability, quantitative easing, quantitative hedge fund, quantitative trading / quantitative finance, Ralph Waldo Emerson, regulatory arbitrage, Renaissance Technologies, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Sharpe ratio, short selling, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, systematic trading, The Great Moderation, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond

The growth of subprime mortgage lending is one indication of the extent to which access to credit has increased for all households, including those with lower incomes. In 1994, fewer than 5 percent of mortgage originations were in the subprime market, but by 2005 about 20 percent of new mortgage loans were subprime. Indeed, the expansion of subprime lending has contributed importantly to the substantial increase in the overall use of mortgage credit. From 1995 to 2004, the share of households with mortgage debt increased 17 percent, and in the lowest income quintile, the share of households with mortgage debt rose 53 percent. —Ben Bernanke, speech at the Opportunity Finance Network's Annual Conference, Washington, DC, November 1, 2006 A wide range of topics is examined, including the GSEs' automated underwriting technology used throughout the industry, their many affordable lending partnerships and underwriting initiatives aimed at extending credit to underserved borrowers, their development of new targeted low down payment products, their entry into new markets such as the subprime market, and their attempts to reduce predatory lending.


pages: 310 words: 90,817

Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown by Detlev S. Schlichter

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bank run, banks create money, British Empire, capital controls, Carmen Reinhart, central bank independence, currency peg, Fractional reserve banking, German hyperinflation, global reserve currency, inflation targeting, Kenneth Rogoff, Long Term Capital Management, market clearing, Martin Wolf, means of production, moral hazard, mortgage debt, open economy, Ponzi scheme, price discovery process, price mechanism, price stability, pushing on a string, quantitative easing, reserve currency, rising living standards, risk tolerance, savings glut, the market place, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, Y2K

As one should expect, and as is now abundantly clear, the credit excesses and mispricing of assets have reached phenomenal proportions. In the 10 years to the start of the most recent crisis in 2007, bank balance sheets in the United States more than doubled, from $4.7 trillion to $10.2 trillion.3 The Fed’s M2 measure of total money supply rose over the same period from less than $4 trillion to more than $7 trillion.4 From 1996 to 2006, total mortgage debt outstanding in the United States almost tripled, from $4.8 trillion to $13.5 trillion,5 as house prices appreciated, in inflation-adjusted terms, three times faster as over the preceding 100 years.6 Why I Wrote This Book It seems undeniable that elastic money has not brought greater stability. Regarding the stability of money’s purchasing power, the historical record of paper money systems has always been exceptionally poor.


pages: 372 words: 107,587

The End of Growth: Adapting to Our New Economic Reality by Richard Heinberg

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3D printing, agricultural Revolution, back-to-the-land, banking crisis, banks create money, Bretton Woods, carbon footprint, Carmen Reinhart, clean water, cloud computing, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, David Graeber, David Ricardo: comparative advantage, dematerialisation, demographic dividend, Deng Xiaoping, Elliott wave, en.wikipedia.org, energy transition, falling living standards, financial deregulation, financial innovation, Fractional reserve banking, full employment, Gini coefficient, global village, happiness index / gross national happiness, I think there is a world market for maybe five computers, income inequality, invisible hand, Isaac Newton, Kenneth Rogoff, late fees, money: store of value / unit of account / medium of exchange, mortgage debt, naked short selling, Naomi Klein, Negawatt, new economy, Nixon shock, offshore financial centre, oil shale / tar sands, oil shock, peak oil, Ponzi scheme, post-oil, price stability, private military company, quantitative easing, reserve currency, ride hailing / ride sharing, Ronald Reagan, short selling, special drawing rights, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, trade liberalization, tulip mania, working poor

By around 2003, the supply of mortgages originating under traditional lending standards had largely been exhausted. But demand for MBSs continued, and this helped drive down lending standards — to the point that some adjustable-rate mortgage (ARM) loans were being offered at no initial interest, or with no down payment, or to borrowers with no evidence of ability to pay, or all of the above. Bundled into MBSs, sold to pension funds and investment banks, and hedged with derivatives contracts, mortgage debt became the very fabric of the US financial system, and, increasingly, the economies of many other nations as well. By 2005 mortgage-related activities were making up 62 percent of commercial banks’ earnings, up from 33 percent in 1987. As a result, what would have been a $300 billion sub-prime mortgage crisis when the bubble inevitably burst, turned into a multi-trillion dollar catastrophe engulfing the financial systems of the US and many other countries as well.


pages: 350 words: 109,220

In FED We Trust: Ben Bernanke's War on the Great Panic by David Wessel

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Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Berlin Wall, Black Swan, central bank independence, credit crunch, Credit Default Swap, crony capitalism, debt deflation, Fall of the Berlin Wall, financial innovation, financial intermediation, full employment, George Akerlof, housing crisis, inflation targeting, London Interbank Offered Rate, Long Term Capital Management, market bubble, moral hazard, mortgage debt, new economy, Northern Rock, price stability, quantitative easing, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, savings glut, Socratic dialogue, too big to fail

A 2004 Fed working paper by staff economist Joshua Gallin, for instance, said that housing prices had risen 70 percent over the previous ten years while rents had risen only half as much. The strong suggestion: house prices couldn’t keep rising. Greenspan himself liked to point to a closed-door November 2002 Fed meeting in which he said the “extraordinary housing boom” and “very large increases in mortgage debt cannot continue indefinitely into the future.” (Of course, no one outside the room knew he had said that until transcripts were released five years later.) But Greenspan thought and said publicly that a nationwide bubble in housing prices was nearly impossible because housing markets — unlike, say, the market for copper — were local markets. “I would tell audiences that we were facing not a bubble but a froth — lots of small, local bubbles that never grew to a scale that could threaten the health of the economy,” he recalled, accurately, in his book.


pages: 364 words: 99,613

Servant Economy: Where America's Elite Is Sending the Middle Class by Jeff Faux

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back-to-the-land, Bernie Sanders, Black Swan, Bretton Woods, BRICs, British Empire, call centre, centre right, cognitive dissonance, collateralized debt obligation, collective bargaining, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, David Brooks, David Ricardo: comparative advantage, falling living standards, financial deregulation, financial innovation, full employment, hiring and firing, Howard Zinn, Hyman Minsky, illegal immigration, indoor plumbing, informal economy, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, lake wobegon effect, Long Term Capital Management, market fundamentalism, Martin Wolf, McMansion, medical malpractice, mortgage debt, Naomi Klein, new economy, oil shock, Plutocrats, plutocrats, price mechanism, price stability, private military company, Ralph Nader, reserve currency, rising living standards, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, school vouchers, Silicon Valley, single-payer health, South China Sea, statistical model, Steve Jobs, Thomas L Friedman, Thorstein Veblen, too big to fail, trade route, Triangle Shirtwaist Factory, union organizing, upwardly mobile, urban renewal, War on Poverty, We are the 99%, working poor, Yogi Berra, Yom Kippur War

According to his own memoirs, published in 2002, while he was telling Congress not to worry, he was also telling his own Federal Reserve Open Market Committee that there was “eye-catching” evidence of an uncommon inflation in housing prices: “It’s hard to escape the conclusion that . . . our extraordinary housing boom and the carryover into very large extractions of equity, financed by very large increases in mortgage debt, cannot continue indefinitely into the future.”24 Still, his public denial of a real estate boom that would inevitably lead to a bust continued. In a February 2004 speech to the Credit Union National Association, he actually chided American families for “losing tens of thousands of dollars” by not taking advantage of variable rate mortgages. As early as 1996, when the Dow industrial index had jumped to almost sixty-five hundred, he uttered his famous comment about the dangers to the economy when “irrational exhuberance”—speculation—rules.


pages: 411 words: 108,119

The Irrational Economist: Making Decisions in a Dangerous World by Erwann Michel-Kerjan, Paul Slovic

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Andrei Shleifer, availability heuristic, bank run, Black Swan, Cass Sunstein, clean water, cognitive dissonance, collateralized debt obligation, complexity theory, conceptual framework, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-subsidies, Daniel Kahneman / Amos Tversky, endowment effect, experimental economics, financial innovation, Fractional reserve banking, George Akerlof, hindsight bias, incomplete markets, invisible hand, Isaac Newton, iterative process, Loma Prieta earthquake, London Interbank Offered Rate, market bubble, market clearing, moral hazard, mortgage debt, placebo effect, price discrimination, price stability, RAND corporation, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, statistical model, stochastic process, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, ultimatum game, University of East Anglia, urban planning

It holds that excessive consumer demand fueled by lax borrowing standards, principally in the United States, drove asset prices to high levels generally, and real estate in particular, to levels not previously seen. These bubbles then popped. And, before they popped, upward price movements first stalled in mid-2007. The timing was driven by concerns that newly incurred and poorly qualified subprime and alt-A mortgage debt would be unserviceable by borrowers without continued price appreciation or interest rate decline. As borrowers began to feel pinched and housing values began to decline, consumption naturally fell. Households needed to pay their debts, without the benefits of continuing home-price appreciation. This recession is necessarily deep, this view holds, because asset prices have to fall a long way before reaching a more normal multiple of cash flow.


pages: 339 words: 109,331

The Clash of the Cultures by John C. Bogle

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asset allocation, collateralized debt obligation, corporate governance, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, estate planning, Eugene Fama: efficient market hypothesis, financial innovation, financial intermediation, fixed income, Flash crash, Hyman Minsky, income inequality, index fund, interest rate swap, invention of the wheel, market bubble, market clearing, mortgage debt, new economy, Occupy movement, passive investing, Ponzi scheme, principal–agent problem, profit motive, random walk, rent-seeking, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, shareholder value, short selling, South Sea Bubble, statistical arbitrage, The Wealth of Nations by Adam Smith, transaction costs, Vanguard fund, William of Occam

Alas, as I report in this chapter, our “Gatekeepers”—the courts, the Congress, the regulatory agencies, the public accountants, the rating agencies, the security analysts, the money managers, the corporate directors, even the shareholders—largely failed in honoring their responsibilities to call out what was going on right before their eyes. The wild and risky “innovative” securities of the era, financial shenanigans by some of our largest corporations, and Congressional sanctioning of excessive mortgage debt by ill-qualified homebuyers are but a few of the myriad examples. In Chapter 3, “The Silence of the Funds,” I describe the failure of our institutional money managers—mutual fund managers and their affiliated pension fund managers, which together manage the lion’s share of our nation’s pension fund assets—to step up to the plate and exercise the rights and responsibilities of corporate governance in the interests of the fund shareholders and plan beneficiaries whom they are duty-bound to serve.


pages: 329 words: 85,471

The Locavore's Dilemma by Pierre Desrochers, Hiroko Shimizu

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air freight, back-to-the-land, British Empire, Columbian Exchange, Community Supported Agriculture, edge city, Edward Glaeser, food miles, Food sovereignty, global supply chain, intermodal, invention of agriculture, inventory management, invisible hand, Jane Jacobs, labour mobility, land tenure, megacity, moral hazard, mortgage debt, oil shale / tar sands, oil shock, peak oil, planetary scale, profit motive, refrigerator car, Steven Pinker, the market place, The Wealth of Nations by Adam Smith, Thomas Malthus, trade liberalization, Upton Sinclair, urban sprawl

Trained as economic policy analysts, we brought up statistics, contemporary case studies, historical parallels, discussions of standard research protocols, and some personal anecdotes. Especially frustrating was how quickly many activists resorted to challenging our motives rather than our arguments. We were told that we were in the remunerated service of agribusiness, Big Oil, the logistics industry, and even the New Zealand government. (Strangely, though, our mortgage debt is still significant.) Based on the volume of hateful correspondence sent our way, we sometimes felt that questioning the existence of God at a revival meeting would have elicited more measured and polite responses. While we were pleased with our original policy paper, we felt the need to spell out our case in more detail in order to counter the broader intellectual underpinnings of locavorism; hence, this book.


pages: 299 words: 83,854

Shortchanged: Life and Debt in the Fringe Economy by Howard Karger

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big-box store, blue-collar work, corporate social responsibility, credit crunch, delayed gratification, financial deregulation, illegal immigration, labor-force participation, late fees, London Interbank Offered Rate, low skilled workers, microcredit, mortgage debt, New Journalism, New Urbanism, offshore financial centre, payday loans, predatory finance, race to the bottom, Silicon Valley, Telecommunications Act of 1996, telemarketer, underbanked, working poor

What some homeowners fail to realize is that real estate, like any other investment, is a gamble.121 LOAN-REFINANCING TRAPS Home equity is a large part of the net household worth of most middle-class families. Despite the rapid rise of housing prices during the 1990s, home equity has actually declined. From 1989 to 1999, the average home equity per homeowner declined (in 1999 inflation-adjusted dollars) from $91,000 to $89,500.30 One reason for this is increased equity borrowing. According to the Federal Reserve Board, about 40% of the growth in outstanding mortgage debt in the late 1990s was linked to home equity loans and cash-out refinancing. A Freddie Mac study found that from 1995 to 2000, about 20% of homeowners had borrowed on their home equity, with loans averaging $36,000. Twenty-five percent of the borrowers said they were concerned about repaying the new loan.31 The rapid growth of refinancing has provided a prime opportunity for fringe economy operators to earn fast money.


pages: 361 words: 105,938

The Map That Changed the World by Simon Winchester

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British Empire, Isaac Newton, James Hargreaves, James Watt: steam engine, mortgage debt, spinning jenny, the market place, the scientific method, Thomas Malthus, trade route, traveling salesman

What little land he still had left from his family back in Oxfordshire had already gone. The Trim Bridge offices were now gone, rented to another tenant. All that remained that he could call his own was his mortgaged home at Tucking Mill. But try as he might, it wouldn’t sell; and the owner of the mortgage, Charles Conolly of Midford Castle, was making it abundantly clear to Smith that he would not release him from the mortgage debt or buy back the house himself. It was at about this time in Smith’s life that he made what appears to have been another woefully bad decision—and that was to get married. A sensible and ordered marriage might of course have been a good thing; but from all the available evidence—and there is very little; much seems to have been destroyed, and perhaps deliberately—it seems that his union was anything but sensible and ordered.


pages: 378 words: 110,518

Postcapitalism: A Guide to Our Future by Paul Mason

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Alfred Russel Wallace, bank run, banking crisis, banks create money, Basel III, Bernie Madoff, Bill Gates: Altair 8800, bitcoin, Branko Milanovic, Bretton Woods, BRICs, British Empire, business process, butterfly effect, call centre, capital controls, Claude Shannon: information theory, collaborative economy, collective bargaining, Corn Laws, corporate social responsibility, credit crunch, currency manipulation / currency intervention, currency peg, David Graeber, deglobalization, deindustrialization, deskilling, discovery of the americas, Downton Abbey, en.wikipedia.org, energy security, eurozone crisis, factory automation, financial repression, Firefox, Fractional reserve banking, Frederick Winslow Taylor, full employment, future of work, game design, income inequality, inflation targeting, informal economy, Internet of things, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kevin Kelly, knowledge economy, knowledge worker, late capitalism, low skilled workers, market clearing, means of production, Metcalfe's law, money: store of value / unit of account / medium of exchange, mortgage debt, Network effects, new economy, Norbert Wiener, Occupy movement, oil shale / tar sands, oil shock, payday loans, post-industrial society, precariat, price mechanism, profit motive, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, RFID, Richard Stallman, Robert Gordon, secular stagnation, sharing economy, Stewart Brand, structural adjustment programs, supply-chain management, the scientific method, The Wealth of Nations by Adam Smith, Transnistria, union organizing, universal basic income, urban decay, urban planning, wages for housework, women in the workforce

In 2009, having wavered before the enormity of the task, Bernanke – together with his UK counterpart Mervyn King, governor of the Bank of England – started the presses rolling. In November 2008 China had already begun printing money in the more direct form of ‘soft’ bank loans from the state-owned banks to businesses (i.e. loans that nobody expected to be repaid). Now the Fed would print $4 trillion over the next four years – buying up the stressed debts of state-backed mortgage lenders, then government bonds, then mortgage debt, to the tune of $80 billion a month. The combined impact was to flush money into the economy, via rising share prices and revived house prices, which meant that it was first flushed into the pockets of those who were already rich. Japan had pioneered the money-printing solution after its own housing bubble collapsed in 1990. As its economy floundered, premier Shinzo Abe was forced to restart the printing presses in 2012.


pages: 357 words: 91,331

I Will Teach You To Be Rich by Sethi, Ramit

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Albert Einstein, asset allocation, buy low sell high, diversification, diversified portfolio, index fund, late fees, mortgage debt, mortgage tax deduction, prediction markets, random walk, risk tolerance, Robert Shiller, Robert Shiller, shareholder value, Silicon Valley, Vanguard fund

(As long as your income is $101,000 or less, you’re allowed to contribute up to $5,000 in 2009.) Rung 4: If you have money left over, go back to your 401(k) and contribute as much as possible to it (this time above and beyond your employer match). The current limit is $15,500. Rung 5: If you still have money left to invest, open a regular nonretirement account and put as much as possible there. For more about this, see the next page. Also, pay extra on any mortgage debt you have, and consider investing in yourself: Whether it’s starting a company or getting an additional degree, there’s often no better investment than your own career. Remember, this ladder of personal finance only shows you where to invest your money. In Chapter 7, I’ll show you what to invest in. Mastering Your 401(k) It is a universally acknowledged truth that girls named Nancy are never hot.


pages: 357 words: 110,017

Money: The Unauthorized Biography by Felix Martin

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bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, call centre, capital asset pricing model, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, credit crunch, David Graeber, en.wikipedia.org, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, Fractional reserve banking, full employment, Goldman Sachs: Vampire Squid, Hyman Minsky, inflation targeting, invention of writing, invisible hand, Irish bank strikes, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, mobile money, moral hazard, mortgage debt, new economy, Northern Rock, Occupy movement, Plutocrats, plutocrats, private military company, Republic of Letters, Richard Feynman, Richard Feynman, Robert Shiller, Robert Shiller, Scientific racism, seigniorage, Silicon Valley, smart transportation, South Sea Bubble, supply-chain management, The Wealth of Nations by Adam Smith, too big to fail

A particular stir was caused in 2011, when it was revealed that the ECB had even been lending against securitised Australian automobile loans. It should be noted that in the ECB’s case, acceptance of such assets is as collateral under repo agreements, so that the credit risk that the central bank bears is not strictly speaking that of the financial security in question but of the bank that is taking liquidity support. Likewise, the U.S. Federal Reserve is in principle indemnified against credit losses on its holdings of mortgage debt by the U.S. Treasury. In both cases, in other words, there is in theory no credit support being granted. 26. It would be the world that James Tobin realised that the models of academic finance implied at their logical limit, in which “[t]here would be no room for discrepancies between market and natural rates of return on capital, between market valuation and reproduction cost. There would be no room for monetary policy to affect aggregate demand.


pages: 207 words: 86,639

The New Economics: A Bigger Picture by David Boyle, Andrew Simms

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Asian financial crisis, back-to-the-land, banking crisis, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, Bretton Woods, capital controls, carbon footprint, clean water, collateralized debt obligation, colonial rule, Community Supported Agriculture, congestion charging, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, delayed gratification, deskilling, en.wikipedia.org, energy transition, financial deregulation, financial innovation, full employment, garden city movement, happiness index / gross national happiness, if you build it, they will come, income inequality, informal economy, Jane Jacobs, land reform, loss aversion, microcredit, Mikhail Gorbachev, mortgage debt, neoliberal agenda, new economy, North Sea oil, Northern Rock, offshore financial centre, oil shock, peak oil, pensions crisis, profit motive, purchasing power parity, quantitative easing, Ronald Reagan, seigniorage, Simon Kuznets, sovereign wealth fund, special drawing rights, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, trickle-down economics, Washington Consensus, working-age population

While the banks, which are at fault, have been bailed out to a previously unimaginable degree APPENDICES 167 by the taxpayer, thousands of hard-working homeowners face the daily insecurity of potential eviction as the recession makes it harder to meet repayments. This is deeply unjust, destabilizing and imposes a huge burden on society. Evictions could be stopped and in their place could be put long-term plans for restructuring householders’ mortgage debts. (b) Use this chance to rebuild the UK’s stock of social housing Following on from the above, in the event of homeowners defaulting to one of the newly nationalized banks and mortgage providers, another option is open to government. Houses facing repossession could be taken into the stock of public housing. Under careful negotiation this would prevent a rise in homelessness and help reverse the decline of social housing in Britain.


pages: 372 words: 109,536

The Panama Papers: Breaking the Story of How the Rich and Powerful Hide Their Money by Frederik Obermaier

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banking crisis, blood diamonds, credit crunch, crony capitalism, Deng Xiaoping, Edward Snowden, family office, high net worth, income inequality, liquidationism / Banker’s doctrine / the Treasury view, Mikhail Gorbachev, mortgage debt, offshore financial centre, optical character recognition, out of africa, race to the bottom, We are the 99%, WikiLeaks

A former state secretary for finance was later sentenced to several years in prison, as were the three former owners of Kaupthing - Ólafur Ólafsson, Hreiðar Már Sigurðsson and Sigurður Einarsson. Jóhannes laughs. ‘I came across all the Kaupthing people in your documents as well, but they’re already locked up in prison.’ An unscrupulous elite had ruined one of the richest countries in the world in the space of just a few years – that is how most people here see it. And while ordinary Icelanders suffered as the cost of living went up, wages went down and mortgage debt soared, many of those who had brought about the crisis had long since moved their money out of the country. ‘Financial Vikings’ is the name the Icelanders still use for those risk-takers who, in their greed for ever more money, both miscalculated and enriched themselves at the same time. The Vikings were aided in this by the government at the time, which is still in power today, consisting of the Independence Party and the Progressive Party.


pages: 332 words: 89,668

Two Nations, Indivisible: A History of Inequality in America: A History of Inequality in America by Jamie Bronstein

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Affordable Care Act / Obamacare, back-to-the-land, barriers to entry, Bernie Sanders, big-box store, blue-collar work, Branko Milanovic, British Empire, Capital in the Twenty-First Century by Thomas Piketty, clean water, cognitive dissonance, collateralized debt obligation, collective bargaining, Community Supported Agriculture, corporate personhood, crony capitalism, deindustrialization, desegregation, Donald Trump, ending welfare as we know it, Frederick Winslow Taylor, full employment, Gini coefficient, income inequality, interchangeable parts, invisible hand, job automation, John Maynard Keynes: technological unemployment, labor-force participation, land reform, land tenure, low skilled workers, low-wage service sector, minimum wage unemployment, moral hazard, mortgage debt, New Urbanism, non-tariff barriers, obamacare, occupational segregation, Occupy movement, oil shock, Plutocrats, plutocrats, price discrimination, race to the bottom, rent control, road to serfdom, Ronald Reagan, Scientific racism, Simon Kuznets, single-payer health, strikebreaker, too big to fail, trade route, transcontinental railway, Triangle Shirtwaist Factory, trickle-down economics, universal basic income, Upton Sinclair, upwardly mobile, urban renewal, wage slave, War on Poverty, women in the workforce, working poor, Works Progress Administration

Economist Branko Milanovic argues that the economic crash of 2006 was ultimately precipitated by inequality. Before the crash, the wealthiest Americans needed places to invest vast sums, and this demand called into being a supply of risky financial instruments. Middle- and low-income Americans had stagnant real wages but could maintain or improve their quality of life with easy access to credit, including subprime mortgages. Debt as a share of income increased from 68.4 percent in 1983 to 118.7 percent in 2007 (see Figure 8.2). The net worth of minorities was much lower than that of whites.13 When the economy collapsed, the media narrative emphasized the irresponsibility of home-buyers in contracting such large levels of debt to begin with. But as many economists have pointed out, existing levels of inequality have made this level of borrowing not only necessary to maintain a reasonable standard of living but also desirable from the perspective of wealthy people with money to lend.


pages: 471 words: 97,152

Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof, Robert J. Shiller

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affirmative action, Andrei Shleifer, asset-backed security, bank run, banking crisis, collateralized debt obligation, conceptual framework, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, experimental subject, financial innovation, full employment, George Akerlof, housing crisis, Hyman Minsky, income per capita, inflation targeting, invisible hand, Isaac Newton, Jane Jacobs, Jean Tirole, job satisfaction, Joseph Schumpeter, Long Term Capital Management, loss aversion, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, new economy, New Urbanism, Plutocrats, plutocrats, price stability, profit maximization, purchasing power parity, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, South Sea Bubble, The Chicago School, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, working-age population, Y2K, Yom Kippur War

Depending on the level of risk that people wanted to assume, tranches could be divided into senior, mezzanine, or junior. These could then be sold off, and different people would own different parts of the payments from the different mortgages. Gillian Tett, author of the 2009 book Fool’s Gold, describes how initially this was an innocuous innovation designed as an end run around the Basel capital requirements. Since taking on such mortgage debts seemed all but totally safe, the capital requirement for holding them was very small. There was only one question: who was going to hold the super-senior tranche, the remaining fraction? This tranche, it was thought, would always pay at par, so it would not have to pay much added interest. Indeed, this is the same question that faces businesspeople in all walks of life. Demolitionists, for example, who take down buildings to make way for newer ones, are an important element of our economy, and they illustrate well the shortcomings of unregulated capitalism.


pages: 1,042 words: 266,547

Security Analysis by Benjamin Graham, David Dodd

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asset-backed security, backtesting, barriers to entry, capital asset pricing model, carried interest, collateralized debt obligation, collective bargaining, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, fear of failure, financial innovation, fixed income, full employment, index fund, invisible hand, Joseph Schumpeter, locking in a profit, Long Term Capital Management, low cost carrier, moral hazard, mortgage debt, p-value, risk-adjusted returns, risk/return, secular stagnation, shareholder value, The Chicago School, the market place, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, zero-coupon bond

., Lawyers Mortgage Company, Title Guarantee and Trust Company) in guaranteed mortgages and mortgage-participation certificates, secured on such dwellings.6 Where investments of this kind are made, the lender should be certain: (a) that the amount of the loan is not over 66% of the value of the property, as shown either by actual recent cost or by the amount which an experienced real estate man would consider a fair price to pay for the property; and (b) that this cost or fair price does not reflect recent speculative inflation and does not greatly exceed the price levels existing for a long period previously. If so, a proper reduction must be made in the maximum relation of the amount of mortgage debt to the current value. The more usual real estate mortgage bond represents a participation in a first mortgage on a new apartment house or office building. In considering such offerings the investor should ignore the conventional “appraised values” submitted and demand that the actual cost, fairly presented, should exceed the amount of the bond issue by at least 50%. Secondly, he should require an estimated income account, conservatively calculated to reflect losses through vacancies and the decline in the rental scale as the building grows older.

As it happened, a new 5% note issue, convertible into stock at 25, was offered in exchange for the 4½% notes. The result was the establishment of a price of 101 for the notes in August 1933 against a coincident price of 21 for the common stock; and a price of 15 for the stock on November 1, 1933, when the notes were taken care of at par. The impending maturity of a bond issue is of importance to the holders of all the company’s securities, including mortgage debt ranking ahead of the maturing issue. For even the prior bonds will in all likelihood be seriously affected if the company is unable to take care of the junior issue. This point is illustrated in striking fashion by the Fisk Rubber Company First Mortgage 8s, due 1941. Although they were deemed to be superior in their position to the 5½% unsecured notes, their holders suffered grievously from the receivership occasioned by the maturity of the 5½s.


pages: 407 words: 114,478

The Four Pillars of Investing: Lessons for Building a Winning Portfolio by William J. Bernstein

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asset allocation, Bretton Woods, British Empire, buy low sell high, carried interest, corporate governance, cuban missile crisis, Daniel Kahneman / Amos Tversky, Dava Sobel, diversification, diversified portfolio, Edmond Halley, equity premium, estate planning, Eugene Fama: efficient market hypothesis, financial independence, financial innovation, fixed income, German hyperinflation, high net worth, hindsight bias, Hyman Minsky, index fund, invention of the telegraph, Isaac Newton, John Harrison: Longitude, Long Term Capital Management, loss aversion, market bubble, mental accounting, mortgage debt, new economy, pattern recognition, quantitative easing, railway mania, random walk, Richard Thaler, risk tolerance, risk/return, Robert Shiller, Robert Shiller, South Sea Bubble, transaction costs, Vanguard fund, yield curve

Another interesting fact: The average plumber retires far sooner than the average lawyer, even though lawyers make more money than plumbers. Why? Because the attorney “must” drive a nicer car, live in a nicer part of town, buy more expensive clothes, and take more exotic vacations than the plumber. The message is obvious. The easiest way to get rich is to spend as little as possible. Other Goals This book is not intended as a financial planning guide; topics such as mortgages, debt management, insurance, and estate planning are well beyond its brief. But there are a few financial planning topics pertaining to basic portfolio mechanics and financial theory that are worth mentioning: Emergencies. This falls under the mantra of the financial planner: “five years, five years, five years.” That is, you should not put any money at risk that will be needed within five years.


pages: 598 words: 140,612

Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier by Edward L. Glaeser

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affirmative action, Andrei Shleifer, Berlin Wall, British Empire, Broken windows theory, carbon footprint, Celebration, Florida, clean water, congestion charging, declining real wages, desegregation, diversified portfolio, Edward Glaeser, endowment effect, European colonialism, financial innovation, Frank Gehry, global village, Guggenheim Bilbao, haute cuisine, Home mortgage interest deduction, James Watt: steam engine, Jane Jacobs, job-hopping, John Snow's cholera map, Mahatma Gandhi, McMansion, megacity, mortgage debt, mortgage tax deduction, New Urbanism, place-making, Ponzi scheme, Potemkin village, Ralph Waldo Emerson, rent control, RFID, Richard Florida, Rosa Parks, school vouchers, Seaside, Florida, Silicon Valley, Skype, smart cities, Steven Pinker, strikebreaker, the built environment, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, trade route, transatlantic slave trade, upwardly mobile, urban planning, urban renewal, urban sprawl, William Shockley: the traitorous eight, Works Progress Administration, young professional

I’ve already discussed the problems that come from expecting cities’ richer residents to pay for the needs of the poorer ones. An antiurban bias is even more obvious in housing and transportation policy, which seems almost intentionally designed to hurt the cities that enrich their countries and the entire world. The centerpiece of federal housing policy is the home mortgage interest deduction, which allows home owners to deduct from their taxes the interest on up to a million dollars of mortgage debt. Because more than 60 percent of Americans are home owners, this policy has become politically inviolate, but it is deeply flawed. The home mortgage interest deduction is a sacred cow in need of a good stockyard. It encourages Americans to leverage themselves to the hilt to bet on housing, which looks particularly foolish in the wake of the great housing bust of 2006-2008. Subsidizing home ownership actually pushes up housing prices by encouraging people to spend more.


pages: 613 words: 151,140

No Such Thing as Society by Andy McSmith

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anti-communist, Ayatollah Khomeini, Berlin Wall, Big bang: deregulation of the City of London, British Empire, call centre, cuban missile crisis, Etonian, F. W. de Klerk, feminist movement, Francis Fukuyama: the end of history, friendly fire, full employment, glass ceiling, greed is good, illegal immigration, index card, means of production, Mikhail Gorbachev, mortgage debt, mutually assured destruction, North Sea oil, Northern Rock, Ronald Reagan, South Sea Bubble, strikebreaker, The Chicago School, union organizing, upwardly mobile, urban decay, Winter of Discontent, young professional

Up to the mid-1980s, no one could increase their mortgage unless they demonstrated that they were using the extra borrowed money to increase the value of their home. A building society would lend to someone who wanted a new kitchen, but someone who wanted a new car had to take a short-term loan from a finance company, at a higher rate of interest. Suddenly, that discipline evaporated, and people happily added to their mortgage debt to pay for consumer spending. And why not? In 1988 alone, according to the Nationwide House Price Index, the price of the average property went up by a third. So if you bought a £60,000 house in January 1988, by the following January, you were in a property worth £80,000. Why leave that £20,000 of extra equity doing nothing when it could be improving your standard of living? All this ready money had its cultural spin-offs.


pages: 482 words: 122,497

The Wrecking Crew: How Conservatives Rule by Thomas Frank

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affirmative action, anti-communist, barriers to entry, Berlin Wall, Bernie Madoff, British Empire, collective bargaining, corporate governance, Credit Default Swap, David Brooks, edge city, financial deregulation, full employment, George Gilder, guest worker program, income inequality, invisible hand, job satisfaction, Mikhail Gorbachev, Mont Pelerin Society, mortgage debt, Naomi Klein, new economy, P = NP, Plutocrats, plutocrats, Ponzi scheme, Ralph Nader, rent control, Richard Florida, road to serfdom, rolodex, Ronald Reagan, school vouchers, shareholder value, Silicon Valley, stem cell, Telecommunications Act of 1996, the scientific method, too big to fail, union organizing, War on Poverty

Such was his dedication to deregulation that he once posed for photographers with a group of banking industry lobbyists holding a chain saw to a pile of rule books and red tape.5 Like so many other Bush-era agencies, the OTS referred to the industry it oversaw as its “customers,” and it treated them with the sort of leniency one associates with such an attitude. One example, from many: In mid-2008, OTS permitted IndyMac Bank, which would soon be dragged under by bad mortgage debt, to alter its records to avoid the appearance of crisis. Thanks to the diffuse nature of bank regulating—there are several over-lapping federal agencies from which a financial institution was permitted to choose—decisions like this made OTS a hot item, a big winner in the resulting “competition in laxity,” as banks rushed to sign up for OTS supervision. Maybe it’s only a coincidence that some of the biggest banks ever to fail were under OTS’s watch, but I doubt it.6 The Securities and Exchange Commission (SEC), the top cop on Wall Street, was no better.


pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

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Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Bretton Woods, British Empire, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund

Between the end of 2002 and the end of 2006, the total amount of debt outstanding in the United States went from $31.84 trillion to $45.32 trillion, an increase of 42.3 percent. Numbers of this magnitude are difficult to visualize. The $13.5 trillion increase in debt amounted to about $43,000 for every person in the country, including children and senior citizens, or about $128,000 for each household. By 2006, the country’s total indebtedness amounted to 350 percent of GDP—see Figure 17.1. Most accounts of the credit crunch have focused on the rapid growth in mortgage debt, especially subprime loans, but the rise in mortgage lending was just part of a much larger credit boom. Of the overall rise in indebtedness between 2002 and 2006, households were responsible for about a third—some $4.4 trillion—and that figure includes all types of household debt, not just mortgages and home equity loans. Another $2 trillion, or thereabouts, came in the form of increased borrowing on the part of federal, state, and local governments.


pages: 401 words: 112,784

Hard Times: The Divisive Toll of the Economic Slump by Tom Clark, Anthony Heath

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Affordable Care Act / Obamacare, British Empire, Carmen Reinhart, credit crunch, Daniel Kahneman / Amos Tversky, debt deflation, deindustrialization, Etonian, eurozone crisis, falling living standards, full employment, Gini coefficient, hiring and firing, income inequality, interest rate swap, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Rogoff, labour market flexibility, low skilled workers, mortgage debt, new economy, Northern Rock, obamacare, oil shock, Plutocrats, plutocrats, price stability, quantitative easing, Ronald Reagan, science of happiness, statistical model, The Wealth of Nations by Adam Smith, unconventional monetary instruments, War on Poverty, We are the 99%, women in the workforce, working poor

In the appraisal of Nobel Laureate Joseph Stiglitz, American banks engaged not merely in reckless lending, but in ‘predatory lending, taking advantage of the least-educated and financially unsophisticated … by selling them costly mortgages and hiding details of the fees in the fine print’.43 The results of the same sort of practices are now evident in Britain as well, where, Sir John Hills’ thorough new review of the evidence asserts: ‘All the sources agree that a quarter or more of households have no, or negative, net financial assets.’ His own analysis suggests that by 2005, the poorest tenth had non-mortgage debt exceeding £6,000, tripling (in real terms) the figure of £1,900 that had applied just a decade before.44 We will return to the long post-bust shadow cast by boom-time lending in Chapter 7. But even during the so-called ‘good times’, the burden of simply maintaining such substantial debt eats into the notionally ‘disposable’ income of many a poor family, such as the disabled and unwaged couple we spoke to in Luton, ‘Stephanie’ and ‘Martin’.


pages: 504 words: 143,303

Why We Can't Afford the Rich by Andrew Sayer

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accounting loophole / creative accounting, Albert Einstein, asset-backed security, banking crisis, banks create money, Bretton Woods, British Empire, call centre, capital controls, carbon footprint, collective bargaining, corporate social responsibility, credit crunch, Credit Default Swap, crony capitalism, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, declining real wages, deglobalization, deindustrialization, delayed gratification, demand response, don't be evil, Double Irish / Dutch Sandwich, en.wikipedia.org, Etonian, financial innovation, financial intermediation, Fractional reserve banking, full employment, Goldman Sachs: Vampire Squid, high net worth, income inequality, investor state dispute settlement, Isaac Newton, James Dyson, job automation, Julian Assange, labour market flexibility, laissez-faire capitalism, low skilled workers, Mark Zuckerberg, market fundamentalism, Martin Wolf, means of production, moral hazard, mortgage debt, neoliberal agenda, new economy, New Urbanism, Northern Rock, Occupy movement, offshore financial centre, oil shale / tar sands, patent troll, payday loans, Plutocrats, plutocrats, predatory finance, price stability, pushing on a string, quantitative easing, race to the bottom, rent-seeking, Ronald Reagan, shareholder value, short selling, sovereign wealth fund, Steve Jobs, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transfer pricing, trickle-down economics, universal basic income, unpaid internship, upwardly mobile, Washington Consensus, Winter of Discontent, working poor, Yom Kippur War

Their smug self-congratulation might occasionally be tinged with embarrassment, in faint recognition that this was a matter of luck, but then, as successful people, they felt they deserved it anyway. An inflated sense of entitlement is a common vice of the better-off. Increasingly, homeowners are encouraged to see their houses not merely as homes but as ‘investments’, indeed they may even think of their mortgage debt as an investment! Some may see it as a step towards becoming rentiers in their own right. But why should anyone expect the price of a house to rise even when nothing has been done to it? When you buy a second-hand car or bike you expect to pay less than the original price. Why doesn’t the same apply to housing? Some tried to justify it, saying it allowed ordinary home-owners to share in the economic growth of the country.


pages: 590 words: 153,208

Wealth and Poverty: A New Edition for the Twenty-First Century by George Gilder

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affirmative action, Albert Einstein, Bernie Madoff, British Empire, capital controls, cleantech, cloud computing, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversified portfolio, Donald Trump, equal pay for equal work, floating exchange rates, full employment, George Gilder, Home mortgage interest deduction, Howard Zinn, income inequality, invisible hand, Jane Jacobs, Jeff Bezos, job automation, job-hopping, Joseph Schumpeter, knowledge economy, labor-force participation, margin call, Mark Zuckerberg, means of production, medical malpractice, minimum wage unemployment, money: store of value / unit of account / medium of exchange, Mont Pelerin Society, moral hazard, mortgage debt, non-fiction novel, North Sea oil, paradox of thrift, Plutocrats, plutocrats, Ponzi scheme, post-industrial society, price stability, Ralph Nader, rent control, Robert Gordon, Ronald Reagan, Silicon Valley, Simon Kuznets, skunkworks, Steve Jobs, The Wealth of Nations by Adam Smith, Thomas L Friedman, upwardly mobile, urban renewal, volatility arbitrage, War on Poverty, women in the workforce, working poor, working-age population, yield curve

The National Mortgage Association and the Federal Home Loan Bank—agencies not even on the federal budget—were channeling close to $30 billion into shelters by the end of the decade, selling mortgage-backed securities to private investors, using the proceeds to finance new mortgages, either directly or through savings and loan associations, and then later purchasing the new mortgages to finance the issue of yet new securities to back a further expansion of mortgage debt, all in a spiral that relies finally on the authority of Treasury guarantees. New credit laws that require counting thirty years of income not only from the husband but also from the wife further stimulated the expansion. It was not chiefly an expression of demand or population growth. The intensification of government support for housing in the seventies came after two decades when the United States was already spending eight times more of its capital on housing than countries in Western Europe and three times more than Japan, which had undergone far faster population growth.


pages: 478 words: 126,416

Other People's Money: Masters of the Universe or Servants of the People? by John Kay

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Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, corporate governance, Credit Default Swap, cross-subsidies, dematerialisation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial innovation, financial intermediation, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, income inequality, index fund, inflation targeting, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, London Whale, Long Term Capital Management, loose coupling, low cost carrier, M-Pesa, market design, millennium bug, mittelstand, moral hazard, mortgage debt, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, regulatory arbitrage, Renaissance Technologies, rent control, Richard Feynman, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, Schrödinger's Cat, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, Washington Consensus, We are the 99%, Yom Kippur War

The USA and Europe have markedly different savings cultures, the result of differences in history and in the structure of intermediating institutions. In Britain, France and Germany investment in housing (net of mortgages) accounts for about 40 per cent of household wealth. The US figure is lower, reflecting in part the lower level of house prices and the tax deductibility of interest but also a higher level of mortgage debt relative to property values, a legacy of the indiscriminate lending that preceded the global financial crisis. The USA is the only country in which direct holdings of securities by individuals form a large proportion of household assets; in the other three countries, most long-term savings are channelled through intermediaries. Fig. 6: Household wealth1 by asset category, end of 2012 (US $000 per capita at purchasing power parity) * Includes land Source: OECD, author’s calculations While in the USA long-term savings products in the investment channel are almost ten times assets in the deposit channel, in Germany the two figures are nearly equal, with Britain and France somewhere in between.


pages: 368 words: 145,841

Financial Independence by John J. Vento

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Affordable Care Act / Obamacare, Albert Einstein, asset allocation, diversification, diversified portfolio, estate planning, financial independence, fixed income, high net worth, Home mortgage interest deduction, mortgage debt, mortgage tax deduction, oil shock, Own Your Own Home, passive income, risk tolerance, time value of money, transaction costs, young professional, zero day

See also Bad debt; Credit card debt; Good debt; Good debt vs. bad debt Debt forgiveness, 95, 97 Debt management action plan for, 98 bankruptcy case study, 67–71 basic principles, 71–73 case study, 67–71 credit, 87–89 credit card debt control, 79–80 credit problems, 87–88 credit report and credit score, 89–93 debt analysis, 94–97 financial responsibilities, 71–72 good debt vs. bad debt, 73–74 house ownership, 83–84 identity theft, 93–94 learn to say no, 72–73 living within one’s means, 72 mortgage debt, 84–85 mortgage refinancing, 85–86 pay yourself first (practice), 72 professional conduct, 85–86 retail therapy, 5 tax facts and strategies for, 96–97 wants vs. needs, 72 Debt management, by loans auto loans, 80–81 borrow against 401K, 78 borrow against life insurance, 78 borrow from family and friends, 78 business and investment loans, 86–87 home equity loan, 77–78 home mortgage loans, 82–83 student loans, 81–82 Debt payments completion, 59 monthly, 83 Decreasing term insurance, 125 Deductible levels, 138 Deductible period, 117 Deferred annuity, 210 Dining out, 55 Disability, 118, 120 26/02/13 2:49 PM Index 345 Disability insurance health insurance, 118–122 long term, 121–122 Social Security disability benefits, 119–121 Disability insurance policy, 131–132 Diversification, 191, 202 Dividends on life insurance policies, 130 Down payments, 84 Drug industry fee, 109 property ownership and transferal, 262–265 tax facts and strategies for, 281–283 tax planning and life insurance, 278–281 trust creation, 265–277 trusts, 260–261 wills, 258–260 Expected entitlements, 2 Expected family contribution, 175 Experian, 89–91 Earned income credit, 64 Education of children, 60.


pages: 507 words: 145,878

Predator's Ball by Connie Bruck

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diversified portfolio, financial independence, fixed income, mortgage debt, offshore financial centre, paper trading, profit maximization, The Predators' Ball, yield management, Yogi Berra, zero-coupon bond

Moreover, the gaming industry was essentially without investment-banking services because no other firm wanted the taint and gaming was not considered a growth industry at the time; if Drexel could overcome its queasiness, it could probably have the whole industry. And besides—Milken wanted it. Over the next two years, Drexel raised not $125 million but $160 million for Wynn’s idea. The capital came largely from mortgage debt, with some subordinated debt and small equity offerings—so Wynn’s ownership stake, roughly 20 percent, was barely diluted. And six years later Wynn’s $2 million stake would be worth about $75 million and he would sell the Atlantic City casino for $440 million. It would turn out to be, as one corporate-finance professional who worked on the deal says, a “grand-slam home run.” “I was the first [investment-banking] client that Mike brought in,” said Wynn proudly.


pages: 504 words: 139,137

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined by Lasse Heje Pedersen

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algorithmic trading, Andrei Shleifer, asset allocation, backtesting, bank run, banking crisis, barriers to entry, Black-Scholes formula, Brownian motion, buy low sell high, capital asset pricing model, commodity trading advisor, conceptual framework, corporate governance, credit crunch, Credit Default Swap, currency peg, David Ricardo: comparative advantage, declining real wages, discounted cash flows, diversification, diversified portfolio, Emanuel Derman, equity premium, Eugene Fama: efficient market hypothesis, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, Gordon Gekko, implied volatility, index arbitrage, index fund, interest rate swap, late capitalism, law of one price, Long Term Capital Management, margin call, market clearing, market design, market friction, merger arbitrage, mortgage debt, New Journalism, paper trading, passive investing, price discovery process, price stability, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, systematic trading, technology bubble, time value of money, total factor productivity, transaction costs, value at risk, Vanguard fund, yield curve, zero-coupon bond

We brought in Blackstone as a partner and wound up buying the company out of bankruptcy by paying off all the creditors for $3.9 billion in cash, down more than 50% from what their company traded for two years before. As part of this structure, we put up $500 million, Centerbridge put up $500 million, and Blackstone put in $500 million. Together we put in $1.5 billion of equity and then raised $2.4 billion of first mortgage debt. So we had the $3.9 billion, and we bought Extended Stay, a 50% discount to the price paid three years before. We did some management changes, some restructuring, but basically, as the economy recovered, the earnings went up. Now Extended Stay is back to the level of profitability it was before, making roughly $600 million in profits. Then we took it public and with the proceeds we paid down the debt.


pages: 549 words: 147,112

The Lost Bank: The Story of Washington Mutual-The Biggest Bank Failure in American History by Kirsten Grind

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asset-backed security, bank run, banking crisis, big-box store, call centre, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, housing crisis, Maui Hawaii, mortgage debt, naked short selling, NetJets, shareholder value, short selling, Skype, too big to fail, Y2K

The WaMu camp had another suspicion: JPMorgan was waiting for a better deal. Tuesday, September 16 NET CHANGE IN WAMU’S DEPOSIT BALANCE: -$2.4 BILLION From the local news: “I’m in front of WaMu’s headquarters in Seattle… Lehman Brothers filed for bankruptcy yesterday, causing a huge slide for the Dow. What company will be next? Will that list include WaMu? WaMu has the same problem Lehman Brothers had—billions of dollars in bad mortgage debt.” At the FDIC’s headquarters in Washington, Fishman and John Robinson, WaMu’s head of regulatory relations, sat across a conference table from Bair and one of her deputies. This was the first time Fishman had met Bair, and he had scheduled this time with her as a meet-and-greet. He was, after all, the new chief executive of WaMu. But the situation had moved far beyond simple introductions.


pages: 515 words: 142,354

The Euro: How a Common Currency Threatens the Future of Europe by Joseph E. Stiglitz, Alex Hyde-White

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bank run, banking crisis, barriers to entry, battle of ideas, Berlin Wall, Bretton Woods, capital controls, Carmen Reinhart, cashless society, central bank independence, centre right, cognitive dissonance, collapse of Lehman Brothers, collective bargaining, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, currency peg, dark matter, David Ricardo: comparative advantage, disintermediation, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial innovation, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, housing crisis, income inequality, incomplete markets, inflation targeting, investor state dispute settlement, invisible hand, Kenneth Rogoff, knowledge economy, labour market flexibility, labour mobility, manufacturing employment, market bubble, market friction, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, neoliberal agenda, new economy, open economy, paradox of thrift, pension reform, pensions crisis, price stability, profit maximization, purchasing power parity, quantitative easing, race to the bottom, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, sovereign wealth fund, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transfer pricing, trickle-down economics, Washington Consensus, working-age population

A super–Chapter 11 might enable firms with excessive debts issued in foreign denomination under foreign jurisdiction to have a quick and fresh start. This might be facilitated by laws allowing easy asset restructurings—for example, a family with a foreign-denominated mortgage on its home issued in a foreign jurisdiction could treat its home as if it were a separate incorporated subsidiary, converting the mortgage debt into equity in the home but without forcing the individual into full bankruptcy. Similarly, this could be done for corporations. Given the increasing litigious nature of Western society, all of this is likely to be messy, but it is still less onerous than the current depression. 30 In any debt restructuring/bankruptcy, there is a provision called “lending in arrears,” which allows those who lend to the entity after the restructuring process begins to get paid back in full, before other claimants are paid back in part.


pages: 494 words: 132,975

Keynes Hayek: The Clash That Defined Modern Economics by Nicholas Wapshott

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airport security, banking crisis, Bretton Woods, British Empire, collective bargaining, complexity theory, cuban missile crisis, Francis Fukuyama: the end of history, full employment, Gordon Gekko, greed is good, if you build it, they will come, Isaac Newton, Joseph Schumpeter, liquidationism / Banker’s doctrine / the Treasury view, means of production, Mont Pelerin Society, mortgage debt, New Journalism, Northern Rock, price mechanism, pushing on a string, road to serfdom, Ronald Reagan, Simon Kuznets, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, Thomas Malthus, trickle-down economics, War on Poverty, Yom Kippur War

In Britain, banks were bailed out in exchange for stocks; in America the banks were given the money outright, lest the president be accused of “socialism.” Bush’s stimulus package was accompanied by a basket of actions by Ben Bernanke, who succeeded Greenspan as chairman of the Fed, to encourage banks to resume lending. Interest rates were halved between September 2007 and April 2008, huge short-term loans were made to banks, and the Fed bought bad mortgage debt. In March 2008, Bear Stearns, a leader in subprime mortgage lending, was sold in a fire sale to JPMorgan Chase. The following September, Lehman Brothers went bankrupt. Neither collapse was popular, not even among those who professed to believe the market should take its course. On the contrary, the most common criticism was that the administration had “allowed” Lehman to stop trading. In October 2008, Treasury Secretary Henry Paulson was given $700 billion by Congress to bail out other failing financial companies.


pages: 613 words: 200,826

Unreal Estate: Money, Ambition, and the Lust for Land in Los Angeles by Michael Gross

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Albert Einstein, Ayatollah Khomeini, bank run, Bernie Madoff, California gold rush, clean water, Donald Trump, estate planning, family office, financial independence, Maui Hawaii, McMansion, mortgage debt, offshore financial centre, oil rush, passive investing, pension reform, Ponzi scheme, Ronald Reagan, Silicon Valley, stem cell, Steve Jobs, Steve Wozniak, The Predators' Ball, transcontinental railway

Unable to concoct a scheme that would let him relive the glory days of IOS, he was slowly but steadily going broke. But he was also obsessed with keeping up appearances, and that meant keeping his Holy Grail, Grayhall, though it became a dead weight dragging him down even faster. In February 1986, Cornfeld’s Grayhall Inc., which owned the estate, borrowed $206,000 from a friend, Howard Mann, a New York City precious metals dealer, secured by the house, to help Cornfeld pay his mortgage debt and forestall a foreclosure from the bank. For the next sixteen months, Bernie and his lawyers maneuvered frantically to keep him in the house. That fall, Grayhall Inc. filed for voluntary bankruptcy and made a deal to repay the mortgage bank. Cornfeld, Mann, and Powers agreed to pay down the debt together and in exchange, Cornfeld signed a document he would later claim was coerced, promising Powers an additional $100,000 on the sale of the house—it was finally on the market for $9 million—in exchange for his $30,000 contribution to the debt service.


pages: 700 words: 201,953

The Social Life of Money by Nigel Dodd

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accounting loophole / creative accounting, bank run, banking crisis, banks create money, Bernie Madoff, bitcoin, blockchain, borderless world, Bretton Woods, BRICs, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, computer age, conceptual framework, credit crunch, cross-subsidies, David Graeber, debt deflation, dematerialisation, disintermediation, eurozone crisis, fiat currency, financial innovation, Financial Instability Hypothesis, financial repression, floating exchange rates, Fractional reserve banking, German hyperinflation, Goldman Sachs: Vampire Squid, Hyman Minsky, illegal immigration, informal economy, interest rate swap, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, Kula ring, laissez-faire capitalism, land reform, late capitalism, liquidity trap, litecoin, London Interbank Offered Rate, M-Pesa, Marshall McLuhan, means of production, mental accounting, microcredit, mobile money, money: store of value / unit of account / medium of exchange, mortgage debt, new economy, Nixon shock, Occupy movement, offshore financial centre, paradox of thrift, payday loans, Peace of Westphalia, peer-to-peer lending, Ponzi scheme, post scarcity, postnationalism / post nation state, predatory finance, price mechanism, price stability, quantitative easing, quantitative trading / quantitative finance, remote working, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Satoshi Nakamoto, Scientific racism, seigniorage, Skype, Slavoj Žižek, South Sea Bubble, sovereign wealth fund, special drawing rights, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, Wave and Pay, WikiLeaks, Wolfgang Streeck, yield curve, zero-coupon bond

In the United Kingdom, the cost to the taxpayer of various measures to support banks has been estimated at £124 billion,51 although the government’s total exposure to the banking system has sometimes reached a figure ten times higher. Those costs include the purchase of preference shares, making the U.K. taxpayer a major shareholder in a number of these banks. In the United States, loans were advanced to banks worth $45 billion, a bridge loan to AIG worth $44 billion, asset purchases valued at $39 billion, mortgage debt purchases totaling $930 billion, loan programs worth $450 billion, and a liquidity guarantee program worth around $300 billion. Some of this outlay will be recouped as loans are repaid, shares gain in value, and assets are sold. Although the remaining, and arguably greater, indirect costs of the crisis are ongoing and difficult to estimate, it seems likely that the monetary system, primarily through its connections with debt, will play a central role in their unraveling.


pages: 662 words: 180,546

Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown by Philip Mirowski

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Andrei Shleifer, asset-backed security, bank run, barriers to entry, Basel III, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, blue-collar work, Bretton Woods, Brownian motion, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, constrained optimization, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, dark matter, David Brooks, David Graeber, debt deflation, deindustrialization, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, facts on the ground, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, full employment, George Akerlof, Goldman Sachs: Vampire Squid, Hernando de Soto, housing crisis, Hyman Minsky, illegal immigration, income inequality, incomplete markets, invisible hand, Jean Tirole, joint-stock company, Kenneth Rogoff, knowledge economy, l'esprit de l'escalier, labor-force participation, liquidity trap, loose coupling, manufacturing employment, market clearing, market design, market fundamentalism, Martin Wolf, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Nash equilibrium, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, oil shock, payday loans, Ponzi scheme, precariat, prediction markets, price mechanism, profit motive, quantitative easing, race to the bottom, random walk, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, school choice, sealed-bid auction, Silicon Valley, South Sea Bubble, Steven Levy, technoutopianism, The Chicago School, The Great Moderation, the map is not the territory, The Myth of the Rational Market, the scientific method, The Wisdom of Crowds, theory of mind, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, War on Poverty, Washington Consensus, We are the 99%, working poor

It does not come as news that the working class has been lumbered with all manner of debt in the last three decades as one effective way to divert attention from flat personal income receipts, not to mention to otherwise soften the blow of a steadily worsening distribution of income in the United States, Britain, and the peripheral EU states. The standard sales pitch that promoted this trend was the stereotypic neoliberal exhortation to joyfully embrace risk through assumption of loans in order to transform the self in a more market-friendly direction, be it through student loans, credit card debt, mortgage debt, or more exotic arrangements. But while all the little entrepreneurs were assiduously busy striving to morph into Galateas exquisitely engineered to succeed without really trying, special panopticons had to be erected to maintain actuarial notions of class membership and fixed identity. Credit proliferation required concerted management; liabilities had to be recurrently affixed to a vigorous continuous human identity; and an augmented scale of loan activity required further standardization of the entities that would be granted this credit.


pages: 1,073 words: 302,361

Money and Power: How Goldman Sachs Came to Rule the World by William D. Cohan

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asset-backed security, Bernie Madoff, buttonwood tree, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, fear of failure, financial innovation, fixed income, Ford paid five dollars a day, Goldman Sachs: Vampire Squid, Gordon Gekko, high net worth, hiring and firing, hive mind, Hyman Minsky, interest rate swap, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, merger arbitrage, moral hazard, mortgage debt, paper trading, passive investing, Ponzi scheme, price stability, profit maximization, risk tolerance, Ronald Reagan, Saturday Night Live, South Sea Bubble, time value of money, too big to fail, traveling salesman, value at risk, yield curve, Yogi Berra

“The individuals do sometimes, but while it requires the utmost humility from us in response[,] I feel very strongly it binds clients even closer to the firm, because the alternative of [‘]take ur money to a firm who is an under performer and not the best,[’] just isn’t reasonable. Clients ultimately believe association with the best is good for them in the long run.” Needless to say, Blankfein did not respond to Kraus. —— ON OCTOBER 11, Moody’s—one of the three large bond-rating agencies—downgraded $32 billion of publicly traded mortgage debt that had been originally issued in 2006, the second large and sweeping ratings downgrade by Moody’s in six weeks. Swenson shared the news with Montag and Mullen. “This will eventually filter into downgrades in CDOs,” he wrote, adding that one of the ABX indexes sold off “by a point” after the news, meaning more profits for Goldman. “ABS [asset-backed securities] Desk P and L will be up between [$]30 and [$]35mm today,” he added.


pages: 935 words: 267,358

Capital in the Twenty-First Century by Thomas Piketty

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accounting loophole / creative accounting, Asian financial crisis, banking crisis, banks create money, Berlin Wall, Branko Milanovic, British Empire, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, central bank independence, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation coefficient, David Ricardo: comparative advantage, demographic transition, distributed generation, diversification, diversified portfolio, European colonialism, eurozone crisis, Fall of the Berlin Wall, financial intermediation, full employment, German hyperinflation, Gini coefficient, high net worth, Honoré de Balzac, immigration reform, income inequality, income per capita, index card, inflation targeting, informal economy, invention of the steam engine, invisible hand, joint-stock company, Joseph Schumpeter, market bubble, means of production, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, open economy, pension reform, purchasing power parity, race to the bottom, randomized controlled trial, refrigerator car, regulatory arbitrage, rent control, rent-seeking, Robert Gordon, Ronald Reagan, Simon Kuznets, sovereign wealth fund, Steve Jobs, The Nature of the Firm, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, trade liberalization, very high income, We are the 99%

It would make sense to tax net wealth below 200,000 euros at 0.1 percent and net wealth between 200,000 and 1 million euros at 0.5 percent. This would replace the property tax, which in most countries is tantamount to a wealth tax on the propertied middle class. The new system would be both more just and more efficient, because it targets all assets (not only real estate) and relies on transparent data and market values net of mortgage debt.28 To a large extent a tax of this sort could be readily implemented by individual countries acting alone. Note that there is no reason why the tax rate on fortunes above 5 million euros should be limited to 2 percent. Since the real returns on the largest fortunes in Europe and around the world are 6 to 7 percent or more, it would not be excessive to tax fortunes above 100 million or 1 billion euros at rates well above 2 percent.


pages: 1,797 words: 390,698

Power at Ground Zero: Politics, Money, and the Remaking of Lower Manhattan by Lynne B. Sagalyn

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affirmative action, airport security, Bonfire of the Vanities, clean water, conceptual framework, corporate governance, deindustrialization, Donald Trump, Edward Glaeser, estate planning, Frank Gehry, Guggenheim Bilbao, high net worth, informal economy, intermodal, iterative process, Jane Jacobs, mortgage debt, New Urbanism, place-making, rent control, Rosa Parks, Silicon Valley, sovereign wealth fund, the built environment, the High Line, time value of money, too big to fail, Torches of Freedom, urban decay, urban planning, urban renewal, white flight, young professional

“We have an overdependence of the financial industry that has to change over the next years, or we’re going to be in real trouble,” said Partnership for New York City president Wylde.37 The litmus test of market demand for new top-quality space was 7 World Trade Center, and the evidence of the time was not encouraging. Silverstein began construction on the speculative office tower in October 2003, after construction of the urgently needed ConEdison electrical substation destroyed on 9/11 was complete. He had gone ahead with 7 World Trade before many of the legal agreements and economic issues with his creditors holding the mortgage debt had been firmly resolved.38 The developer’s leasing agents began listing space for rent in fall 2003, but almost two years later, “Larry Silverstein’s 52-Story Vacancy Problem” was a feature story in New York Magazine. Silverstein’s “stubborn insistence” on asking for rents that were substantially above what was typical in the downtown market was putting the “whole site at risk,” was how Crain’s described the situation in early May.39 By year end 2005, Silverstein still hadn’t found any major tenants willing to pay his asking rents of $50 to $55 per square foot—easily the highest prices in downtown.


pages: 1,773 words: 486,685

Global Crisis: War, Climate Change and Catastrophe in the Seventeenth Century by Geoffrey Parker

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agricultural Revolution, British Empire, Climatic Research Unit, colonial rule, currency manipulation / currency intervention, Defenestration of Prague, Edmond Halley, en.wikipedia.org, European colonialism, failed state, Fellow of the Royal Society, financial independence, friendly fire, Google Earth, Isaac Newton, Joseph Schumpeter, Khyber Pass, Mercator projection, moral hazard, mortgage debt, Peace of Westphalia, Peter Thiel, Republic of Letters, South China Sea, the market place, trade route, transatlantic slave trade, transatlantic slave trade, unemployed young men, University of East Anglia, World Values Survey

The rebels entitled their political anthem ‘The new song of William Tell, made in the Entlebuch in 1653’.82 Finally, the valley possessed a considerable measure of political and religious autonomy, a cadre of experienced and respected leaders and a well-developed communications network that facilitated rapid mobilization. On 26 February 1653 a gathering of peasants from all over the region approved a manifesto drafted by Hans Emmenegger that blamed their desperate situation on a synergy of human and natural factors: The common farmer can scarcely hold on to his house and home, let alone pay his mortgage, debts and interest on them, or support his wife and children … Drought or the loss of horses or cattle has forced people to leave their houses and homes, to give up their property and to move to a distant place to make their living. Later that day, the assembled peasants swore to oppose the policies imposed on them by the authorities in Luzern. In particular they demanded the restoration of currency at its former value and permission to pay interest on their debts in kind instead of in cash.83 Peasant communities in Cantons Bern, Basel and Solothurn as well as Luzern soon took up the call, and over two thousand men from the four cantons attended an assembly that drew up a ‘letter of union’ (Bundesbrief) demanding a return to the ‘eternal, God-given and inviolable laws’ of Switzerland and the abolition of all innovations (a shrewd ploy, since a Bundesbrief of 1291 between three cantons formed the founding document of the entire Confederation).