I acknowledge that the government sponsored a "Let them eat cake" initiative in regard to home ownership.

It definitely played a big role in the mess at the root level...(the interaction between Heidi and her patrons)....

What I'm after is what contributed most and at which level we can actually do something to prevent the whole thing from happening again.

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The world could use more Stan Ovshinsky's

Yes but a market of the nature that Melanie describes will rebound and is likely to rebound stronger than it was before the collapse. Look at it this way. If in the scenario you described (which I think does an excellent job of providing an example by the way) the government had stayed out of and just let the market handle it then it is likely that the future customers of businesses would be more cautious about the debt they incur, the future Heidis would be more careful about their business policies, the future creditors on up the line would be more careful about the businesses that they lend to, etc. It's kinda like the old saying about how when your heart gets broken it mends back stronger only with regards to the economy.

I can certainly see where you are coming from and why you feel the way that you do but I feel that the best thing for at least the federal government is to not get involved outside of maybe cutting taxes or giving speeches encouraging people to be more careful in the future (not forcing these people mind you, just encouraging them).

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"We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, ... That to secure these rights, governments are instituted among men,"
-Declaration of Independence

Two truths that many Americans seem to have forgotten:
1. Men are endowed by God with inalienable rights.
2. Government's purpose is to secure man's God-given rights.

Are you familiar with the MBS deal, how that worked? Mortgage Backed Securities?

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"The captain has turned off the `No Dubbing' sign. You are free to speak any language you choose."

Easy money is at fault, too much capital chasing too few opportunities, a perfect scenario for the Wall Street wolves. The easy money was the Fed's fault.

As far as prevention, I say, take them off the grid. Pass a law that no SEC regulated company can engage in derivatives that doesn't involve their primary business, and those derivatives in total cannot have a material effect on earnings.

In the same law clearly state that no Treasury or Fed money can ever be used to provide liquidity to any derivatives market. No regulations, no bailout, no access to government money.

Goldman Sachs would have to go private again, which is fine with me.

I'd also like to see the big banks broken up into smaller pieces that wouldn't be "too big to fail" (that goes against my nature as a "free market" guy, but damnit they made a mess of things).

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Giving money and power to government is like giving whiskey and car keys to teenage boys. ---P. J. O'Rourke

And btw, repeal CRA.

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Giving money and power to government is like giving whiskey and car keys to teenage boys. ---P. J. O'Rourke

Really good explanation.

^response to the original post.


edit: I would say they are all responsible, but would say the people consuming the alcohol (the customers) are the most responsible.

I'm liking that idea.

I'm wondering if all derivatives should also be made part of a public exchange.....I'm pretty sure that Geithner talked about that, but I would want to make sure they follow through on that.

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The world could use more Stan Ovshinsky's

The drunks, of course. Such a business plan is so blatantly contrary to common sense that every one should know better. Heidi and her creditors might have devised such a crazy scheme, but no one made anyone sign on the dotted line. Who's more the fool, the fool or the fool who follows him?

Of course, thats were our little analogy diverges from reality, which more closely resembles the drunks hitting up Heidi for "free samples" over and over, and getting a lawyer and a cop if she refuses. If you deny people the means to earn an honest living, they will earn a dishonest one. Is it any wonder why Heidi et al would look for ways to make a bundle short term?

Bankers had a built in way to nip this in the bud. It's called asking questions, but problems develope when you legislatively declare questions racist.

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January 21, 2013: The End of an ERROR.

"Only a virtuous people are capable of freedom. As nations become more corrupt and vicious, they have more need of masters."
"When the people find that they can vote themselves money, that will herald the end of the republic."
"The Constitution only gives people the right to pursue happiness. You have to catch it yourself."
---Benjamin Franklin

If I see this right, the answer would be C) and, to a lesser extent D) as they would no doubt accept, that C) has done his homework and checked the risks.

The article you posted is a very accurate descrption of the functioning o f angl-american Capitalism.
IE any risk is acceptable as long as money can be made of it for a short period.
This mentality has brought about two major and some eight minor economy crashes with effects on the economies of the whole world.
And, with the current heavy borrowing from the State, the next major crash is pre-programmed.

Brings us to point 2)

Find and accept a version of Capitalism, which reduces risks to a bearable level.
Eliminate the careless and brainless high-risk takers by letting them go bankrupt.
Give credits only to founders of new businesses ( existing businesses too if they can prove, they´ve been harmed by reckless actions of others while having acted responsibly themselves ) after carefully considering the risks and the probable rentability accompanied by that deal.

Create laws to severely punish individuals and corporations who recklessly endanger and harm the common economy for purely personal gain.

Lend every unemployed a patch of land and a cabin, where they can fend for themselves and their families until they get new employment or start their own business.
Give SS only to the handicapped and chronically ill.

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"There is no means of avoiding the final collapse
of a boom brought about by credit (debt) expansion.
The alternative is only whether the crisis should come sooner
as the result of a voluntary abandonment of further credit (debt) expansion,
or later as a final and total catastrophe of the currency system involved." - Ludwig von Mises

Here we go again blaming the CRA.

We had a dual system going, on one hand banks playing by the rules, and on the other hand banks going after the same customers, but outside the purview of the CRA.

What should have happened was when it was evident that there were non-traditional banks trying to capitalize on the CRA market, without oversight, the SEC should have stepped in and put a stop to it, or insisted they comply with the provisions of the CRA; which they couldn't have.

Loans within the CRA were lower interest, and much less likely to default.

All this blame shifting from rouge banks onto banks complying with CRA, is ridiculous.

This is like pharmaceutical drug companies on one hand, and illegal drug lords on the other.

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"Shake off all the fears of servile prejudices, under which weak minds are servilely crouched. Fix reason firmly in her seat, and call on her tribunal for every fact, every opinion. Question with boldness even the existence of a God; because, if there be one, he must more approve of the homage of reason than that of blindfolded fear."

-Thomas Jefferson

wth are you talking about? is F&F a rogue bank? the numbers didn't work where never gonna work and we were gonna take it right you know where and we did....and for what?

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"The captain has turned off the `No Dubbing' sign. You are free to speak any language you choose."

We've already got the CBOT, and of course, Las Vegas.
I don't think easier access will lessen the problem, although it would increase the transparency for those needing their daily "fix".

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Giving money and power to government is like giving whiskey and car keys to teenage boys. ---P. J. O'Rourke

As a modification to the original scenario:

The one fee that Heidi DID charge her customers, and demanded payment every drink from, was a 5% fee called Drink Tab Insurance. This money went to an insurance company that guaranteed Heidi payment for clients who eventually showed they didn't have enough money to pay their tab. That way Heidi wasn't completely screwed when customers couldn't pay their bill ... she could go to the insurance company and redeem the Drink Tab Insurance policies.

My question with this mortage meltdown, is what the fuck happened to mortgage insurance? And unlike drunks at a bar, the houses and the land they were built on still existed as assets for Heidi or the larger banks to seize as collateral. The mortgage insurance as well as the physical collateral of the houses should have been PLENTY to keep everything afloat without needing bailouts.

What happened to the mortgage insurance money? Is it really just a scam as I've suspected all along for banks to collect an extra 5%?

Mortgage insurance pays off the mortgage if the borrower dies.
If the borrower doesn't pay, the bank repos the property.
But the mortgage crisis was only a small part of the meltdown.
Credit Default Swaps were the major part of the meltdown, and for something hardly anyone had ever heard of, there were a lot of them, the face value of the credit default swap market was 76 Trillion dollars, considering that all the corporate bonds in the world add up to around 7 trillion dollars, that was a lot of money bet, and since it was unregulated, there wasn't any reserve requirement. The average default swap sold for 2% of face, so people paid 1.5 trillion dollars for credit default swaps which boosted the earnings of the hedge funds that sold them, until someone defaulted, and then it wiped out the hedge funds that sold them.

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“ The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.”

Adam Smith , The Wealth of Nations 1776

"We have always known that heedless self-interest was bad morals; we know now that it is bad economics"
FDR's second Inaugural Address

It's your numbers that don't add up. You're just rehashing already debunked partisan dribble. How Uber-Partisan of you.

__________________
"Shake off all the fears of servile prejudices, under which weak minds are servilely crouched. Fix reason firmly in her seat, and call on her tribunal for every fact, every opinion. Question with boldness even the existence of a God; because, if there be one, he must more approve of the homage of reason than that of blindfolded fear."

-Thomas Jefferson