Having lived in big cities for the past few years, I’d forgotten how diverse bird songs can be. Now that I’m in the Delaware suburbs, with my apartment facing a wooded area, I can hear all sorts of bird calls in the morning and evenings. I’ve identified at least 4 different types of calls and they’re all absolutely fascinating.
Spring is here!
You’d have to been living under a rock to not have heard about the “sub-prime crisis". However, most people still do not understand how it came about and its impact on the majority of Americans. Yesterday, I saw a show on ABC about the impact on “ordinary Americans” and I felt it was trying to get us to pity the people who made bad financial decisions and wanted to set the record straight.
How did the sub-prime crisis occur?
The sub-prime crisis was caused by a variety of factors. First, low interest rates and lax lending standards from 2004-2006 lead unscrupulous mortgage brokers to encourage people to buy properties with 0% down and take interest-only adjustable-rate mortgages(ARMs) because “property values were going to go up” and they could sell before interest rates went up anyway. This lead to intense condo speculation(buying property for the purpose of selling, rather than self-use), especially in areas with lots of land like Las Vegas and Florida.
Mortgages were already commonly securitized (bundled and traded as securities on financial markets) at the time. It’s how non-bank finance companies such as Countrywide and Household Finance operated. However, returns on these securities were generally low for good quality bundles and while generally safe, not particularly exciting.
Then, the financial institutions(lead by Bear Stearns) convinced Standard and Poors to rate some sub-prime mortgage securities as “investment grade” (since they were backed by property) and invented exotic ways to chop up the securities into different strips (pieces) such as cash flows of the first 10 years, or principal repayments, etc.
Normally, in financial markets, the risk/return tradeoff is inevitable, but when everyone saw that the high-return sub-prime mortgages had been rated investment grade, it opened up a whole new market (hedge and mutual funds are normally restricted to investment grade securities). When the rights were repackaged a few times, they had been sliced and diced in such a manner that no one really understood what they were really holding, only that it was “safe"(because of the rating) and offered higher returns.
As interest rates started rising in 2007, people started finding that their mortgage payments were becoming unmanageable and started trying to cash in on the supposed increased value of the properties. However, due to the scale of the speculation(ABC says as high as 80% of Florida condos) and everyone being in roughly the same situation in regards to ARMs, everyone tried to sell at the same time and property markets in places that had grown 15-20% per year immediately crashed. This became a snowball that picked up more and more victims as it rolled downhill, causing more and more people to put their houses on the market.
Even on the non-speculative side, people with unaffordable ARMs started defaulting and foreclosures started happening. As banks foreclosed, they needed to dump the properties to recover their money, resulting in further inventory in the market and a downward price spiral.
That’s when hedge and mutual funds started realizing that they might not be able to get those cash flows that had originally looked quite secure due to defaults. They started getting nervous and wanted to dump the holdings. The same death-spiral that happened in the housing market began to happen in financial markets with more and more institutional investors trying to dump the sub-prime securities.
The normally active credit securities market froze up because everyone wanted to sell and no-one wanted to buy, forcing some mutual/hedge funds to acknowledge that there was no way to value their sub-prime holdings due to the lack of an active market. That caused individual investors to panic and redeem money from the funds, resulting in the fund equivalent of a run on the bank.
It didn’t help that most financial institutions had found ways to move those liabilities off of their balance sheets(to improve their financial ratios) through Structured Investment Vehicles(SIVs), resulting in a complete lack of transparency of who was holding what. Everyone became paranoid and the credit market froze up because no one wanted to risk lending to someone who might default due to a sub-prime holding. This caused the demise of the finance corporations such as Countrywide because they couldn’t get money on the market to continue their business.
So we’ve come to today, where the sub-prime mortgage and credit market are both frozen and the property market death spiral continues.
What happened? Pure, simple, greed. Greedy mortgage brokers, greedy people who wanted bigger homes than they could afford, greedy bankers wanting more commissions, etc.
What does this mean to the average American?
Well, it means that credit is a LOT harder to get. Even if you have good credit, forget about trying to get a “jumbo mortgage” because there’s almost no one who will lend to you. Recent news indicates the situation is so bad that many lenders have even exited the student loan business.
How long will this continue?
Well, if I knew the answer to that question, I would be making billions just by offering advice. However, conventional theories of supply and demand determine that once enough of the bad debts are written off and housing prices fall to what people deem a “acceptable” level, the crisis will begin abating. However, the credit crunch will continue until there is sufficient faith in the recovery of the housing market.
My guess? Without too much government intervention, probably 3-4 years. If the government does silly things like stop foreclosures, it’ll only prolong the pain.
I was very happy to see that the Ma Ying Jeou had won the Taiwan presidential elections and equally delighted to read a very sensible editorial on the matter. I believe the Taiwanese people have realized that it’s time to get pragmatic, focus on improving living standards and economic strength of Taiwan and forget about ridiculous political posturing over “independence".
I (and most likely the 23 million residents of Taiwan) fully believe that Taiwan is already an independent country. Just because China doesn’t admit it doesn’t change the truth. Like Ma said, the issue will not be resolved within his lifetime, and most probably not mine. In the meantime, all I ask for is stable development, prudent government spending and an improved standard of living.
I was reading the NYTimes today and came across a classic example of the correlation v causation problem in statistical analysis. The article implied that exposing teens to wine at the dinner table resulted in a lower chance of alcoholism later on.
In 1983, Dr. George E. Vaillant, a professor of psychiatry at Harvard University, published “The Natural History of Alcoholism,” a landmark work that drew on a 40-year survey of hundreds of men in Boston and Cambridge.
Dr. Vaillant compared 136 men who were alcoholics with men who were not. Those who grew up in families where alcohol was forbidden at the table, but was consumed away from the home, apart from food, were seven times more likely to be alcoholics that those who came from families where wine was served with meals but drunkenness was not tolerated.
He concluded that teenagers should be taught to enjoy wine with family meals, and 25 years later Dr. Vaillant stands by his recommendation. “The theoretical position is: driving a car, shooting a rifle, using alcohol are all dangerous activities,” he told me, “and the way you teach responsibility is to let parents teach appropriate use.”
It looks good on the face and even provides a simple solution to a potentially big problem. However, if you think about it a bit, it’s pretty ridiculous to expect that serving wine at dinner will directly result in lower chance of alcoholism. It’s like saying serving healthy meals to children will result in lower chance of drug abuse; there may be a correlation, but there’s clearly no causation.
This study falls flat on its face because it does not appear to control for some crucial variables, most notably: social class and family environment. If you’re enjoying wine at family meals, you’re most likely coming from a middle/upper class family in a good neighborhood with two well-educated, caring parents. Children brought up in such an environment would obviously you will be much less likely to become an alcoholic.
Note: This was writteon the 5th anniversary of 9/11. As you can probably tell, I’ve been very behind in posting
Today marks 5 years from the attacks on the Twin Towers in NYC…
I was a Sophmore at UC Berkeley, sound asleep in my bed when the phone rang at 7am. It was my roommate’s father and he said breathlessly, “They’ve hit the Twin Towers! Go turn on the TV!". My brain was still trying to wake up and process what he said when the images came on the news. I said, “My God…” and hung up the phone. For the next hour, I watched as the towers burned and fell.
That day, my macro-economics professor, Nobel prize-winner Daniel McFadden, walked into class and wrote on the chalkboard “No Class Today". Many students actually cheered, probably thinking about what they would do with their time off and not really considering that thousands of people had died on the other side of the US.
The next few days were a blur. I remember many classes being canceled and the news broadcasting 24/7 about the attack. I spent most of outside of class at the Rescomp as usual. What was different was that instead of the usual music, the radio was tuned to a news channel.
Last night, I saw a Chinese TV program recapping the events of that day. I saw for the first time footage of the second plane hitting the tower. It came as a complete shock; the plane literally disappeared into the tower and then there was a huge explosion. In that very instant, America was changed forever.
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