tag:blogger.com,1999:blog-7651702561869518108.post6710584679003925807..comments2024-01-12T19:58:00.378-06:00Comments on Causes of the Crisis: Why the Greek Debt Panic?Critical Reviewhttp://www.blogger.com/profile/11368176629434189670noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-7651702561869518108.post-7964191765915828642019-11-02T11:03:05.284-05:002019-11-02T11:03:05.284-05:00There are many mortgage lenders nowadays. But all ...There are many mortgage lenders nowadays. But all of them are not useful. Some lenders cannot deal with the clients who have bad credit history. <a href="https://mimortgage.ca/" rel="nofollow"> Bad credit mortgage Oshawa </a> is tough to get. I always trust on Mortgage intelligence who helped me a lot to overcome bad credit. Sheranhttps://www.blogger.com/profile/14566063258930861585noreply@blogger.comtag:blogger.com,1999:blog-7651702561869518108.post-41000488007329349722011-11-02T06:35:48.835-05:002011-11-02T06:35:48.835-05:00I am concerned that the Greek debt crisis might le...I am concerned that the Greek debt crisis might lead to a war (although I don't know who would be fighting who). The problem is economic at its heart, and such a war might involve the breakup of the EU or departure of a country from the euro.<br /><br />Here's the current situation: Some 27 countries, some with small overseas territories, are in the European Union, and many of those are also in NATO. Greece happens to be bankrupt (and Italy is allegedly also heading that way, not to mention Spain and/or Portugal). France and Germany are arguing over what to do about it. France pretty much wants money to be created and poured into its banks to shore them up. Germany is afraid of inflation and wants most of Greece's debt to be written off. (At least that's what I think their positions are.)<br /><br />People are afraid that this situation is going to get out of control (the so called "debt contagion"). If that happens, then there might be departures from the euro/EU, attempts at "military Keynesianism", and, for all we know, attempts at taking over assets in other countries by force. After all, Hitler built up his forces and broke various international treaties before going to war - in the wake of the Great Depression.<br /><br />How big is the risk of a war from a European recession/ depression stemming from the debt crisis? Is the hatchet truly buried?Dela @ Chromatic Tunerhttp://chromatictuner.orgnoreply@blogger.comtag:blogger.com,1999:blog-7651702561869518108.post-29153846681724654552010-04-04T21:45:47.833-05:002010-04-04T21:45:47.833-05:00You should mention that governmental deposit insur...You should mention that governmental deposit insurance has removed the discipline of the market that depositors would otherwise bring to bear on banks, keeping the banks from over-leveraging themselves. All that is left to restrain them is governmental regulation, which can always be (and was) gamed.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7651702561869518108.post-40002498433726134072010-03-26T07:40:55.199-05:002010-03-26T07:40:55.199-05:00Milton,
Because asset-backed securities are more ...Milton,<br /><br />Because asset-backed securities are more diversified from the get go. It's similar to the difference between buying $100 in stock of one company or buying $100 of a mutual fund which holds stock. The latter is a more diversified investment.<br /><br />A bank can lend a home owner $100,000 to buy a house or a bank can buy $100,000 worth of mortgage-backed securities and be diversified across hundreds of mortgages.<br /><br />It's these very facts that lead to the lower risk rating of mortgage-backed securities over holding mortgages directly.<br /><br />So why did banks buy the securities? Because they believed the same risk models which lead to the rules to begin with.Malachihttps://www.blogger.com/profile/13279330151397285672noreply@blogger.comtag:blogger.com,1999:blog-7651702561869518108.post-12331533444055970942010-02-17T01:18:04.510-06:002010-02-17T01:18:04.510-06:00For a given amount of capital, Basel rules establi...For a given amount of capital, Basel rules establish the maximum bank investment in that category. In your example, if the bank had $40 of capital, it could hold $1000 of mortgages, or $2500 of AAA MBS (2500x.08x.20=40).<br /><br />Assuming the riskiness of mortgages and AAA MBS are identical, one still needs to explain why banks would increase their MBS holdings, and the risk of their holdings, by 2.5x by switching to MBS from mortgages.<br /><br />Moreover, there is an additional risk to the holdings from the loss of the diversification effect by increasing the amount of loans/investments backed by housing. Why didn't banks keep their MBS holdings equal to their prior amount of mortgage holdings and use the freed capital to diversify.<br /><br />Simultaneously, borrowers through refinancing and through purchases were increasing their risk by higher debt leverage in their homes. If banks wanted to hold their risk constant as they increased their holdings of MBS, the banks could have asked for a higher down payment on their mortgage loans. A higher down payment is equivalent to putting aside higher capital. For example, if a bank requires a 10 percent down payment for a mortgage, $1000 of mortgages is backed by $1111 of home values. At 25 percent down payment, $1000 of mortgages is backed by $1333 of home value. In the later case, the bank increases it collateral by 20 percent giving the bank an extra cushion against defaults and home price declines. <br /><br />Banks increased their risk three ways. They lowered the capital for the loan; they lowered the down payment and amount of collateral; they over invested in one asset class, residential houses, and lost the benefit of diversification from holding more of other asset classes.<br /><br />Basel lowered capital, but it does not explain the banks willingness to increase the risk of its holdings, especially when they could have lowered the risk, or kept it constant, by diversifying and by raising down payment requirements on their mortgage loans to compensate for the additional risk.<br /><br />Basel capital rules for MBS are one important part of the puzzle but it is not the whole story. Other factors affecting banks and borrowers' risk tolerances and risk avoidance were also at play.Milton Rechthttps://www.blogger.com/profile/02488660316957122768noreply@blogger.com