Interesting Wired article.

[Batutta]

Don't want to make this a political thread. In fact, you can lock it after I post this, I just thought it was an important article and wanted to share, as it's the clearest explanation I've read about why our economy went south last year. It can mostly be traced to a simple mathematical formula gone awry--

http://www.wired.com/techbiz/it/magazine/17-03/wp_quant

 

[imthinking]

Interesting article, but adding to that is the presidential order by Clinton allowing mortgages to be purchased by those who could not pay down 20% and to allow banks the ability to lend money based on a moving interest rate to help achieve those home buying plans. This wasn't changed by Bush and not planned to by Obama. When a mortgage payment can go from 800.00 to 1400.00 in a month well the result is what you see now. The 20% down was to make sure if the economy went south for a little while you had padding in your asset to offset this issue but with 0% down mortgages banks had 60% in assets and 30% in cash due to the man in this article, and then when the markets soften and prices dropped so did asset value and oopps we have a recession. So if we don't change what was done in the 90's are we not destined to do it again in less than 10 years?
We should stop loans based on adjustable rates for anyone who can't put down 20% and this alone would help reduce economic risk in the future. The difference in an ARM rate and FIXED is usually less than 1% so if the person can't afford the higher rate should we give them a loan when in less than 5 years they will HAVE to pay the higher rate? THIS IS JUST STUPID... I am not against or for Clinton, Bush or Obama but the truth is where its at. They all tried to micro manage a system by allowing financial institutions further their political goals and i assure you that none can place the blame on any other person the most than these three presidents!

 

[Batutta]

Interesting article, but adding to that is the presidential order by Clinton allowing mortgages to be purchased by those who could not pay down 20% and to allow banks the ability to lend money based on a moving interest rate to help achieve those home buying plans. This wasn't changed by Bush and not planned to by Obama. When a mortgage payment can go from 800.00 to 1400.00 in a month well the result is what you see now. The 20% down was to make sure if the economy went south for a little while you had padding in your asset to offset this issue but with 0% down mortgages banks had 60% in assets and 30% in cash due to the man in this article, and then when the markets soften and prices dropped so did asset value and oopps we have a recession. So if we don't change what was done in the 90's are we not destined to do it again in less than 10 years?
We should stop loans based on adjustable rates for anyone who can't put down 20% and this alone would help reduce economic risk in the future. The difference in an ARM rate and FIXED is usually less than 1% so if the person can't afford the higher rate should we give them a loan when in less than 5 years they will HAVE to pay the higher rate? THIS IS JUST STUPID... I am not against or for Clinton, Bush or Obama but the truth is where its at. They all tried to micro manage a system by allowing financial institutions further their political goals and i assure you that none can place the blame on any other person the most than these three presidents!

But the economy wouldn't have crashed as fast and hard if those mortgage loans weren't valued higher than they were. Because of the misapplication of this formula, that's exactly what happened, and when the values were corrected, trillions of dollars vanished overnight.