The Gold Standard?

[Gilby]

Just curious how you choose to deal with your banknotes.

I'd recommend against speculating and would hold my assets in a world market portfolio consisting of stocks, bonds, real estate and real assets in proportion to the capitalization ratios they have relative to all assets in the world.

 

[therealjjj77]

So lets look at real world. If you fear inflation and have no confidence in the dollar, what do you as an individual do? If you expect higher rates of inflation in the future and the loss of value for dollars (sorry, Federal Reserve Notes), then the rational thing is to get rid of them. Buy things today while it takes fewer notes to buy them than in the future when it will take more. You don't want to save since that would be losing value.

If you believe metals such as gold will hold value against inflation you can buy that. But if you are buying from a dealer he will take a cut of around fifteen percent to sell you some gold and then again to buy it back. That means you need to have the price of gold go up by 30% just to break even.

Foreign currencies? The Euro has risen against the dollar. Again you have transaction costs to buy the Euros and later to convert them back to dollars. Not as steep as the markup on metals but you still probably need about a twenty percent change in the exchange rate to break even. Then you have the risk of the dollar regaining ground against the Euro or whatever currency.

You cannot use either to exchange for goods or services in this country.

Just curious how you choose to deal with your banknotes.

It sure would be easy to sit behind a desk all day getting paid by a Federal Reserve Bank to rummage forums and make sure there is no dissention in the ranks of FRN using Americans.

Wouldn't that be a nice job to have?

 

[ARealConservative]

So lets look at real world.

Yes - lets

You claimed the housing bubble was a product of free market principles. I directly challenged your point on this - which you ignored.

Do you think government programs designed to modify consumer spending habits is a principle of free markets? Yes or No.


This is an important first question. We are both wishing to look at the real world, yet somehow, when you described the real world you began by discussing the unicorns you see flying around your head.

 

[Zippyjuan]

I'd recommend against speculating and would hold my assets in a world market portfolio consisting of stocks, bonds, real estate and real assets in proportion to the capitalization ratios they have relative to all assets in the world.

Sounds like a nice, well rounded portfolio.

 

[Zippyjuan]

Yes - lets

You claimed the housing bubble was a product of free market principles. I directly challenged your point on this - which you ignored.

Do you think government programs designed to modify consumer spending habits is a principle of free markets? Yes or No.


This is an important first question. We are both wishing to look at the real world, yet somehow, when you described the real world you began by discussing the unicorns you see flying around your head.

Sorrry you took it that I was ignoring you. Yes, the government has deemed that home ownership is a desirable thing and have instituted tax credits to help encourage it. But that policy has been in effect for many decades and was not a contributing factor of the housing bubble. That was priced into the market decades prior to it. The free market principles I was refering to was the financial market loosening their lending policies allowing people to buy a more expensive house than they would have been able to afford under previous lending terms. That led to the demand for more expensive housing since people could more easliy afford them. It was supply and demand for houses that built up the prices- market forces. Demand grew faster than supply due to easier money so prices skyrocketed. That led to more construction booms but there are delays between wanting to build a house and it actually being for sale so now we have the opposite condition of excess supply and few buyers so prices are dropping in many areas. Free market supply and demand.

 

[Zippyjuan]

It sure would be easy to sit behind a desk all day getting paid by a Federal Reserve Bank to rummage forums and make sure there is no dissention in the ranks of FRN using Americans.

Wouldn't that be a nice job to have?

It would be nice. I understand the Fed pays pretty well.

 

[Gilby]

Yes, the government has deemed that home ownership is a desirable thing and have instituted tax credits to help encourage it. But that policy has been in effect for many decades and was not a contributing factor of the housing bubble.

I remember back in 2002 or 2003, when I was looking for my first home, that the Prez was signing some bill to make it easier for everyone to own their own home, and that this was a big goal for government to assist in. So things did change recently at the kickoff of the housing bubble.

The free market principles I was refering to was the financial market loosening their lending policies allowing people to buy a more expensive house than they would have been able to afford under previous lending terms.

So, why would they do that? If I had a bank and loaned out money and knew that if the borrowers were to default on their loan, my bank would suffer, then I would check everything out and make sure the borrower was fully qualified. But, if I was guaranteed that my loans would be bought by Fannie Mae and Freddie Mac (government programs) to be repackaged as mortgage backed securities, then why would I care if the borrower was qualified or not? I'd simply want to sell as many loans as I could and get the commissions from the closing costs because a later default would not be my bank's loss. So, that's exactly what happened.

Low interest rates provided the fuel for bubble, and the government backed regulations via Fannie Mae and Freddie Mac, provided the industry for the bubble to take place in.

A coerced market, not at all a free market.

 

[Gilby]

Sounds like a nice, well rounded portfolio.

Yeah, but it's easier said than done. Basically, have a diversified portfolio, as predicting the market is hard to do, especially when the government coerces so much of it.

Harry Browne's advise was to hold equal proportions of stocks, bonds, cash, and gold. The reason breaks down to:
Prosperity: Stocks
Inflation: Gold
Tight money or recession: Cash (short-term bonds)
Deflation: Bonds

It may be the most stable for short term, but long term, I think it holds too much gold and cash. A total market portfolio would probably hold:
35 percent in stocks
25 percent in bonds
25 percent in real estate
15 percent in real assets (gold, oil, timber, grains, etc)

Those would include both domestic and foreign assets.

You'd want to adjust your portfolio for your needs. For example, depending on the net value of your portfolio, you may want more stable assets in case you need cash in the short term. That can be done by holding short term bonds (or CDs) or high yielding stocks.

 

[Mini-Me]

Sorrry you took it that I was ignoring you. Yes, the government has deemed that home ownership is a desirable thing and have instituted tax credits to help encourage it. But that policy has been in effect for many decades and was not a contributing factor of the housing bubble. That was priced into the market decades prior to it. The free market principles I was refering to was the financial market loosening their lending policies allowing people to buy a more expensive house than they would have been able to afford under previous lending terms. That led to the demand for more expensive housing since people could more easliy afford them. It was supply and demand for houses that built up the prices- market forces. Demand grew faster than supply due to easier money so prices skyrocketed. That led to more construction booms but there are delays between wanting to build a house and it actually being for sale so now we have the opposite condition of excess supply and few buyers so prices are dropping in many areas. Free market supply and demand.

This is the problem you run into when you have "some" free market policies that are still tied into an overall system of economic interventionism. The banks over-leveraged fractional-reserve banking (which should be illegal anyway, at least in the context of "money created as debt") and created too much easy credit because,

1. Our screwed up monetary policy and fractional-reserve banking allow this kind of irresponsibility, and
2. The Fed, FDIC safety net, etc. essentially subsidize banking irresponsibility. As someone else on these forums said, it's a bit like, "privatized profits, socialized losses"

 

[Zippyjuan]

I remember back in 2002 or 2003, when I was looking for my first home, that the Prez was signing some bill to make it easier for everyone to own their own home, and that this was a big goal for government to assist in. So things did change recently at the kickoff of the housing bubble.

So, why would they do that? If I had a bank and loaned out money and knew that if the borrowers were to default on their loan, my bank would suffer, then I would check everything out and make sure the borrower was fully qualified. But, if I was guaranteed that my loans would be bought by Fannie Mae and Freddie Mac (government programs) to be repackaged as mortgage backed securities, then why would I care if the borrower was qualified or not? I'd simply want to sell as many loans as I could and get the commissions from the closing costs because a later default would not be my bank's loss. So, that's exactly what happened.

Low interest rates provided the fuel for bubble, and the government backed regulations via Fannie Mae and Freddie Mac, provided the industry for the bubble to take place in.

A coerced market, not at all a free market.

For the most part, the banks were not as agressive in the subprime lending market- certainly not at the outset. There were a lot of private mortgage companies that booked loans and then resold them to investment companies or yes, banks. They got their money up front and weren't that concerned about the lower quality of papers they were issuing. The loan repurchasers often put together packages of mortgages and then resold them to somebody else as securities backed by the mortgages. These packages were often bunches of different types of mortgages to spread the risks around. The securites with higher risk notes backing them should have offered higher rates of return and that made them more attractive to buyers who thougt the market would continue to boom.

People buying these packages were offered a higher possible rate of return by taking on the risks- but found later that the risks were much higher than they were led to believe and that is why the financing collapsed. All the repackaging and reselling led to reduced ability to judge the quality until nobody wanted to buy any of the mortgages or mortgage backed bonds.

Fannie Mae and Freddy Mac do have limits on the size of loans they will guarantee. In some places like Southern California, they would not cover even the median loan since the price of the median home rose to above their maximum levels. http://www.fanniemae.com/aboutfm/loanlimits.jhtml In San Diego the median housing price was as high as $517,000 and even at the latest figure of $430k exceeds the Fannie Mae maximum of $417,000.

I agree that housing is not a truely free market, but my point was simply that the prices were responding in a free market fashion to more money becoming more easily available for the purchase of homes- a combination of historically low interest rates and looser lending practices and creative financing- which led to greater demand and thus higher prices. The market responded by trying to increase the supply of housing stocks but some came too late and now there is excess supply relative to demand and housing prices are making a very rare retreat in asking prices.

I would heartily agree with anyone who opposes bailing out either individuals or banks or investment firms who lost money by being involved in the housing market- they accepted the risks and should pay the price if things go wrong. Bailing them out (as the previous poster rightly says) would only encourage more risky behavior in the future.

 

[therealjjj77]

For the most part, the banks were not as agressive in the subprime lending market- certainly not at the outset. There were a lot of private mortgage companies that booked loans and then resold them to investment companies or yes, banks. They got their money up front and weren't that concerned about the lower quality of papers they were issuing. The loan repurchasers often put together packages of mortgages and then resold them to somebody else as securities backed by the mortgages. These packages were often bunches of different types of mortgages to spread the risks around. The securites with higher risk notes backing them should have offered higher rates of return and that made them more attractive to buyers who thougt the market would continue to boom.

People buying these packages were offered a higher possible rate of return by taking on the risks- but found later that the risks were much higher than they were led to believe and that is why the financing collapsed. All the repackaging and reselling led to reduced ability to judge the quality until nobody wanted to buy any of the mortgages or mortgage backed bonds.

Fannie Mae and Freddy Mac do have limits on the size of loans they will guarantee. In some places like Southern California, they would not cover even the median loan since the price of the median home rose to above their maximum levels. http://www.fanniemae.com/aboutfm/loanlimits.jhtml In San Diego the median housing price was as high as $517,000 and even at the latest figure of $430k exceeds the Fannie Mae maximum of $417,000.

I agree that housing is not a truely free market, but my point was simply that the prices were responding in a free market fashion to more money becoming more easily available for the purchase of homes- a combination of historically low interest rates and looser lending practices and creative financing- which led to greater demand and thus higher prices. The market responded by trying to increase the supply of housing stocks but some came too late and now there is excess supply relative to demand and housing prices are making a very rare retreat in asking prices.

I would heartily agree with anyone who opposes bailing out either individuals or banks or investment firms who lost money by being involved in the housing market- they accepted the risks and should pay the price if things go wrong. Bailing them out (as the previous poster rightly says) would only encourage more risky behavior in the future.

I would say I agree with your conclusion that we should not bail them out. However, I would strongly use this instance as a charge against those in office who violated the 10th amendment by proposing and putting forward this program, to bring them to justice and set an example once and for all what our federal government SHOULD NOT be doing.