tag:blogger.com,1999:blog-4123986840630926993.post6069721617010495414..comments2023-09-07T02:33:38.579-06:00Comments on Mental Detritus: Review of the bailoutJohn J.http://www.blogger.com/profile/15113315088960432426noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-4123986840630926993.post-52119652309153361072008-10-16T16:00:00.000-06:002008-10-16T16:00:00.000-06:00john j,You do not understand the basics of credit....john j,<BR/><BR/>You do not understand the basics of credit.<BR/><BR/>There is no comparison between the stocks in a 401-K account and bonds, mortgages or other credit instruments that are at the center of the current crisis.<BR/><BR/>In short, credit theory is based on the expectation of periodic cash flows arriving where they are supposed to arrive. Monthly mortgage payments, for example.<BR/><BR/>The future value of a steam of cash flows is simple to calculate. Nothing about these cash flows is analogous to the price of a stock. There is no legally binding contract between the debtor and the creditor in the world of stocks. There is also almost no collateral in the stock world.<BR/><BR/>A stock represents the "residual value" remaining after all the other obligations of a corporation have been satisfied.<BR/><BR/>In other words, what's left after all the banks are paid off, after the bondholders are paid off, and all the vendors are paid off. <BR/><BR/>When a company is in trouble, stockholders' equity is negative. But even when it's negative, the banks and bondholders often get full reimbursement.<BR/><BR/>Things may get tricky with Credit Default Swaps and other seemingly exotic credit derivatives, but they are not as esoteric as journalists invariably suggest.<BR/><BR/>That aside, none of our current problems would exist if it were not for the 1977 enactment of the Community Reinvestment Act, which forced banks to offer mortgages to people with low credit scores, poor work histories and no downpayment money.<BR/><BR/>If we were all required to cough up 20% to buy a house, our current problems would have been stopped before they started.no_slappzhttps://www.blogger.com/profile/04207475509053402475noreply@blogger.comtag:blogger.com,1999:blog-4123986840630926993.post-27025286867601194712008-09-29T12:49:00.000-06:002008-09-29T12:49:00.000-06:00It's failed in the House.I appreciate your analysi...It's failed in the House.<BR/><BR/>I appreciate your analysis. It will be interesting to see what a revised bill will look like compared to this one.Comrade Kevinhttps://www.blogger.com/profile/11393718048145784837noreply@blogger.com