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I recommend to you the article at the end of this post. The notions in it provide the foundation for my support for the $700 billion plan -- even when, understandably, the majority opposed the plan.

I think we're in a real pickle. How we got here will be the subject of numerous studies. There's plenty of blame to go around -- from compromised elected officials, to ignorant elected officials, from horrifically bad leadership to very poor financial decisionmaking by housing speculators.

One thing I can say for sure is that blind faith in "free markets" is truly part of the problem. I'm an advocate of free markets, of free trade, and I welcome a more interconnected world. So let me expain my complaint.

Certain advocates of free-market thinking -- who climbed high in this and past administrations -- did not understand that all of our freedoms have limitation. We are not free to do anything we want and at any time. We are not free to throw rocks through our neighbors' windows. We are not free to launder money. We are not free to do a lot of things. There are rules in society, and we naturally understand the need for them.

Likewise, free financial markets do not work without rules. Taken to the extreme that it was in our banking sector, free-market philosophy would legalize drunk driving. "Hey, you takes your chances out there on the road." The free-market purist would say drunk driver should only be arrested if they can't successfully navigate their way through the neighborhood without hurting anyone. That's freedom of the sort I don't want.

And this is how our investment banks were allowed to operate, particularly after the abandonment of the net capital rule in 2004. The whole of Wall Street could leverage up recklessly, hoping to play hot potato with the bad debts, regardless of what risk it put other people in. This is where free markets have to give way to stop signs and speed traps and rules against reckless driving. Because without them, the risk of damage to others is great. And that damage actually isn't about a $700 billion burden to taxpayers. That damage is that unregulated financial markets foster corruption, greed, self-interest, and naturally lead to market collapses, and to depression.

Because the financial world is product-less and inventory-less, it can hard to pin down these concepts. So let's look at unregulated commerce of another sort, being practiced in China today:

http://www.chicagotribune.com/news/nationworld/sns-ap-as-asi...

If we wanted to, we could say, "Hey, consumers of the world, you takes your chances. Eat a chocolate bar and risk being poisioned because we are going to let anyone and everyone be free -- from criminally negligent business leaders to reckless drivers. We know you can take care of yourself."

You have a too-free market in China when it comes to food-quality standards right now. And I'm sure it's obvious to everyone that self-regulation doesn't work. So you have to tax citizens to fund the creation of basic food quality standards, basic requirements for creation of medicinals, highway laws, AND regulations to the financial world. Unbelievably, the S.E.C. in recent years has become an advocate of eliminating regulation. And we're not talking about excessive regulation. We're talking about the elimination of basic rules of fair play in finance, to protect the markets all the way through to consumers putting money into their local bank.

Now I am not asking for the introduction of massive new regulations. And I'm a strong opponent of socialism. I hate the idea that the government needs to take temporary ownership stakes in banks in order to a) protect customer deposits and b) return to the taxpayer what is rightfully theirs (in the form of deficit reductions). But I think this is the only way to begin biting the bullet now in the way the bullet must be bitten down on to avert a more permanent and more crippling freeze to the credit markets.

All of this is preface to what I think is a fine article describing the mess we're in. I hope you got this far, because I think this is a fine description of our predicament:

http://www.telegraph.co.uk/finance/financetopics/financialcr...
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That damage is that unregulated financial markets foster corruption, greed, self-interest, and naturally lead to market collapses, and to depression.

I'm glad to see that like I, you are probably voting for Obama (lol).

So let's look at unregulated commerce of another sort, being practiced in China today:

Judging from headlines I'd say it'd be hard to disagree that China produces a great deal of un-qualified commerce. Unregulated, however, may or may not be an accurate term. Lack of enforcement, however, may be more to blame. Take the poisened milk. According to the article you linked and one I'm about to, China does have legal guidelines for, in this case, melamine in food. And officials there raided the suspected factories and jailed people. Yes, it's closing the door after the horses got out. But the U.S. often doesn't catch illegal goings-on or inferior products until they've hit the market as well. At which time, "voluntary" recalls are basically mandated by the consumer protecton agency.

Whether China officals don't have written regulations, or don't or can't enforce some of them, is yet to be understood. In the milk scare, apparantly they do have regulations and have enforced them once a problem was discovered. What I suspect, however, is that officials enjoy unlimited job creation there and choose not to tread on business with something so pesky as safety. But, a billion or so people may make it five times harder to police all the activity than say in the U.S. I am unable to discern if China condones and turns a blind eye to counterfeitting and chemical/paint type substitutions. Or, if they have the regulations, will jail those who break them, but don't have the resources to check all factories for every drop of liquid that comes out of them???

sidebar: (Chinese) Police raided dairy farms and milk purchasing stations in northern China, detaining 22 people accused of being involved in a network that manufactured, sold and added melamine to milk, the official Xinhua News Agency reported Monday. Police also seized more than 485 pounds of the chemical.
http://news.yahoo.com/s/ap/20080930/ap_on_re_as/as_china_tai...

I do believe more regulation of the financial markets is needed in the U.S. But short of setting governmental benchmarks for credit for people, it would seem impossible to regulate an economy into constant lifestyle improvement.

Our country was founded on the premise that pursuing happiness and profit and lifestyle improvements are protected by the constituion. To advocate say, regulations that would deny by law, some Americans enough credit to have a home, might be a hard sell. And in fact, limiting credit by law, may stifle growth.

I agree with more regulations but I just don't know what those should be or if they should in any way, shape or form, make credit illegal for any group in America. Maybe, just maybe, it should be illegal for Americans ourselves, to accept credit which is beyond our means to pay. Another toughie to figure out though.

Paul T.
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I listened to a program on the radio this weekend and a guy (don’t remember who it was) explained the problem and how we got into it.

I will give the short version.

Starts with the subprime mortgages and the refinancing that took place after the rates were dropped so Low after 9/11, people just remortgage the house and took out the equity, spent it.

Anyway, that started it, the failure of Lehman Brothers and the failure of AIG started the ball rolling down hill.

Default Credit Swaps (totally unregulated) got the ball moving at high speed.

The way it was explained and I am not great at explaining this but here goes.

I buy a million $ bond of company ABC, and I decide to ensure it just in case the company goes under.

So, I pay AIG 2 or 3 % a year on the million, if ABC goes under, AIG covers the million, so I am safe.

Not a problem in itself, since, like any insurance, the premium is higher if the company is risky and since they sell this insurance on 1000’s of companies, if a few go under, the premiums on the rest, will cover the hit they take. (This is not completely true, but I talk about Capital Reserves later)

Now someone else comes along, and wants to buy insurance as well, only they don’t have a bond, they want to buy insurance on MY bond. They pay 2 or 3 % to AIG and if company ABC goes under, AIG now owe $ 2 million to cover the loss of the bond.

However, it did not stop there. There could be 10 others that want to buy insurance on the same bond, so now if company ABC goes under, AIG owes 10 million on a one million $ bond.

And I am using 1 Million as an example, we are talking TRILLIONs not millions.

I think the guy said roughly $ 5 Trillion in company bonds out, and $ 60 Trillion in insurance.

This is an OVER simplified explanation of Default Credit Swaps, when you get right into them...............I got completely lost.

Everything runs great, money is made, as long as, company ABC does not go under, in that case, the dominoes start to fall and there is not enough money to cover the insurance.

On top of that, let’s call company ABC - Lehman Brothers, they owe many other corporations money that they borrowed from, including Money Market Funds that lent them huge amounts in overnight lending. This causes everything to fall apart. And one of the reasons the Fed stepped in and said they would guarantee Money Market Funds.

None of this was or is regulated, so, no one knew or even now, knows how big the problem is.

The insurance companies, banks, brokerage firms did some heavy lobbying to ensure it did not get regulated. IF it did get regulated, then these firms would be required to hold capital in reserve based on the amount of insurance outstanding. And, since they are not interested in keeping money on hand (can’t make money if you have to hang on to it) they made sure no bill was passed to regulated Default Credit Swaps.

And, no banker could understand how this all works and it was not a banker that came up with Credit Default Swaps, but a physicist.

So, anyone that thinks this problem is over, or that $ 700 Billion will even come close to fixing is, is just fooling themselves. AND, right or wrong, I don’t think I will be buying any of the 5 MDP recs coming up, until I know more of how this will all shake out. IF I miss some upside, such is life.

I asked a question of the FOOL on 2 different boards and no one was willing to answer the question, and that makes me even more nervous. SO, I will be sitting on the sidelines for a bit, I may even sell into any upside in the market over the next few weeks.........not sure.
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So, anyone that thinks this problem is over, or that $ 700 Billion will even come close to fixing is, is just fooling themselves. AND, right or wrong, I don’t think I will be buying any of the 5 MDP recs coming up, until I know more of how this will all shake out. IF I miss some upside, such is life.

I asked a question of the FOOL on 2 different boards and no one was willing to answer the question, and that makes me even more nervous. SO, I will be sitting on the sidelines for a bit, I may even sell into any upside in the market over the next few weeks.........not sure.


I don't know what radio station you were listening to but it was a good one.

You are asking your questions on the wrong board. They have been discussing the CDS (Credit default swaps) for quite awhile. They knew this was coming, just not when.

http://boards.fool.com/Messages.asp?bid=114903&mid=27061...
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jean, I think it was NPR radio and the question had nothing to do with default swaps.............it was about the FOOL making recs in this market, it's more involved but I already asked it twice, not going to beat my head against the wall and do it again.

It tells me, no one even at the Fool is thinking clearly, just buy buy and hold, and all will be well.
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Speaking of regulations, remember what preceded this crisis? Enron, Tyco, Worldcom and others. In those cases I believe it was mostly a matter of regulations being in place but not being adhered to.

No amount of regulations will insure compliance, but there may be key guidelines that can't be ignored. Seems like giant mergers have a hard time ignoring monopoly laws for instance. Too high profile I guess.

The crash of the large businesses like Enron were largely the fruit of an era (that probably still exists) where if regulations could be bypassed, over and over for decades, then it's not really a law. Kind of like what I call the speed limit syndrome. If enough people go over the speed limit, the government has to change the limit to match the average speeds being achieved, in Michigan. It's a law. It's a law that protects mass breaking of the law. Such was and is the Enron era culture, and very much so, the current AIG era as well. Whether the regulations exist or not, shady practices unenforced define tacit government approval.

Paul T.
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It tells me, no one even at the Fool is thinking clearly, just buy buy and hold, and all will be well

The boards are an electronic abyss in which each message we write sinks slowly to the bottom of the www ocean. Along the way, messages, usually per chance, float and sink nearby other messages. But 99.999% of all messages never see or respond to other messages.

Throwing a ? out on a board is like throwing a dart out of an airplane. I would suggest not passing judgement on the Fool based on two posts you made. Keep trying, or email Tom or David yourself. They are approacheable.

Saw on TV the other day (don't quote me) that there's never been a 25 year losing period in the markets. With this in mind, the "don't panic, don't sell, and don't quit buying" philosophy of TMF withstands the test of time.

Paul T.
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.....it was about the FOOL making recs in this market, it's more involved but I already asked it twice, not going to beat my head against the wall and do it again.

===========

I does seem that way doesn't it.

Remember the FOOL's business is basicly promoting buy and hold. They do stress do your own investigation. There are people on the boards that don't agree, the people at the board I linked to is one.

Jean
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I think you missed what the regulations would have done on Default Swaps......basically, the insurance companies would NOT have gotten into them certainly not this deep and maybe not at all........if Capital Reserves were required.

Does not matter, too late now.............the horses have left the barn........
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My understanding is, ALL messages are read.........anyway, does not really matter, nothing they could say would alter my perception or plan of attack at the moment............
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"I listened to a program on the radio this weekend and a guy (don’t remember who it was) explained the problem and how we got into it."

It is a GREAT explanation- its Ira Glass "This American Life" a weekly NPR show. HIGHLY recommended!!!
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And this is how our investment banks were allowed to operate, particularly after the abandonment of the net capital rule in 2004. The whole of Wall Street could leverage up recklessly, hoping to play hot potato with the bad debts, regardless of what risk it put other people in. This is where free markets have to give way to stop signs and speed traps and rules against reckless driving. Because without them, the risk of damage to others is great. And that damage actually isn't about a $700 billion burden to taxpayers. That damage is that unregulated financial markets foster corruption, greed, self-interest, and naturally lead to market collapses, and to depression.

I have to disagree with you here Tom; you missed a key point. Now I am sure that banks will more regulated if not nationalized in the near future; but this will not restore confidence in the market. What is needed is an elected official, respected business leader or journalist to look straight into a camera and explain to them that we are a society that spends far more than we make. But that won't happen because our senators and congress men/women need to get re-elected and the journalist don't want to jepordize their careers as well. Now some people invest save money for a rainy day. But the majority save no money and purchase those must have products even though they cannot afford them. Fortunately they have a credit card with the a large enough credit limit.........


And when the huge bill comes in from all those purchased and couples don't have the money to pay the $9000 Visa card bill they can pay the minimum or transfer it to their Mastercard. Like sweeping dirt under the rug. Now the vast majority of couples have credit debt+mortgage debt; were does all this debt go to? Who is responsible???? Those big companies or we, the people that don't fulfill their obligations by paying heir bills.

So how do we get this market back on track?

No more credit or debit cards.

ARM's and subprime mortgages are gone. 20% down on all home/car/boat/etc. mortages. If you don't have that money then save first. Then when you have saved enough you will be entitled to make that purchase. How do you save that money...live well below your means. While disheartening at first when you reach your financial goal it is rewarding to know you did it yourselves.

We are coming to a crossroads IMHO that either we take control or our government will do it for us..cradle to grave..........
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Default Credit Swaps.

I saw that part also. The problem is the 60 trillion far exceeds the 13 trillion in mortgauge debt.

Where is balance? Perhaps it is the credit card debt?????????
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