Subprime, spillover and greed

I think we should reflect on Jie Chao's questions in the tagbox if you are interested in finance and the economy in general.

Here are his questions:
1. So this subprime crisis is aggravating the decline of the general US economy?
2. Am i right to say that this flood of refinancing of homes fueled the US economy some years back?
3. why does this deleveraging and foreclosures have such an ripple effect on the WORLD economy?
4. so basically the whole crisis lies in banks and financial institutions throwing out money to create a future stream of income that is in really a fat dream, right?5. therefore, it is really a false prosperity and that the seed of the crisis has long been planted when they refinance the homes?

In my opinion, I think that subprime has acted as a primer that triggered of this whole chain of event.

I'll attempt to link them up together.

Foreclosure rate increased in 2006 -->Home price decline --> Higher default rates --> Securitised assets (CDOs, MBS, etc) falls in value --> Securitised assets was held by leveraged loans (think of the 2 Bear Sterns hedge funds) --> reduced lending of banks + deleveraging of hedge fund +Reduced leveraged buyout --> CREDIT CRUNCH --> Reduced leveraged buyout + reduced economic activity (US states that can't finance public projects included)+ rising unemployment, funding problem faced by many companies --> economic slowdown/recession
(The above is my interpretation & understanding of this crises, and ideas formed from a talk i attended in SMU where an Exec Director from JPMorgan tried to explain the whole issue to us in English...please tell me if i have serious flaw(s) in the chain of reasoning)

After reading on Chaos theory, i'm damn scared to find causality between events. As human beings, we have a need to explain things in a way that make sense to us. This makes us vulnerable to flawed reasoning. However, I'll confidently pronounce that this crises is CAUSED by GREED, and no more than that. Greedy bankers and naive investors wanting to fuel the dreams of hopeful homeowners caused this debacle.

This is also partly fueled by Greenspan era of cheap money aka low interest rate, and the introduction of Adjustable-Mortgage-Rate type of loans to the US public (DBS introduced them last year too!). Furthermore, the securitized mortgages and debt were sold to yield hungry investors, say in China or other countries flushed with dollars bills from export to the US. So this US financial crises has a double whammy effect on these nations as (1) The investment that they hold has declined in value, (2) Their export will be hurt as US is the world’s largest importer.

Could we have predicted this crises and made money from it? Maybe…John Paulson made billions from it, Bill Gross side stepped it, Bill Miller stepped right into it, Countrywide financial and Bear Sterns gone down with it, JP Morgan got to buy the whole of Bear Stern on less than book value…who really knows who’s lucky who’s not.

Oh ya, by the way, Loh Wei bought shares in both JPMorgan and Countrywide last year. Some say lose some win some, but in this pair of trade, I lost more than I gained. Haha. That’s for discussion some other day.