Central to the distrust and hate that we see on Prime Time Television, in documentaries, and even on bumper stickers is a misunderstanding of the primary goal of finance. This goal is risk management. The most important part of the finance sector is to hedge against risk. We want to spread it out over as many people as possible so that when economics shocks and the ups and downs of the business cycle so occur, everyone shares the financial burden that this may cause and therefore everyone suffers less because it is spread out over many many people.
So, when a person benefits while everyone else is losing on their investments we shouldn't hate him for it. He has managed his risk more efficiently than others. Imagine two men working at two different firms, one man loses his pension, and the other one does just fine with his. We wouldn't assume that the man who's pension came through was clearly evil.
Diversification is an aspect of risk management.
There are assets which pay out when the business cycle is up, and assets that pay out when there is a recession. This is because financially minded people hedge against the business cycle. This relates to the "toxic assets" because many people think that financiers "bet" on the failure of these assets. They did not bet that people would not pay their loans back.
When the FED bought as many of the subprime assets as they could to get them out of the market the FED actually ended up making money. What does this mean? This means that FED spent
$1.25 trillion to buy agency Mortgage Backed Securities to get them out of the market and they made hundreds of billions of dollars in profit, which will turn into losses once the interest rates go up. The goal of quantitative easing (QE) is to keep the FED posting profits until the economy can handle the losses. The idea is that a stronger economy will make the interest rates go up which would cause those losses. This would mean that QE has been successful and hopefully this is how it happens. You can look at a graph of projections in the below article.
http://www.economist.com/news/finance-and-economics/21570753-what-happens-when-fed-starts-losing-money-other-side-qe
Is it now toxic to loan to people with bad credit? So many in this nation have bad credit, that we cannot overlook their desires to buy homes. They were just hedging against risk. Portfolios generally, almost always, have something like this that makes sure they don't just get a good payoff when the business cycle is peaking, but also some stuff to make sure that they also have income when there is a recession. That is when you really need money right? So your financial advisor, or broker had better be doing this for you.
So, when a person benefits while everyone else is losing on their investments we shouldn't hate him for it. He has managed his risk more efficiently than others. Imagine two men working at two different firms, one man loses his pension, and the other one does just fine with his. We wouldn't assume that the man who's pension came through was clearly evil.
Diversification is an aspect of risk management.
There are assets which pay out when the business cycle is up, and assets that pay out when there is a recession. This is because financially minded people hedge against the business cycle. This relates to the "toxic assets" because many people think that financiers "bet" on the failure of these assets. They did not bet that people would not pay their loans back.
When the FED bought as many of the subprime assets as they could to get them out of the market the FED actually ended up making money. What does this mean? This means that FED spent
$1.25 trillion to buy agency Mortgage Backed Securities to get them out of the market and they made hundreds of billions of dollars in profit, which will turn into losses once the interest rates go up. The goal of quantitative easing (QE) is to keep the FED posting profits until the economy can handle the losses. The idea is that a stronger economy will make the interest rates go up which would cause those losses. This would mean that QE has been successful and hopefully this is how it happens. You can look at a graph of projections in the below article.
http://www.economist.com/news/finance-and-economics/21570753-what-happens-when-fed-starts-losing-money-other-side-qe
Is it now toxic to loan to people with bad credit? So many in this nation have bad credit, that we cannot overlook their desires to buy homes. They were just hedging against risk. Portfolios generally, almost always, have something like this that makes sure they don't just get a good payoff when the business cycle is peaking, but also some stuff to make sure that they also have income when there is a recession. That is when you really need money right? So your financial advisor, or broker had better be doing this for you.