(Quick) Question, Pls Rspnd if you're watching the forum....

[AdamL]

Can you borrow money from the bank strictly to invest in the stock market?

If so, can you use gains in the stock market to refinance your loan to a larger amount and reinvest? I could see this being very profitable, since it is basically what people who buy real estate can do except the stock market gives way higher returns.

[laserboy]

No.

They used to allow this type of extreme leverage in the 1920's and it led to the greatest speculative bubble of the 20th century (kind of like what is happening in real estate right now). Laws were passed in the 1930's to signicantly restrict margin requirements to protect speculators from their own stupidity.

[AdamL]

Recommend any books on that?

I don't think there is anything wrong with using leverage to finance companies. In fact, that's the whole point. I think there is more to it than just the loans, as far as 1929 goes. Why didn't interest rates skyrocket if the demand for loans went up? Qd should't change unless the money supply is growing -- inelastic supply makes for an interest rate that reflects demand pure and simple.

A lot of people going broke because they took out huge loans and never could repay them due to their dumb stock choices -- now that I can understand.

[AdamL]

Here's another question:

Since this is going on with real-estate right now (leverage, refinancing, more buying, more refinancing, and so on and upward), does this mean we are setting up for a 1929 in the real estate market?

If not, how are they different?

[laserboy]

[ QUOTE ]
Since this is going on with real-estate right now (leverage, refinancing, more buying, more refinancing, and so on and upward), does this mean we are setting up for a 1929 in the real estate market?


[/ QUOTE ]

Regarding the real estate market - Yes.

Regarding speculative bubbles and the use of leverage - I recommend Irrational Exuberance by Robert Schiller.

[AdamL]

Any recommendations for reading about what's going on in real estate with this?

[goodedesign]

[TStoneMBD]

the posters of this forum can give you a much more intelligent response than i can, but from my understading, real estate is a much safer route when considering an investment vehicle in comparison to stock market. with real estate you are buying a tangible assest, with the stock market you are buying an intangible promissory note.

[DOTTT]

The stock market offers something that real estate doesn’t, liquidity. Simply put you can purchase or sell stock at any time you choose. Real estate on the other hand is a very illiquid asset, which is why I'd shy away from purchasing properties right now. Interest rates are eventually going to rise and when they do prices will plummet.

However, I do agree with you real estate is one of the safest ways to make money, just not right now. In a couple of years I believe will see some real bargains, that's what I'm waiting for.

[laserboy]

Unfortunately there is no single source for this kind of information. The nature of bubbles dictates that they are not well documented until after the fact. You will have to do your own research and come to your own conclusions.

Let me ask you a few leading questions though... Do you understand why lenders allow people to wield such enormous leverage in buying real estate? Do you understand why they are making loans today that they would have never dreamed of making in the past due to the inordinate amount of risk involved? Read about current trends in the mortgage industry (125% financing, interest only loans, subprime lending), the GSE's (Fannie Mae and Freddie Mac), and historical debt/income ratios.

My personal opinion is that current lending practices are fundamentally unsound and will not survive as interest rates continue to rise and the economy continues to deteriorate.

[GeorgeF]

Most brokerages will lend you money, 'margin'. You need to put up 50% of the value of the stock.

[GeorgeF]

Anyone who has had shoddy work done by a contractor knows the value of owing intagible assets. Real estate is a business not an investment. Read Bob Bruss or john T reed.

[AdamL]

[ QUOTE ]
Let me ask you a few leading questions though... Do you understand why lenders allow people to wield such enormous leverage in buying real estate? Do you understand why they are making loans today that they would have never dreamed of making in the past due to the inordinate amount of risk involved? Read about current trends in the mortgage industry (125% financing, interest only loans, subprime lending), the GSE's (Fannie Mae and Freddie Mac), and historical debt/income ratios.

My personal opinion is that current lending practices are fundamentally unsound and will not survive as interest rates continue to rise and the economy continues to deteriorate.

[/ QUOTE ]

Unfortunately, I lack the knowledge on where to find this sort of information. Pretty embarassing for an economics major, but they only teach theory and rarely teach us where to look when we get out! /images/graemlins/smile.gif

Can you expand on these comments? Can you provide answers for the questions you ask?

[laserboy]

The reason that mortgage lenders are churning out so many high risk loans is because they have been able to borrow money at insanely low interest rates and package their crappy loans to suckers on the secondary market. Their business will deteriorate as short term interest rates rise and the yield curve flattens. Look at what is happening in the mortgage lending industry right now. Check out companies like FNM, CFC, NFI, NEW, and LEND.

Read "How to Profit from the Coming Real Estate Bust" by John Rubino is you want a more detailed description.