I tend to be a bit pessimistic. You get that way after you've been on the planet long enough. But even I am a bit shaken at the pessimism I find at every turn when the discussion turns to America's current fiscal plight.
Economics prof and New York Times columnist Paul Krugman didn't pull any punches today:
"I’ve never seen financial insiders this spooked — not even during the Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world.
This time, market players seem truly horrified — because they’ve suddenly realized that they don’t understand the complex financial system they created.
“What we are witnessing,” says Bill Gross of the bond manager Pimco, “is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August.”
Behind the disappearance of liquidity lies a collapse of trust: market players don’t want to lend to each other, because they’re not sure they’ll be repaid.
In a direct sense, this collapse of trust has been caused by the bursting of the housing bubble. The run-up of home prices made even less sense than the dot-com bubble — I mean, there wasn’t even a glamorous new technology to justify claims that old rules no longer applied — but somehow financial markets accepted crazy home prices as the new normal. And when the bubble burst, a lot of investments that were labeled AAA turned out to be junk.
...what has really undermined trust is the fact that nobody knows where the financial toxic waste is buried. Citigroup wasn’t supposed to have tens of billions of dollars in subprime exposure; it did. Florida’s Local Government Investment Pool, which acts as a bank for the state’s school districts, was supposed to be risk-free; it wasn’t (and now schools don’t have the money to pay teachers).
How did things get so opaque? The answer is “financial innovation” — two words that should, from now on, strike fear into investors’ hearts.
...the innovations of recent years — the alphabet soup of C.D.O.’s and S.I.V.’s, R.M.B.S. and A.B.C.P. — were sold on false pretenses. They were promoted as ways to spread risk, making investment safer. What they did instead — aside from making their creators a lot of money, which they didn’t have to repay when it all went bust — was to spread confusion, luring investors into taking on more risk than they realized.
Why was this allowed to happen? At a deep level, I believe that the problem was ideological: policy makers, committed to the view that the market is always right, simply ignored the warning signs.
With liquidity drying up, confidence in the greenback falling, the housing market heading for "correction", federal debt mounting at $1.4-billion each day and expected to reach a total of $10-trillion by the time Bush is finally gone, America is on very shakey ground. Read the financials. One after another, commentators are forecasting a hard recession looming and don't get smug - Canada will very likely be swept up and carried along for the ride.
Economics prof and New York Times columnist Paul Krugman didn't pull any punches today:
"I’ve never seen financial insiders this spooked — not even during the Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world.
This time, market players seem truly horrified — because they’ve suddenly realized that they don’t understand the complex financial system they created.
“What we are witnessing,” says Bill Gross of the bond manager Pimco, “is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August.”
Behind the disappearance of liquidity lies a collapse of trust: market players don’t want to lend to each other, because they’re not sure they’ll be repaid.
In a direct sense, this collapse of trust has been caused by the bursting of the housing bubble. The run-up of home prices made even less sense than the dot-com bubble — I mean, there wasn’t even a glamorous new technology to justify claims that old rules no longer applied — but somehow financial markets accepted crazy home prices as the new normal. And when the bubble burst, a lot of investments that were labeled AAA turned out to be junk.
...what has really undermined trust is the fact that nobody knows where the financial toxic waste is buried. Citigroup wasn’t supposed to have tens of billions of dollars in subprime exposure; it did. Florida’s Local Government Investment Pool, which acts as a bank for the state’s school districts, was supposed to be risk-free; it wasn’t (and now schools don’t have the money to pay teachers).
How did things get so opaque? The answer is “financial innovation” — two words that should, from now on, strike fear into investors’ hearts.
...the innovations of recent years — the alphabet soup of C.D.O.’s and S.I.V.’s, R.M.B.S. and A.B.C.P. — were sold on false pretenses. They were promoted as ways to spread risk, making investment safer. What they did instead — aside from making their creators a lot of money, which they didn’t have to repay when it all went bust — was to spread confusion, luring investors into taking on more risk than they realized.
Why was this allowed to happen? At a deep level, I believe that the problem was ideological: policy makers, committed to the view that the market is always right, simply ignored the warning signs.
With liquidity drying up, confidence in the greenback falling, the housing market heading for "correction", federal debt mounting at $1.4-billion each day and expected to reach a total of $10-trillion by the time Bush is finally gone, America is on very shakey ground. Read the financials. One after another, commentators are forecasting a hard recession looming and don't get smug - Canada will very likely be swept up and carried along for the ride.
2 comments:
This is the reason Warren Buffet called these products economic weapons of mass destruction. Few of the people buying or selling this shit knows what it is, what asset is backing it, how it actually works or what risk it holds.
The total derivative market is 500+ trillion or 3x WORLD GDP
If you read what is happening you can't help but be pessimistic and you can't argue it's just he nuts and malcontents anymore, this is going main stream.
I go through bursts with this stuff, I read, I digest, I blog, then I get so down I can't bring myself to write about it anymore.I then go into hiding for a couple of weeks, blog politcal or play with the kids more.
My wife was about ready to have me medicated, but after two years and some good predictions about dollar parity, the housing bubble, gold and silver, she at least leaves me to my madness now.
Some will argue for a orderly correction but if people are as "spooked" as the writer claims how much longer before irrational behaviour hastens into panic.
What kind of cyborg, blogger are you 14 or 15 posts in day?
Krugman takes a lot of flak from the right but he's been very accurate overall. Even when he's wrong he's able to dissect his thinking and show where he went off track. I can appreciate how someone who actually understands the mechanics of this derivatives business could be driven over the edge. Fortunately I, like most, can take refuge in the bliss of my ignorance. As for the posts, I'm retired and some days find myself with a lot of time on my hands.
LoW, I'm old enough to remember the very height of the Cold War when we really thought a full-blown, strategic exchange of missiles was quite possible. Even then, I think we had more basic optimism than people have today. Problems seem to have slipped out of our grasp, our control. Give me the worst part of the Cold War again, please?
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