The Dim-Post

February 22, 2009

Too soon to tell

Filed under: general idiocy — danylmc @ 10:19 am

I realise I’m tearing up the final shreds of my credibility by linking to Daily Kos, but this post about the causes of the financial crisis is one of the best things I’ve read on the subject. It’s written by billmon, one of the pioneers of the left-wing blogosphere, now semi-retired. Billmon used to be a finance reporter and is now an analyst in the financial services industry which may explain why he’s a bit more clued up and articulate than the usual Kos Diarist. Sample quote:

But this was just the beginning. Having created and sold CDOs – and persuaded (well, bribed) the credit agencies into blessing them – Wall Street promptly  began creating and selling CDOs that invested in other CDOs (“squared” CDOs) and CDOs that invested in CDOs that invested in other CDOs (“cubed” CDOs). Because even this didn’t deliver a big enough fix for the hard-core risk junkies (i.e. the hedge funds) the banks also created  and sold “synthetic” CDOs, which, instead of investing in actual loans, wrote (sold)  credit default swaps – insurance-like derivatives that promised to pay off if and when a company defaulted on its debts. This made it possible for synthetic CDOs to accept staggering amounts of credit exposure, and get paid for it, without putting down much, if any, cash – pushing their “notional” leverage ratios towards infinity.

Amazon have plenty of books on the crash with more being published in the next few months; I doubt any of them will be very insightful – partly because good history needs a little more distance, partly because the results of the disaster have yet to be visible (as Chou En-Lai said, it’s too early to tell) but mostly because the crash isn’t really over, and has probably only just begun. It’s traditional in the blogosphere to compare every political, economic and cultural phenomenon with the second world war, so being a fairly lazy, unimaginative fellow I’ll fall in line and say we’re currently in the early months of the 1940 twilight war, in which Poland (Lehman Bros and the other investment banks) have fallen but France and Norway (the big commercial outfits) are still nominally standing. Various doomed attempts are being made to reinflate the housing bubble, or prop up the US auto industries so they can go back to making terrible cars no one wants to buy. I guess these are comparable to the French offensive in the Saar, or the Norway debacle, although if pressed to justify the analogy I’d be in trouble, and I’m not really sure who Mussolini is. Structured finance? Bernie Madoff? Indebted consumers? If we’re lucky then Churchill’s dramatic transformation from an incompentant drunk to surprisingly capable warlord will symbolise the transition from George W to Obama. (Obviously nationalising the banks will indicate Stalin’s alliance with the allies, and if Obama decides to inflate his way out of the National Debt he’s Truman dropping the A-Bomb.)

It goes without saying that anyone disagreeing with my analogy is Adolf Hitler.

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21 Comments »

  1. come now danyl, why are you linking to these lefties?

    everyone knows the problem was some bad loans and “the negros” and “the hispanics” didn’t pay back. not all this financial house-of-cardery…

    Comment by Che Tibby — February 22, 2009 @ 4:23 pm

  2. Based on Obamas latest barrel of pork he has no idea either so I wouldnt pin your hopes on him.
    It should be die die die for GM and its ilk.Fuck, they should have realised this 20 years ago when Honda opened its first factory in the US. Let the bad banks also die, buy the “good” debt, back it into “new” Freddie Mac and Fannie mae, recapatilise them and get them lending to home buyers instead of continuing to throw cash at a hole which no-one knows how deep is.
    I fear many are going to be sorely disappointed by Obama. So far the “change” has just been rhetoric as all we’ve got is good old democrat spending, spending and spending.
    A bit like Rudd. I mean seriously, who thinks giving everyone $950 is really going to solve the fundamentals which affect their economy.
    The world has changed, and its not some glitch. This is a major tangent and these guys dont know it.

    Comment by Captain Crab — February 22, 2009 @ 5:01 pm

  3. spending …….. spending……….. spending

    like the republicans ???????

    The ‘markets’ have lost trillions

    Are they broken ? .

    Has any Govt lost such huge sums in such a short time ?.

    Geee those markets are really efficent at some theings arn’t they ……..

    Comment by nznative — February 22, 2009 @ 5:10 pm

  4. Putting aside my urge to tel Che Tibby to keep drink the coolade..
    Danyl, you make my brain hurt.
    welcome back from wherever it was you went.

    Comment by barnsleybill — February 22, 2009 @ 7:50 pm

  5. Churchill barley holds it together with a few good speeches but Sarah Palin/ small govt GOP is an obscure Lt Col called Eisenhower.

    Nancy Pelosi, the Dem houses and their stimulus Act are the Maginot Line.

    The incompetents running banks & auto industry are Quaisling.

    Gordon Brown is in charge of the Soviet’s 1939 Finland offensive.

    IMF & world bank are Mussolini

    Comment by Simon — February 22, 2009 @ 9:12 pm

  6. And of course Alan Greenspan is Chamberlain and bailing out Long Term Capital Management which is the 1938 Munich agreement. (Timothy F. Geithner is the French leader)

    Comment by Simon — February 22, 2009 @ 9:33 pm

  7. You can be forgiven for referencing Kos on this occasion – this is pretty much what Warren Buffett was saying for years. It’s not exactly origional.

    True, he’s a democrat, but Charlie Munger was also. Neither is exactly what you’d call inexperienced in the financial world – Warren started trading in the aftermath of the ’29 crash after all.

    Comment by scrubone — February 23, 2009 @ 8:53 am

  8. I like billmon’s use of appropriate language. Swearing is fully justified here.

    To understand the dilemma facing Mr. Geithner and the Obama Administration, you could do a lot worse than read “Catch-22″ … Because unfortunately, [Catch-22] rather precisely describes the estimated $2 or $3 trillion in “legacy” assets – to use the administration’s preferred euphemism – clogging the arteries of the global financial system.

    Except that [Catch-22] has some novelty value, most — if not all — of Big Shitpile (to use Atrios’s favorite euphemism, and mine) has none.

    This, in turn, means it would literally be easier to square a circle, or maybe invent a perpetual motion machine, than to devise a plan that a.) lifts Big Shitpile off the balance sheets of the banks, while at the same time leaving them b.) solvent and c.) in the hands of private investors, without d.) constituting a flat-out transfer of wealth from taxpayers to bank shareholders.

    These are simply not realistic policy objectives – in fact, they are mutually exclusive …

    Comment by ropata — February 23, 2009 @ 3:28 pm

  9. [...] (With a hat-tip to the Dim-Post.) [...]

    Pingback by Financial Acronyms, with Diagrams « earth is my favourite planet — February 23, 2009 @ 4:08 pm

  10. Still fixated on CDO’s? Dem evil bankers, LOL.

    New Zealand had a housing bubble that burst, yet we had no CDO’s: explain.

    Comment by Clunking Fist — February 23, 2009 @ 7:03 pm

  11. i disagree

    Comment by Adolf — February 23, 2009 @ 8:07 pm

  12. Brilliant Adolf. Well done.

    But our banking system hasn’t fallen over (yet) has it CF? NZ’s bubble was driven by cheap credit and a tax regime which favours property. The US mess results from cheap credit coupled with ludicrously poor lending standards resulting from the fact that the lenders didn’t care whether the lenders could repay, as the mortgages were bundled up and sold.

    Comment by Guy Smiley — February 23, 2009 @ 8:36 pm

  13. New Zealand had a housing bubble that burst, yet we had no CDO’s: explain.

    We did have the finance companies, but they played a much less pivotal role in our economy than the major banks in the US do over there. If a finance company goes bust then all the investors get wiped out. If a commercial bank goes bust then all the notional wealth its despositors have is destroyed. That’s why banks are ‘too big to fail’ but finance companies aren’t.

    Comment by Danyl Mclauchlan — February 23, 2009 @ 9:26 pm

  14. “resulting from the fact that the lenders didn’t care whether the lenders could repay, as the mortgages were bundled up and sold.”

    And you reakon Mac and Mae (quasi-gummint organs) reducing moral hazard had nought to do with it?

    “We did have the finance companies”

    But we had no mechanism for reducing moral hazard, so most savers steered clear of finance companies, understanding that they were riskier than banks. I know only a couple of old folk who have lost some to finance companies. Contrast that with the truckload I know who have lost nothing, but are bitching mightily about the current low interest rates: they are pissed off that once again that borrowers (who may have contributed to the bubble) are “favoured” over savers.

    (Declaration of interest: I am a borrower, a home “owner” who is delighting in the current low interest rates. With tax cuts, interest rate cuts, I’m laughing all the way to the bank…assuming I can retain paid employment. Me? I’m about to refix, so seriously given thought to a 5 year term.)

    Comment by Clunking Fist — February 23, 2009 @ 9:55 pm

  15. “I’m laughing all the way to the bank…assuming I can retain paid employment.”

    which is of course the real issue here in nzl, not the collapse of the finance companies.

    and with our overseas markets likely to tank… they’re actually using the word ‘depression’ in japan (according to the melbourne age).

    Comment by Che Tibby — February 24, 2009 @ 9:24 am

  16. “they’re actually using the word ‘depression’ in japan (according to the melbourne age).”

    What about the Japanese speakers? They using “depression”? Or the Japanese equivalent which might also translate as “recession”?

    Just wondering.

    Comment by llew — February 24, 2009 @ 10:25 am

  17. Me? I’m about to refix, so seriously given thought to a 5 year term.)

    I’d float for now – they’ll probably lower the rates a bit more over the next six months, and fix when inflation looks like it’ll force another OCR rise.

    Comment by danylmc — February 24, 2009 @ 10:48 am

  18. @llew. heh. they’re indicating a >10% contraction in “the economy” in a quarter, which qualifies for the western word.

    but the paper added that it might just be dodgy japanese figures. and it was from a newspaper… which aren’t known for their reliability.

    the gist was that the word was being used *at all*.

    Comment by Che Tibby — February 24, 2009 @ 12:20 pm

  19. “17. I’d float for now – they’ll probably lower the rates a bit more over the next six months, and fix when inflation looks like it’ll force another OCR rise.”

    By which time the yield curve could well be a different shape: short term rates lower than now, but longer terms higher. Really, Danyl, I’d not picked you as someoine who would “play the markets” in this way!

    ;^)

    Comment by Clunking Fist — February 24, 2009 @ 12:47 pm

  20. “Me? I’m about to refix, so seriously given thought to a 5 year term.)

    I’d float for now – they’ll probably lower the rates a bit more over the next six months, and fix when inflation looks like it’ll force another OCR rise.”

    Hmm, fixing for 5 years now might be sensible. Remember the banks have to roll over $60 Billion of mtge funding raised offshore every 90 days. They are already bleating about the cost offshore, hence why everyone is being held to pay break costs on their mtges…..

    Comment by Captain Crab — February 24, 2009 @ 2:22 pm

  21. Indeed, Captain Crab. That is why I wonder why a lot of lefties (and some folk I know who I THOUGHT were righties) bleat that tax cuts won’t be spent, they’ll be saved instead! Doh, an economy needs saving as well: that’s where the money may (partially) come from to finance my mortgage rolling over. Better to pay the interest to a Kiwi (who will pay NZ tax on it: furriners don’t).

    Comment by Clunking Fist — February 24, 2009 @ 7:23 pm


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