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.