^ Therein lies a question, however; assuming the ratings agencies "generally" get things right but manage to really whiff out on some rare market event - like the CDS scenario - how does that leave us off any better than we are now?

That is, all of the sudden you have a very large number of calls to their liability policy - kind of a parallel version of where we are right now.

3/28/2009 3:41:59 PM

One thing to keep in mind, however, is that assessing the likelihood of future cash flows from mortgage-backed securities is extremely difficult, if not impossible to do accurately. Doing so requires making assumptions on future default rates, interest rates, prepayment rates and home prices among a host of other variables. No person has the capacity to correctly forecast such volatile variables over a long time horizon. Even professional economists have a poor record of accurate economic forecasts.

Perhaps all ratings should be accompanied by sensitivity or scenario analysis whereby the agency will declare a rating based on a set of assumptions, but show how changes in those assumptions will affect the riskiness of the rated security. The more transparency in their ratings, the more investors will be cognizant that ratings are based on forecasts that are prone to massive error.

[Edited on March 28, 2009 at 4:45 PM. Reason : .]

3/28/2009 4:43:34 PM

1. Cook-out raising milkshake prices

3/28/2009 5:56:29 PM

^^ ratings definitely need to become more complicated. "AA" doesn't bein to come close to assessing a large company's risk to certain events.

i like the sensitivity analysis idea

3/28/2009 6:04:56 PM

Quote :

"One thing to keep in mind, however, is that assessing the likelihood of future cash flows from mortgage-backed securities is extremely difficult, if not impossible to do accurately."

I don't doubt that. But I'm sure having the brokers of those securities paying your salary doesn't make it any easier

3/28/2009 6:10:03 PM

Economist, Arnold Kling, has an interesting letter to the Washington Post:

Quote :

"The March 26 front-page story "Geithner to Propose Vast Expansion of U.S. Oversight of Financial System" said that Treasury Secretary Timothy F. Geithner's proposal would mean "breaking from an era in which the government stood back from financial markets and allowed participants to decide how much risk to take in the pursuit of profit." In fact, banks have been subject to strict, risk-based capital requirements. It was these very capital requirements, which favored triple-A-rated securities, that produced the boom in the creation of structured products backed by subprime mortgages. ad_icon Risk-based capital requirements were a response to the savings and loan crisis of the 1980s, and regulators were confident that with those requirements in place, we would not see a repeat. As we watch Mr. Geithner's plan make its way through Congress, we should be wary that it, too, will seem like the correct response to the present crisis while laying the basis for the next one. ARNOLD KLING "

On a related note, he has an interesting theory on regulation:

Quote :

"The beloved Henry Paulson writes, "In March 2008, after conducting a year-long process of study, I put forward a series of comprehensive recommendations to modernise our regulatory architecture in the Treasury's Blueprint for a Modern Financial Regulatory Framework. The blueprint identified an optimal structure that was not designed to be accomplished overnight." Note the word optimal. My theory is that we always have an optimal financial regulatory structure--for the previous cycle's financial system. That is, think of financial markets as going through cycles of euphoria, crash, and recovery. Give each round of the cycle a number. For example, the 1930's might be cycle number n. Then the S&L crisis would be n+1. The current crisis would be n+2 (if you ignore other events, like the Penn Central commercial paper crisis of 1970 or the August 1987 stock market crash or Long Term Capital Management or the Dotcom bubble). Note that after crisis n in the 1930's, we created an optimal mortgage finance system, in the sense that we no longer had short-term balloon mortgages. Instead, we created the S&L industry, with a mandate to issue thirty-year fixed rate mortgages. We created an optimal system to prevent bank runs, with deposit insurance, deposit interest rate ceilings, and other regulations. Guess what crisis n+1 consisted of? S&L's going belly-up, because the fixed-rate loans were under water in a high-inflation environment. The deposit insurance system was exposed to be badly flawed, at great expense to taxpayers. Crisis number n+1 was exacerbated because the mortgage loans were not marked to market and because capital requirements were not tied to risk. So we created an optimal regulatory system, consisting of risk-based capital regulations and market-value accounting. Guess what crisis n+2 consisted of? "Toxic" assets created to satisfy risk-based capital regulations (the infamous AAA-rated securities were just what risk-based capital was supposed to encourage), and a vicious spiral caused by market-value accounting, which made everybody have to sell illiquid assets at once. Suppose Henry Paulson and all of the other "experts" get their way, and we create another optimal regulatory structure that would have prevented crisis n+2. Can you guess what crisis n+3 will consist of? "

[Edited on March 29, 2009 at 3:15 PM. Reason : .]

3/29/2009 3:14:20 PM

When you read stuff like this

http://zerohedge.blogspot.com/2009/03/exclusive-aig-was-responsible-for-banks.html

It makes you think, lets just go ahead and tax the fuck out of Wall Street...because lets face it, bankers have more time and incentive on their hands to find cracks and holes in regulation (^ like just pointed out) with which to profit to the gills than the rest of us. So if we just tax the piss out of them, at least we can build up a big stash when it all crashed down again in another decade or so. Increasing taxes on these guys will stifle financial innovation? Good!

3/29/2009 10:00:43 PM

actually, no. Taxing the piss out of them will just destroy our financial industry the same way other regulations have destroyed our manufacturing industries. Good work, buddy

3/30/2009 6:36:34 AM

You said(typed) that tongue in cheek, right?

3/30/2009 8:16:36 AM

Quote :

"Increasing taxes on these guys will stifle financial innovation? Good!"

I would argue the exact opposite. Increasing taxes would dramatically increase financial innovation since the only way to avoid the tax is to make the finance so complicated that IRS agents couldn't figure it out. Afterall, the last round of innovation, which caused the current crisis, to a certain extent, was caused by efforts to avoid government imposed burdens (capital reserve requirements). If you increase the burden then you increase efforts to avoid them on behalf of investors. Afterall, the only real check on stupid behavior is investors which are affraid of losing their investments. But, if the only way to make a good return is to make your finance too complex for government regulators then it is probably also too complex for investors to track.

As such, reducing taxes and regulation should, theoretically, eliminate financial innovation and allow wall-street to simplify, hopefully giving investors the ability to perform due dilligence.

3/30/2009 10:04:23 AM

Quote :

"Afterall, the last round of innovation, which caused the current crisis, to a certain extent, was caused by efforts to avoid government imposed burdens (capital reserve requirements)."

You must have really been high when you typed that one.

Quote :

"As such, reducing taxes and regulation should, theoretically, eliminate financial innovation and allow wall-street to simplify, hopefully giving investors the ability to perform due dilligence."

Allowing Wall Street to simplify? Have you gone mad? We removed regulations and all Wall Street did was come up with the most complex financial weapons of mass destruction this world has ever seen.


[Edited on March 30, 2009 at 10:22 AM. Reason : .]

3/30/2009 10:14:36 AM

And the stated purpose of the weapens were to circumvent the reserve requirements and ratings requirements imposed by the government.

3/30/2009 1:08:18 PM

and..... by doing so, they sunk their companies. Well, that, plus the special waiver some of them did get on their capital reserves, which helped push them over the edge.

Are you honestly suggesting that had there been no capital reserve requirements to begin with, that everybody would have been happy to just play along with the traditional banking products, there would have been no bubble, bust, etc?

3/30/2009 1:32:42 PM

There is a list of contributors to the current fiasco of which incentives to circumvent ratings agencies was just one. But, yes, it would have lessened the situation a bit.

However, even if you had implimented a perfect policy proposal there would still have been a housing bubble and bust. It is, afterall, the natural state of such markets to suffer such eventualities from time to time. All my changes would have done is prevent the rush to attain "too big to fail" status, eliminated the rating agency scam, dramatically lessened the size of the bubble, and dramatically cut down on the number of institutions currently bankrupt. However, some californian banks and investment banks would have still found themselves insolvent from holding bad mortgages and there would most likely still be a recession. But society would have been much better off.

3/30/2009 4:18:13 PM

The Tarp in pictures:

http://www.scribd.com/doc/12704684/The-TARP-in-Pictures

[Edited on April 1, 2009 at 1:29 PM. Reason : ,]

4/1/2009 1:28:52 PM

Even Jim Cramer is arguing that the CEO bonuses and salaries have runaway. You may not agree with his advice on investments but he's no liberal.

4/1/2009 1:38:50 PM

4/1/2009 1:56:46 PM

^ Quite nice.

4/1/2009 4:11:58 PM

Hunt, that was bloody hilarious

4/2/2009 8:13:47 AM

Quote :

"1. Cook-out raising milkshake prices "

the end of mankind, as we know it.

4/2/2009 8:28:44 AM

Quote :

"Should We Kill the Fed? by Patrick J. Buchanan, April 3 2009 For the financial crisis that has wiped out trillions in wealth, many have felt the lash of public outrage. Fannie and Freddie. The idiot-bankers. The AIG bonus babies. The Bush Republicans and Barney Frank Democrats who bullied banks into making mortgages to minorities who could not afford the houses they were moving into. But the Big Kahuna has escaped. The Federal Reserve. "(T)he very people who devised the policies that produced the mess are now posing as the wise public servants who will show us the way out," writes Thomas Woods in Meltdown. Already in its sixth week on the New York Times best-seller list, this eminently readable book traces the Fed's role in every financial crisis since this creature was spawned on Jekyll Island in 1913. The "forgotten depression" of 1920–21 was caused by a huge increase in the money supply for President Wilson's war. When the Fed started to tighten at war's end, production fell 20 percent from mid-1920 to mid-1921, far more than today. Why did we not read about that depression? Because the much-maligned Warren Harding refused to intervene. He let businesses and banks fail and prices fall. Hence, the fever quickly broke, and we were off into "the Roaring Twenties." But, the Fed reverted, expanding the money supply by 55 percent, an average of 7.3 percent a year, not through an expansion of the currency, but through loans to businesses. Thus, when the Fed tightened in the overheated economy, the Crash came, as the stock market bubble the Fed had created burst. Herbert Hoover, contrary to the myth that he was a small-government conservative, renounced laissez-faire, raised taxes, launched public works projects, extended emergency loans to failing businesses and lent money to the states for relief programs. Hoover did what Obama is doing. Indeed, in 1932, FDR lacerated Hoover for having presided over the "greatest spending administration in peacetime in all of history." His running mate, John Nance Garner, accused Hoover of "leading the country down the path to socialism." And "Cactus Jack" was right. Terrified of the bogeyman that causes Ben Bernanke sleepless nights – deflation, falling prices – FDR ordered crops destroyed, pigs slaughtered, and business cartels to cut production and fix prices. FDR mistook the consequences of the Depression – falling prices – for the cause of the depression. But prices were simply returning to where they belonged in a free market, the first step in any cure. Obama is repeating the failed policies of Hoover and FDR, by refusing to let prices fall. Obama, with his intervention to prop up housing prices and Bernanke with his gushers of money to bail out bankrupt banks and businesses are creating a new bubble that will burst even more spectacularly. The biggest myth, writes Woods, is that it was World War II that ended the Great Depression. He quotes Paul Krugman: "What saved the economy and the New Deal was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy's needs." This Nobel Prize winner's analysis, writes Woods, is a "stupefying and bizarre misunderstanding of what actually happened," Undoubtedly, with 29 percent of the labor force conscripted at one time or another into the armed forces, and their jobs taken by elderly men, women and teenagers with little work experience, unemployment will fall. But how can an economy be truly growing 13 percent a year, as the economists claim, when there is rationing, shortages everywhere, declining product quality, an inability to buy homes and cars, and a longer work week? When the cream of the labor force is in boot camps or military bases, or storming beaches, sailing ships, flying planes and marching with rifles, how can your real economy be booming? It was 1946, a year economists predicted would result in a postwar depression because government spending fell by two-thirds, that proved the biggest boom year in all of American history. Why? Because the real economy was producing what people wanted: cars, TVs, homes. Businesses were responding to consumers, not the clamor of a government run by dollar-a-year men who wanted planes, tanks, guns and ships to blow things up. "The Fed was the greatest single contributor to the crisis that unfolds before us," Woods writes of today, and "more dollars were created between 2000 and 2007 than in the rest of the republic's history." After 9-11, the Fed kept interest rates low – in one year as low as 1 percent. That money flooded into the housing and stock markets. And in 2008, as the Fed tightened, the bubble burst. Now the money supply is again expanding, to rescue us from a crisis created by the previous expansion. Of Nicholas Biddle's Bank of the United States, the great Andrew Jackson was eloquent. "It has tried to kill me," he said. "But I will kill it." And he did. Should not this creature from Jekyll Island, for all its manifold crimes and sins against the republic, also be summarily put to death? "

Kill the Fed!

4/3/2009 11:27:23 PM

No. I agree with many that Greenspan made an honest mistake. Don't throw out a system that has shown itself to work reasonably well just because it has failed once.

4/3/2009 11:46:54 PM

This has been a pretty informative thread. There are obviously many contributing factors to the crisis and so far I agree with most of the reasons cited...

I know this isn't a groundbreaking idea that has never been discussed but the one factor that I think does not get nearly enough attention is the fundamental flaw that the goals of CEO's and executives do not align with long term interests for the shareholders, employees, and the nation's overall economic health.

People spend their entire adult life consumed by their work in order to reach the top of the food chain. Once they reach that point it is inevitable that most will seek to reap the rewards of their sacrifice.

Consider the reason most Super Bowl teams don't repeat, most elite soccer players get fat, most tennis #1's go down after a brief run at the top, etc. It's fun being at the top. Very few people are able to maintain the focus and drive that it took to achieve such success once they are there. Hard work, market research, and business planning tends to get replaced with golf outings, dinner banquets, and paradise vacations.

A CEO much like the President is a figurehead not an omniscient being. Sure, some can make astute decisions that save or revitalize their companies and some will undoubtedly make unethical or bad business decisions that devastate them. However, even in a properly run business there are so many outside factors that a CEO can not control or possibly predict that much of his success, or lack thereof, can be explained by random noise rather than brilliant leadership.

A CEO has a much shorter time horizon than a 30 year buy & hold investor, an 35 year old employee years away from retirement, or a 10 year girl who will one day enter the job market. Given that knowledge it is in the CEO's best interest to be as aggressive as possible to produce short term results without worry about future consequences. This unquestionably leads to much riskier behavior in order to achieve the desired result. The downside risks are mitigated or nearly eliminated because they have pre-arranged compensation packages that will enable them to continue a care free lifestyle even if they fail. So these executives engage in business practices that are akin to musical chairs and as long as they can keep the music playing they look like geniuses.

Surely most long term investors would prefer steady returns for 30 years over steep run ups preceding eventual crashes. Surely most employees would prefer steady employment over nice bonuses quickly followed by layoffs.

[Edited on April 4, 2009 at 6:28 AM. Reason : a]

4/4/2009 6:27:26 AM

Quote :

"A CEO has a much shorter time horizon than a 30 year buy & hold investor, an 35 year old employee years away from retirement, or a 10 year girl who will one day enter the job market. Given that knowledge it is in the CEO's best interest to be as aggressive as possible to produce short term results without worry about future consequences. This unquestionably leads to much riskier behavior in order to achieve the desired result. The downside risks are mitigated or nearly eliminated because they have pre-arranged compensation packages that will enable them to continue a care free lifestyle even if they fail. So these executives engage in business practices that are akin to musical chairs and as long as they can keep the music playing they look like geniuses."

I disagree. A CEO answers to the board which answers to the shareholders, which care about stock price. Or, factoring in that the average CEO is not going to hang around for very long, say five to ten years, his only metric for success is, again, stock price.

So, now think deeper than you have: what drives a companies stock price? A stock's price should be the risk adjusted expected return to the stock's owner. As almost no companies return all quarterly profits as stock dividends then a company which returns massive profits for five years, of which 10% gets returned as dividends, and then goes bankrupt would have an abysmal stock price, as the price would only include the present value of five years of dividends.

Meanwhile, a different company pays far lower dividends but traders can see it will avoid bankruptcy, so not only do you earn some dividends but after five years you would get to sell the stock for roughly what you paid for it. Is there any question that the stock of the stable company would be higher today than that of the visibly unstable?

So, unless a CEO wants to lose his stock options, sacrifice his career, and get branded a failure due to poor stock performance during his tenure, he will not knowingly increase the odds of insolvency just to improve profits in the short-term.

You need to remember there is not only one side in these issues. Whatever you know the stock traders know and they will act upon it, and any CEO knows that.

That said, there is a competing argument among economists. It derives from the fact that there is much more headroom than there is floor. For example, if a company takes a risk and it pays off, the return will not be a doubling of returns, but a quadruppling. Plus, after the bet pays off, the company is guaranteed secure. To put it another way, the choice is not "high profits in the short-term bankruptcy in the long" but "a 50% chance of bankruptcy in the short-term against a 50% chance of insane returns in the long". Given this setup, we can see why shareholders and stock-traders would want to arrange management contracts to encourage risk taking. Afterall, shareholders are diversified, if one share goes bankrupt they lose little of their overall portfolio, but the employees and management would have a 50% chance of losing their job and become shunned and a 50% chance of getting larger than normal bonus (bad bet to take). Therefore, since taking this risky bet is in the interest of shareholders but not in the interest of management, they apportion management with golden paracutes, because otherwise management would not take the bet and shareholders would lose out.

4/4/2009 11:18:17 AM

You know I definitely respect your knowledge of economics but I couldn't disagree with your post much more.

Some of it is just mired in academia...

CEO's answer to the board? That's laughable. Those guys are all golfing buddies. The board is just there to collect their checks in exchange for keeping their mouth shut. The board almost never bothers protecting the shareholders interest.

Quote :

"As almost no companies return all quarterly profits as stock dividends then a company which returns massive profits for five years, of which 10% gets returned as dividends, and then goes bankrupt would have an abysmal stock price, as the price would only include the present value of five years of dividends."

This is precisely the problem! Over the last bull market companies convinced stockholders that they did not need to increase dividends because they were getting such great stock price appreciation in the form of retained earnings. However, most of the retained earnings went out the back door in executive compensation and the rest were all phony earnings based on accounting tricks and wreckless leverage. Now the shareholders only have 5 years of shitty dividend yields and worthless stock certificates to show for it.

Quote :

"So, unless a CEO wants to lose his stock options, sacrifice his career, and get branded a failure due to poor stock performance during his tenure, he will not knowingly increase the odds of insolvency just to improve profits in the short-term."

Stock options are another huge problem with executive compensation. Most of the options are short term and are priced out of the money. If the stock price doesn't go up then the options expire worthless. This gives the executive every incentive to make wreckless bets knowing that they have nothing to lose and everything to gain.

And I've already pointed out they don't give a fuck about sacrificing their career because they get a gigantic check even if they fail. Would you rather bust your ass for $200 million or just collect $60 million for doing nothing...

How can you argue they won't do this when it's exactly what they've done?

Quote :

"we can see why shareholders and stock-traders would want to arrange management contracts to encourage risk taking."

Tell this to 75 year old's who own conservative dividend paying stocks like Bank of America... or even worse preferred stocks.... or CIT group bonds... or the fucking Chrysler stable value retirement fund that is down ELEVEN percent. It's one thing if you are running Potash or Chesapeake but it's completely different when you have a responsibility to protect principal like GE, PG, or BAC

Quote :

"Afterall, shareholders are diversified, if one share goes bankrupt they lose little of their overall portfolio "

And what if these reprehensible actions cause systemic risk and every asset class in the world drops 25-50%? You know, like what we're experiencing now.... what the fuck does diversification, modern portfolio theory, and asset allocation do for you then?


If management wants to help the shareholders how about they stop wasting money on lavish corporate outings, decorating offices, buying suites to athletic events, etc and return the money to the rightful owners (you know, the shareholders?!) in the form of dividends.

Stocks are junior to bonds yet bonds yield more than stocks. That's a really bad deal for shareholders unless retained earnings are used to grow the business and increase future profitability.

[Edited on April 4, 2009 at 1:25 PM. Reason : a]

4/4/2009 1:24:35 PM

Quote :

"You know I definitely respect your knowledge of economics but I couldn't disagree with your post much more. Some of it is just mired in academia..."

Interesting to see someone else picked up on that. He definitely has the broadest and best grasp of econ (except for maybe kwsmith) of anyone here, but anytime I read something from him that just doesn't jive with reality, I assume that this is the reason. It's just regurgitated and outdated theory.

4/4/2009 1:36:30 PM

Quote :

"Some of it is just mired in academia"

I was not addressing a specific company so, by definition, my post was purely academic.

Quote :

"This is precisely the problem! Over the last bull market companies convinced stockholders that they did not need to increase dividends because they were getting such great stock price appreciation in the form of retained earnings...Now the shareholders only have 5 years of shitty dividend yields and worthless stock certificates to show for it."

And therefore? I was referring to the general incentives in the system, but if you wish to express a specific example, that is fine too. A ready example is Enron. It was a company, didn't pay heavy dividends but enjoyed rampant stock appreciation. To refresh, stock traders are human beings and therefore able to learn. Now, the management of Enron cooked the books to make the company look both sound and profitable, so the traders bid up the stock price. The trick worked, Enron execs ripped off everyone on wallstreet. However, when the jig was up everyone learned a lesson to look out for cooked books. So, now, short trade investigators make a living prowling the corporate ranks for evidence of cooked books and when they find them they short the shit out of the company and then tell everyone.

So, what are the incentives now? Yes, Enron had a good run of lying to everyone, but could another company get away with exactly the same tricks in the post-Enron world? Maybe, but definitely not for as long. Enron invented a new way of cooking the books which no one was looking for, the same could not be said the next time.

What this should demonstrate is that in much of your post you repeatedly portray stock traders as getting taken advantaged off and, like lemmings, coming back for more. Wallstreet does not work that way because Wallstreet is not occupied by lemmings, but learning human beings. Which is shown out: you complain that executive compensation is bankrupting companies (which is absurd as corporate compensation is a tiny fraction of expenses) because shareholders are not in control. However, when we find companies whose board of directors consists entirely of investor-owners we see compensation packages even more generous than those at shareholder owned companies. Which implies a reverse bias: non-investor boards feel guilty about being too generous (something investor occupied boards don't worry about) and therefore employ less than the best talent with less than the best outcomes.

Quote :

"And what if these reprehensible actions cause systemic risk and every asset class in the world drops 25-50%? You know, like what we're experiencing now.... what the fuck does diversification, modern portfolio theory, and asset allocation do for you then?"

I do not find the arguments in favor of systemic risk persuasive. Also, I have seen no persuasive evidence that systemic risk has had anything to do with the current recession. In many ways, the current financial crisis was less severe than the 1987 collapse. The only real difference, in my mind, is that the current crisis resulted in a re-pricing of risk, which caused a sectoral shift in the economy away from borrowers towards savers, which caused a recession. I see no reason why the current price of risk is unreasonable as it is little different from the risk-prices that prevaled a few decades ago. So, like I have said in other threads, the bailouts were unnecessary as there were plenty of sound banks left to operate the financial system and only set the stage for the next financial crisis by once again rescuing bad companies and bond holders from poor lending decisions. So, there will continue to be bad companies and poor lending bond holders.

4/5/2009 10:20:52 AM

When I read stuff like this

http://www.nakedcapitalism.com/2009/04/guest-post-wall-street-back-to-its.html

it makes me wonder why Main Street was so pissed off about bonuses.

4/5/2009 1:25:11 PM

because the concept of "bonuses" (even though what Wall Street sees as bonuses still isn't even close to what most companies think of bonuses) is a lot easier to understand than: "As Zero Hedge disclosed yesterday, mall REIT Kimco decided to dilute its equityholders by issuing over $700 million (including the green shoe) in new shares which would be used to buy back the company's debt, as KIM has $735 million in debt maturities over the next 3 years, and a $707 million currently drawn on its secured credit facility"

And the 5-part series of events outlined there cannot be summarized into a pithy headline or a Fox News/CNN news crawl.

4/5/2009 2:48:47 PM

Economist, Robert Higgs:

Quote :

"In my mind’s eye, I envision a street fair—one of those happy community gatherings at which sellers of handcrafted ceramics, funky clothing, herbal remedies, fresh vegetables, and edible delicacies congregate to display their wares for the strolling customers, who chat amiably with the stall-keepers and with one another. Suddenly, amid horrified shrieks and the roar of a giant engine, a truck plows through this placid setting, scattering twisted debris and broken bodies in its wake. Finally, after wreaking a hundred-yard swath of death and devastation, the truck stops, and the driver, Ben Bernanke, climbs down from the cab. “People, people,” he exhorts them in a calm, world-weary voice, “do not panic. I am here to assess the damage and make recommendations for reforms that will prevent a recurrence of this unfortunate and wholly unforeseen act of God.” Whereupon he proceeds to lay out his assessment and recommendations, always speaking in the same quiet, unemotional voice. The stunned and wounded survivors gaze at him in astonishment. “He’s a madman,” one cries out. Undismayed by the swelling chorus of curses and the groans of the injured, the truck driver addresses the gathering crowd of stunned onlookers. “We must have a strategy that regulates the street-fair system as a whole . . . not just its individual components.” He then methodically lays out a series of recommendations for strengthening the construction materials of stalls and regulating their placement along the street, for ensuring that each transient merchant have an adequate capital cushion against such crises, for monitoring fruitmongers and hippy artists deemed “too big to fail,” to keep them from taking excessive risk. He proposes that the city council consider new ordinances to require that wooden crafts such a birdhouses be made sturdier and to establish a “limited system of insurance” to protect against customer runs on the most daring drug-paraphernalia sellers. “Moreover,” he continues, “street fairs are too important to be left for each town to regulate on an ad hoc basis.” He proposes that the rules be harmonized among the mayors of all the world’s great cities and that a global street-fair authority be created to monitor street-fair risks and protect the people from accidents such as the one that has just occurred. Listeners look on in amazement, their mouths agape. With that walk on the imaginary side as a warmup, I invite you to consider the speech Bernanke gave to the Council on Foreign Relations today, March 10, 2009. In this address, he proposes a sweeping overhaul of the regulation of “the financial system as a whole . . . not just its individual components.” [...] These proposals certainly answer the question, How do you make a byzantine regulatory system more byzantine by an order of magnitude? At the same time, they show how you display a conviction that if only you tinker with the apparatus long enough, you can make monetary central planning work, even though central planning has always and everywhere produced economic calamity. All of this second-order handwaving might be dismissed as touchingly naive or as workaday establishment obtuseness, were it not such transparent grasping for power in the fashion that crisis always brings to the fore in a world entranced by the ideology of salvation by the grace of government. Bernanke concludes that “the government should consider creating an authority specifically responsible for monitoring financial risks and protecting the country from crises like the current one.” And who, pray tell, might fill these mighty shoes? Well, of course, none other than the Federal Reserve System, over which Ben Bernanke presides with such placid and self-confident mien. In view of the Fed’s fundamental, if wholly unacknowledged, role in bringing about the world’s present economic debacle – by spewing forth the ample fuel that allowed the recent ill-fated mania in real estate and related financial dealings to flame so high ? the question that Bernanke’s current proposals immediately raise could not be more obvious: Quis custodiet ipsos custodes? Until someone can provide a compelling answer to this insistent question, we will be well advised to ignore, or even to denounce, the proposals advanced by this lunatic truck driver.""

4/18/2009 1:00:29 PM

here's a quick overview of the past 30 years - about 12 minutes of video
(Financial Times) http://tinyurl.com/ar2f8e
http://tinyurl.com/cezlqh

4/25/2009 11:51:12 PM

Another interesting take on the crisis: the below is from a paper by economist, Stan Liebowitz...

Quote :

"The bogeyman in the mortgage story is the unethical subprime mortgage broker who seduced unwary applicants out of their hard-earned, sacredly treated assets. This subprime bogeyman charged usurious rates for his mortgages and bamboozled his clients with artificially low teaser rates that allowed them to purchase homes that were unaffordable at realistic interest rates. This character has been pilloried by all manner of politician and pundit. Although a convenient scapegoat, this character does not actually appear to be responsible for the main part of the mortgage meltdown. This is not to say that there are not lying and cheating mortgage brokers—there are. But every profession, including economics, has its share of liars and cheaters. There is an important problem with the hypothesis that evil subprime lenders caused the mortgage meltdown. That problem is the fact that subprime loans did not perform any worse than prime loans. Let’s take a look. Figure 4 shows Foreclosures Started for subprime loans. Just as for overall mortgages, the increase began in the third quarter of 2006. But this wouldn’t be surprising since subprime foreclosures are a large share of all foreclosures. However, while the overall foreclosure rate was clearly in uncharted territory by the end of 2007, the foreclosure rate of subprime loans, by contrast, is only somewhat above the level that occurred in late 2000 and mid 2002. It is interesting to compare this to the performance of prime loans, which the media claimed only started suffering from defaults after the problems in the subprime market “seeped” into the prime market. Prime foreclosures began their increase at the same moment (third quarter of 2006) as subprime foreclosures, as can be seen in figure 5. Further, the prime foreclosure rate went into territory that was far above where it had been in the prior ten years, much more so than was the case for subprime loans. In percentage terms, the increase in foreclosures started from the second quarter of 2006 until the end of 2007 was 39 percent for subprime loans and 69 percent for prime loans. There is no evidence to support a claim that somehow the subprime market had this unprecedented increase in foreclosures and that later the prime loans accidentally caught the contagion. Both markets were hit at the same time, and the force was at least as strong in the prime market. But this is not to say that foreclosures were not higher in the subprime market. They were. Historically, subprime default rates have been ten times as large as the default rates for prime loans, and that has largely continued through the mortgage meltdown (just compare the numbers on the vertical axes of the figures 4 and 5). That is one reason that subprime loans carry much higher interest rates than prime loans. It has also been claimed that adjustable-rate subprime loans have been hit harder by foreclosures even than fixed-rate subprime loans. This is true. Figure 6 illustrates this fact. "

http://www.independent.org/pdf/policy_reports/2008-10-03-trainwreck.pdf

[Edited on May 3, 2009 at 8:03 AM. Reason : .]

5/3/2009 8:02:44 AM

Quote :

"Geithner's Revelation He concedes that monetary policy was 'too loose too long.' The Earth stood still, the seas parted and a member of the U.S. political class admitted last week that the Federal Reserve helped to cause the financial meltdown. OK, only the last of those happened, but it's a welcome miracle nonetheless. The revelation came from Timothy Geithner last Wednesday with PBS's Charlie Rose, who asked the Treasury Secretary: "Looking back, what are the mistakes and what should you have done more of? Where were your instincts right, but you didn't go far enough?" [Review & Outlook] Getty Images Mr. Geithner: "We need a little more time to get full perspective." Mr. Rose: "Right." Mr. Geithner: "But I would say there were three types of broad errors of policy and policy both here and around the world. One was that monetary policy around the world was too loose too long. And that created this just huge boom in asset prices, money chasing risk. People trying to get a higher return. That was just overwhelmingly powerful." Mr. Rose: "It was too easy." Mr. Geithner: "It was too easy, yes. In some ways less so here in the United States, but it was true globally. Real interest rates were very low for a long period of time." Mr. Rose: "Now, that's an observation. The mistake was that monetary policy was not by the Fed, was not . . ." Mr. Geithner: "Globally is what matters." Mr. Rose: "By central bankers around the world." Mr. Geithner: "Remember as the Fed started -- the Fed started tightening earlier, but our long rates in the United States started to come down -- even were coming down even as the Fed was tightening over that period of time, and partly because monetary policy around the world was too loose, and that kind of overwhelmed the efforts of the Fed to initially tighten. Now, but you know, we all bear a responsibility for that. I'm not trying to put it on the world." Mr. Geithner went on to cite a lack of supervision over bank risk-taking and the slow pace of government response to the problem -- both of which are now conventional wisdom. But the real news here is Mr. Geithner's concession that monetary policy was "too loose too long." The Washington crowd has tried to place all of the blame for the panic on bankers, the better to absolve themselves. But as Mr. Geithner notes, Fed policy flooded the world with dollars that created a boom in asset prices and inspired the credit mania. Bankers made mistakes, but in part they were responding rationally to the subsidy for credit created by central bankers. We disagree with Mr. Geithner on one point. He's right that monetary policy needs to be considered in global terms, but he's still too quick to pass the buck from the Fed to other central banks. The European Central Bank was much tighter than the Fed throughout this period. The Fed was by far the major monetary player because much of the world was on a dollar standard, with its monetary policy linked to the Fed's. That was true of China, most of Asia and the Middle East. The Fed's loose policy from 2003 to 2005 created the commodity and credit bubbles that made these countries flush with dollars. Given their low domestic propensity to consume, these countries then recycled those dollars back into dollar-denominated assets, such as Treasurys and real-estate-related assets such as Fannie Mae securities. The Fed itself had created the surplus dollars that kept long rates low and undermined for a substantial period its belated attempts to tighten. Mr. Geithner's concession is important nonetheless because before he moved to Treasury he was vice chairman of the Fed's Open Market Committee that sets monetary policy. His comments mark a break with the steadfast refusal of Fed Chairmen Alan Greenspan and Ben Bernanke to admit any responsibility. They prefer to blame bankers and what they call the "global savings glut," as if the Fed had nothing to do with creating that glut. Mr. Geithner's remarks are a sign of intellectual progress, and they suggest that at least some in government are thinking about their own part in creating the mess. The role of Fed policy should also be at the heart of the hearings that Speaker Nancy Pelosi is planning on the causes of the financial meltdown. We won't begin to understand the credit mania and panic until we acknowledge their monetary roots."

http://online.wsj.com/article/SB124208327133908471.html

5/13/2009 4:02:14 PM

here's another This American Life special from this weekend that does an hour-long look into some of the causes of the crisis. It has some really interesting info on regulators like the Office of Thrift Supervision, and on the history of the credit rating industry
http://www.thisamericanlife.org/Radio_Episode.aspx?episode=382

6/8/2009 2:12:23 PM