Tuesday, October 7, 2008
Gone Grey?
Is it just me, or has Obama suddenly gotten a lot greyer at the temples? I know campaigns are hard and all; nonetheless, I suspect foul play (or at least artificial colorings).
Long, and almost certainly wrong, the only question is how wrong, explanation of the CRISIS ON WALL STREET, Part 4
So, G. (no, wait, it's g.) posted an hour long YouTube video that took me about 8 hours to get through, because I stopped, looked stuff up on wikipedia, rewound and listended to again, etc. I wrote as I went along, too, and here's what I wrote (the wikipedia articles are referenced in Part 3).
My understanding of “Crisis on Wall Street” : Princeton economists review recent events on Wall Street and assess the implications for the economy and public policy – September 23rd, 2008
posted on Impolite Company: http://morisey.typepad.com/my_weblog/ and available on YouTube at http://www.youtube.com/watch?v=Wj_JNwNbETA
My reaction
The first portion is definitely the hardest to understand, mainly because there are so many unfamiliar terms and concepts. From watching this (especially the first part), I can understand how easily the Very Smart People on Wall Street got very distracted by the trees in front of them and didn't notice that the forest was burning.
It seems like there are basically two things that need to be done:
First, Wall Street is structured a little like a house of cards, and once panic strikes, it gets out of control real fast. Seems like the solution is to put things in place that remind people not to panic - Douglas Adams, where are you when we need you? I think Guy 2 got into at least the edges of this – part of what makes the stock market and Wall Street work is that you don’t ever really know what something’s worth. If my car is really worth a thousand bucks, but I can sell it for $2000, then I’ve created worth in some way. Transparency works against this - if you can look up the blue book value for my car, then you’re not going to buy it at 2k if it’s only worth 1k. But if you have less transparency, you have more possiblity for corruption. So maybe the problem is with the system of an economy that is made of buying and selling more than making, because creating worth by obfuscation is inherently unstable. Which would seem to argue for keeping Wall Street tightly regulated and lean and small, while encouraging more manufacturing and building and etc. But if Wall Street has been financing the building, and Wall Street can’t, anymore, who will? How does Venture Capitalism figure into all of this? But wait – we have the Small Business Administration, and some amount of subsidies available for entrepeneurs that comes from the government – is this the difference between socialism and capitalism? If the government had said to Brin and Sergey, “ok, here’s a couple of million dollars, go make Google,” and they had, and had paid back the government, all well and good. But what about those two yahoos (no pun intended) who tried to make Smoogle? They lost the government 2 million dollars! How is that recouped? Seems like we’ve moving into more of an insurance model – Google has to pay some percentage of its profits to the government every year in return for being lent the 2 mill, and that return subsidizes Smoogle’s failure. And here’s why the capitalist model isn’t right for it – why it should be done by the government: the point isn’t to make profit, it’s just to break even.
Second, we need to find a way to stabilize housing prices. I don’t buy the argument that that’s not possible. Why are they falling? I haven’t seen that explained, except that there was a bubble and inevitably it burst. So, housing was over-valued? The problem on the street is that folks can’t afford their mortagages – so, if we adjust the mortgages downward, essentially making the housing cheaper without forcing them to be sold, seems like that would help things – you’d still lose money, but you’d lose less, and people would be less homeless. And then, perhaps, you could do something to squeeze people out of rental situations and encourage the renters to buy. Maybe you could make it easier to buy a house without being a citizen – if migrant labor can do the work we don’t want to do, maybe they can buy the houses we don’t want, too. I’m sure there are things that could be done.
My understanding of “Crisis on Wall Street” : Princeton economists review recent events on Wall Street and assess the implications for the economy and public policy – September 23rd, 2008
posted on Impolite Company: http://morisey.typepad.com/my_weblog/ and available on YouTube at http://www.youtube.com/watch?v=Wj_JNwNbETA
My reaction
The first portion is definitely the hardest to understand, mainly because there are so many unfamiliar terms and concepts. From watching this (especially the first part), I can understand how easily the Very Smart People on Wall Street got very distracted by the trees in front of them and didn't notice that the forest was burning.
It seems like there are basically two things that need to be done:
First, Wall Street is structured a little like a house of cards, and once panic strikes, it gets out of control real fast. Seems like the solution is to put things in place that remind people not to panic - Douglas Adams, where are you when we need you? I think Guy 2 got into at least the edges of this – part of what makes the stock market and Wall Street work is that you don’t ever really know what something’s worth. If my car is really worth a thousand bucks, but I can sell it for $2000, then I’ve created worth in some way. Transparency works against this - if you can look up the blue book value for my car, then you’re not going to buy it at 2k if it’s only worth 1k. But if you have less transparency, you have more possiblity for corruption. So maybe the problem is with the system of an economy that is made of buying and selling more than making, because creating worth by obfuscation is inherently unstable. Which would seem to argue for keeping Wall Street tightly regulated and lean and small, while encouraging more manufacturing and building and etc. But if Wall Street has been financing the building, and Wall Street can’t, anymore, who will? How does Venture Capitalism figure into all of this? But wait – we have the Small Business Administration, and some amount of subsidies available for entrepeneurs that comes from the government – is this the difference between socialism and capitalism? If the government had said to Brin and Sergey, “ok, here’s a couple of million dollars, go make Google,” and they had, and had paid back the government, all well and good. But what about those two yahoos (no pun intended) who tried to make Smoogle? They lost the government 2 million dollars! How is that recouped? Seems like we’ve moving into more of an insurance model – Google has to pay some percentage of its profits to the government every year in return for being lent the 2 mill, and that return subsidizes Smoogle’s failure. And here’s why the capitalist model isn’t right for it – why it should be done by the government: the point isn’t to make profit, it’s just to break even.
Second, we need to find a way to stabilize housing prices. I don’t buy the argument that that’s not possible. Why are they falling? I haven’t seen that explained, except that there was a bubble and inevitably it burst. So, housing was over-valued? The problem on the street is that folks can’t afford their mortagages – so, if we adjust the mortgages downward, essentially making the housing cheaper without forcing them to be sold, seems like that would help things – you’d still lose money, but you’d lose less, and people would be less homeless. And then, perhaps, you could do something to squeeze people out of rental situations and encourage the renters to buy. Maybe you could make it easier to buy a house without being a citizen – if migrant labor can do the work we don’t want to do, maybe they can buy the houses we don’t want, too. I’m sure there are things that could be done.
Long, and almost certainly wrong, the only question is how wrong, explanation of the CRISIS ON WALL STREET, Part 3
So, G. (no, wait, it's g.) posted an hour long YouTube video that took me about 8 hours to get through, because I stopped, looked stuff up on wikipedia, rewound and listended to again, etc. I wrote as I went along, too, and here's what I wrote (the wikipedia articles are referenced in Part 3).
My understanding of “Crisis on Wall Street” : Princeton economists review recent events on Wall Street and assess the implications for the economy and public policy – September 23rd, 2008
posted on Impolite Company: http://morisey.typepad.com/my_weblog/ and available on YouTube at http://www.youtube.com/watch?v=Wj_JNwNbETA
GUY 3
"Yes, there's panic, but underneath the panic, don't forget that housing prices are going down - we have to deal with that mess in addition to the panic."
Housing prices stopped going up, on average, for the first time ever (at least as far as Wall Street knew). One housing prices start going down, mortgages start being defaulted (before, if you couldn't pay your mortgage, you sold your house and then you could pay it off. Or the bank took it and sold it, and got its money back).When housing prices go down, money disappears. [Again, why is that different than when anything else is devalued? ] So, the banks are out of money - why can't we just make new banks if the current ones are screwed? If a restaurant goes out of business because of bad food, someone else will open a new restaurant with better food, right? So if a bank goes out of business because of bad debt, then a new bank can open up with better debt? Well, yes, but Wall Street banks are not made overnight. Long term, that WILL happen - but "long term we'll all be dead." So, all of the sturm and drang that Guy 1 was talking about is on top of the underlying factors of housing stuff -
1 - housing prices have shot up in the last decade after being basically stable for a really long time - though everyone has been saying that it's not a bubble, clearly it is.
2. And it's not done bursting yet. He shows the Case-Shiller 10 City (Case-Shiller is a way of looking at housing prices) deflated by the Consumer Price Index - which I think means "accounting for inflation." If you look at the graph that he showed, it's a straight line and a bell curve upward, but the downward point of the curve is only about half way to the baseline. It's an "r", not an "n".
3. All of this has nothing to do with what Guy 1 was talking about with the panic and all that.
4. The banks are reporting losses that are pretty much in line with what they would actually be if housing prices stopped dropping, but they won't, "by any reasonable index;" they're going to keep falling for a while. So there are more losses to come.
I think his point here is that no amount of regulation or government interference is going to effect the housing market (as opposed to the financial market, which it can effect). Short of the federal government "buying up 10 million houses and knocking them down."
So, what are we going to do? We've gone from "no more bailouts" to "bail out the entire system." He takes umbrage to the phrasing of "take the troubled assets off the balance sheet." You can easily take them off - just declare them worthless, and they're 0. Voila, done. But the problem is that these are "assets" which no longer exist - which means the total liabilities are bigger than the total assets. So to make these institutions solvent again, the goverment has to buy the assets for a large enough price that it puts the balance sheet at least back at 0 – really, a little above, so they can start making loans again - which, at this point, is greatly overvaluing the assets.
So, what's the plan? Apparently, Paulson's original plan was "give me $700 billion dollars and I have absolute power." Almost literally - the "plan" was only 3 pages?!
Even IF Paulson was beyond reproach, hello, election year? He's not going to be the treasury secretary much longer. Next, he mentions that Paulson said this morning (Sept 23rd) that he totally wants oversight, but it had to be a short document so it would be presumptuous to add oversight language to it. Except, EXCEPT, the document actually specifically PRECLUDES oversight, which is very different than not mentioning it.
Ergo, liar liar pants on fire. Ergo, this is not being done in good faith. So, what are they going to do? Seemed like at first, they didn't really know - Paulson just wanted the money. Now, it's seeming like they're talking about the government buying the "troubled assets" (the mortgages, ultimately) at a very inflated price. Makes sense - that's what's necessary, after all (see above). But, he points out, the way these things are normally handled is, somebody swoops in and saves your bacon (I will give you a cash infusion so your business doesn't fail), they typically get an ownership stake in your business. So, it seems like the right thing to do is to give the government an ownership stake in Wall Street. So, what are they trying to do? Up until recently, it's seemed to be all about staving off the panic, which doesn't really make sense, because of falling house prices, etc. So now, maybe they're working on the bulking up the financial capital of the market – which is what needs to happen in addition to calming the panic - nationalizing the market along the way to some extent. We did it in the SnL crisis, Sweden did it, and Japan eventually did it. That's what happens.
Panel discussion:
How big a deal is this for the "real world?" So far, it hasn't been a huge issue. Everybody downstream is still pretty much functioning, and the housing industry has already been nationalized.
Question: Come on, the CEOs knew what was happening. You’re not trying to tell me this was all an honest mistake, are you?
Answer: No, you’re right. The CEOs got greedy and stupid.
So, that’s what they all said. I think.
Case-Shiller 10 Cities: http://en.wikipedia.org/wiki/Case-Shiller_home_price_index
Consumer Price Index: http://en.wikipedia.org/wiki/Consumer_price_index
My understanding of “Crisis on Wall Street” : Princeton economists review recent events on Wall Street and assess the implications for the economy and public policy – September 23rd, 2008
posted on Impolite Company: http://morisey.typepad.com/my_weblog/ and available on YouTube at http://www.youtube.com/watch?v=Wj_JNwNbETA
GUY 3
"Yes, there's panic, but underneath the panic, don't forget that housing prices are going down - we have to deal with that mess in addition to the panic."
Housing prices stopped going up, on average, for the first time ever (at least as far as Wall Street knew). One housing prices start going down, mortgages start being defaulted (before, if you couldn't pay your mortgage, you sold your house and then you could pay it off. Or the bank took it and sold it, and got its money back).When housing prices go down, money disappears. [Again, why is that different than when anything else is devalued? ] So, the banks are out of money - why can't we just make new banks if the current ones are screwed? If a restaurant goes out of business because of bad food, someone else will open a new restaurant with better food, right? So if a bank goes out of business because of bad debt, then a new bank can open up with better debt? Well, yes, but Wall Street banks are not made overnight. Long term, that WILL happen - but "long term we'll all be dead." So, all of the sturm and drang that Guy 1 was talking about is on top of the underlying factors of housing stuff -
1 - housing prices have shot up in the last decade after being basically stable for a really long time - though everyone has been saying that it's not a bubble, clearly it is.
2. And it's not done bursting yet. He shows the Case-Shiller 10 City (Case-Shiller is a way of looking at housing prices) deflated by the Consumer Price Index - which I think means "accounting for inflation." If you look at the graph that he showed, it's a straight line and a bell curve upward, but the downward point of the curve is only about half way to the baseline. It's an "r", not an "n".
3. All of this has nothing to do with what Guy 1 was talking about with the panic and all that.
4. The banks are reporting losses that are pretty much in line with what they would actually be if housing prices stopped dropping, but they won't, "by any reasonable index;" they're going to keep falling for a while. So there are more losses to come.
I think his point here is that no amount of regulation or government interference is going to effect the housing market (as opposed to the financial market, which it can effect). Short of the federal government "buying up 10 million houses and knocking them down."
So, what are we going to do? We've gone from "no more bailouts" to "bail out the entire system." He takes umbrage to the phrasing of "take the troubled assets off the balance sheet." You can easily take them off - just declare them worthless, and they're 0. Voila, done. But the problem is that these are "assets" which no longer exist - which means the total liabilities are bigger than the total assets. So to make these institutions solvent again, the goverment has to buy the assets for a large enough price that it puts the balance sheet at least back at 0 – really, a little above, so they can start making loans again - which, at this point, is greatly overvaluing the assets.
So, what's the plan? Apparently, Paulson's original plan was "give me $700 billion dollars and I have absolute power." Almost literally - the "plan" was only 3 pages?!
Even IF Paulson was beyond reproach, hello, election year? He's not going to be the treasury secretary much longer. Next, he mentions that Paulson said this morning (Sept 23rd) that he totally wants oversight, but it had to be a short document so it would be presumptuous to add oversight language to it. Except, EXCEPT, the document actually specifically PRECLUDES oversight, which is very different than not mentioning it.
Ergo, liar liar pants on fire. Ergo, this is not being done in good faith. So, what are they going to do? Seemed like at first, they didn't really know - Paulson just wanted the money. Now, it's seeming like they're talking about the government buying the "troubled assets" (the mortgages, ultimately) at a very inflated price. Makes sense - that's what's necessary, after all (see above). But, he points out, the way these things are normally handled is, somebody swoops in and saves your bacon (I will give you a cash infusion so your business doesn't fail), they typically get an ownership stake in your business. So, it seems like the right thing to do is to give the government an ownership stake in Wall Street. So, what are they trying to do? Up until recently, it's seemed to be all about staving off the panic, which doesn't really make sense, because of falling house prices, etc. So now, maybe they're working on the bulking up the financial capital of the market – which is what needs to happen in addition to calming the panic - nationalizing the market along the way to some extent. We did it in the SnL crisis, Sweden did it, and Japan eventually did it. That's what happens.
Panel discussion:
How big a deal is this for the "real world?" So far, it hasn't been a huge issue. Everybody downstream is still pretty much functioning, and the housing industry has already been nationalized.
Question: Come on, the CEOs knew what was happening. You’re not trying to tell me this was all an honest mistake, are you?
Answer: No, you’re right. The CEOs got greedy and stupid.
So, that’s what they all said. I think.
Case-Shiller 10 Cities: http://en.wikipedia.org/wiki/Case-Shiller_home_price_index
Consumer Price Index: http://en.wikipedia.org/wiki/Consumer_price_index
Long, and almost certainly wrong, the only question is how wrong, explanation of the CRISIS ON WALL STREET, Part 2
So, G. (no, wait, it's g.) posted an hour long YouTube video that took me about 8 hours to get through, because I stopped, looked stuff up on wikipedia, rewound and listended to again, etc. I wrote as I went along, too, and here's what I wrote (the wikipedia articles are referenced in Part 3).
My understanding of “Crisis on Wall Street” : Princeton economists review recent events on Wall Street and assess the implications for the economy and public policy – September 23rd, 2008
posted on Impolite Company: http://morisey.typepad.com/my_weblog/ and available on YouTube at http://www.youtube.com/watch?v=Wj_JNwNbETA
Guy 2:
"Here's how Wall Street got into the housing business, and here's why it went so very, very wrong."
He's saying that when the dot-com bubble burst, the big 5 Wall Street banks had to do *something*, and all the real debts and stocks (securities) they were used to (GE and GM, as he says) were all, "No, thank you! That bubble burst HURT!" - so Wall Street wandered over to the housing market. And Wall Street was all, "hey, take a look at these mortagages! They're just like GE and GM securities!" And the credit rating agencies bought it (or played along), and rated the mortgages (or mortgage bundles, once they were up to Wall Street level) the same way they rated GE and GM - really safe, sorta safe, not really safe but you might get lucky, etc. And then Wall Street kept really safe for itself. Since they were (alledgedly) really safe, they had low capital (I think he means captital ratio - the difference between how much it's really worth and how much the market thinks it's worth. Since they were "rock solid," the difference SHOULD have been near zero. Thus, they were cheap). Then he's talking about the past 25 years - light regulation meant that the banks were free to innovate and take risks (and innovation means taking risks, right? Cause you're inventing new things, they're untested), and were largely successful - so they got REALLY big - 25% of the S&P 500 and a large fraction of the GDP. Which means, basically, that a large part of our economy has been tied up in money. It's sort of like Richard Gere's character in Pretty Woman - instead of making things to make money, we've been buying and selling things to make money. And then he says, "is that really a good idea? Smart economists have been trying to figure it out." 2 years ago, the fed raised interest rates, and the era of cheap credit was over - basically, the ability for these banks to keep growing up and up and up hit its limit - and because of the house-of-cards nature and lack of transparency that Guy 1 talked about, everybody flipped out and indeed things started going down and down and down.
Lessons he talks about -
Interestingly, he seems to be saying that bubbles are not a bad thing - we want to feed the bubble. And his point is that in the dot-com bubble, we got a lot of good companies (YouTube, Google), and the housing bubble meant that we got lots of new houses. But these bubbles are inevitably going to be messy - when you innovate, a lot of things ultimately aren't going to work. You can fuck up royally. Put another way, to find the one good thing, you have to go through a lot of bad things. And I see what he's saying - it's sort of a basic tenet of creativity. BUT, he says, that housing is fundamentally different, and nobody recognized that. He doesn't really say why in any but an axiomatic way, from what I can tell - housing is bad because housing is harder to get rid of, because there's less of an ability to control a soft landing - that's the definition of bad, yes, but what about houses makes them like that compared to, say, shares of Google?
Don't blame the messenger - he's basically arguing for more transparency instead of less. This seems like a no-brainer to me. Except, I guess, if the stock market (and "capital") is all about getting more money than things are worth, I can see why obfuscation could be considered a good thing. But obfuscating requires trust, and I don't think we should trust these over-confident investors.
But then he's talking about poor regulation, which is odd, because it sounded like he was crediting lack of regulation for innovation before - but in this case, he's talking about the parties doing things that were obviously wrong - getting too far into debt, issuing too many AAAs - obviously you can't have THAT many rock-solid securities (if you do, you have no capital!), and you can't be taking THAT many risks and reasonably expect to come out ok. Sure, sky-dive, but don't just jump out the plane and hope to encounter a parachute on the way down...
The past does not equal the future - here, I think he's basically saying that, in contrast to "if you do the same thing you'll get the same result," "if you do something different, you'll get a different result." Wall Street thought housing was safe, because it always had been in the past - but housing had never been traded by Wall Street before, and that trading changed the game, and their was no model for that. He's saying a weakness of the financial industry as a discipline is that it only understands the past, it doesn't attempt to insert new variables and see how that might change things.
And finally, he says that the silver lining is that we're being forced to deal with the debt overhang sooner rather than later. what? Oh wikipedia... Ok, the debt overhang is when you have more debt than you have ability to pay it, and it de-motivates you to make good investments, because your creditors are just going to get all of your money anyway - so why bother working hard to make good investments? I don't entirely get this - when individuals are deep into debt, their incentive to get out is so they can get more credit, and so they will stop being called by debt collectors. Maybe high finance doesn't get harrassed the way people do...but with his comparison to Japan, he seems to saying that it took them 10 years to get it together and deal with the fact that they were out of money, and maybe we'll figure it out sooner than that.
GUY 2 Definitions:
CDO: http://en.wikipedia.org/wiki/Collateralized_debt_obligation
Securities: http://en.wikipedia.org/wiki/Securities
Debt Overhang: http://en.wikipedia.org/wiki/Debt_overhang
My understanding of “Crisis on Wall Street” : Princeton economists review recent events on Wall Street and assess the implications for the economy and public policy – September 23rd, 2008
posted on Impolite Company: http://morisey.typepad.com/my_weblog/ and available on YouTube at http://www.youtube.com/watch?v=Wj_JNwNbETA
Guy 2:
"Here's how Wall Street got into the housing business, and here's why it went so very, very wrong."
He's saying that when the dot-com bubble burst, the big 5 Wall Street banks had to do *something*, and all the real debts and stocks (securities) they were used to (GE and GM, as he says) were all, "No, thank you! That bubble burst HURT!" - so Wall Street wandered over to the housing market. And Wall Street was all, "hey, take a look at these mortagages! They're just like GE and GM securities!" And the credit rating agencies bought it (or played along), and rated the mortgages (or mortgage bundles, once they were up to Wall Street level) the same way they rated GE and GM - really safe, sorta safe, not really safe but you might get lucky, etc. And then Wall Street kept really safe for itself. Since they were (alledgedly) really safe, they had low capital (I think he means captital ratio - the difference between how much it's really worth and how much the market thinks it's worth. Since they were "rock solid," the difference SHOULD have been near zero. Thus, they were cheap). Then he's talking about the past 25 years - light regulation meant that the banks were free to innovate and take risks (and innovation means taking risks, right? Cause you're inventing new things, they're untested), and were largely successful - so they got REALLY big - 25% of the S&P 500 and a large fraction of the GDP. Which means, basically, that a large part of our economy has been tied up in money. It's sort of like Richard Gere's character in Pretty Woman - instead of making things to make money, we've been buying and selling things to make money. And then he says, "is that really a good idea? Smart economists have been trying to figure it out." 2 years ago, the fed raised interest rates, and the era of cheap credit was over - basically, the ability for these banks to keep growing up and up and up hit its limit - and because of the house-of-cards nature and lack of transparency that Guy 1 talked about, everybody flipped out and indeed things started going down and down and down.
Lessons he talks about -
Interestingly, he seems to be saying that bubbles are not a bad thing - we want to feed the bubble. And his point is that in the dot-com bubble, we got a lot of good companies (YouTube, Google), and the housing bubble meant that we got lots of new houses. But these bubbles are inevitably going to be messy - when you innovate, a lot of things ultimately aren't going to work. You can fuck up royally. Put another way, to find the one good thing, you have to go through a lot of bad things. And I see what he's saying - it's sort of a basic tenet of creativity. BUT, he says, that housing is fundamentally different, and nobody recognized that. He doesn't really say why in any but an axiomatic way, from what I can tell - housing is bad because housing is harder to get rid of, because there's less of an ability to control a soft landing - that's the definition of bad, yes, but what about houses makes them like that compared to, say, shares of Google?
Don't blame the messenger - he's basically arguing for more transparency instead of less. This seems like a no-brainer to me. Except, I guess, if the stock market (and "capital") is all about getting more money than things are worth, I can see why obfuscation could be considered a good thing. But obfuscating requires trust, and I don't think we should trust these over-confident investors.
But then he's talking about poor regulation, which is odd, because it sounded like he was crediting lack of regulation for innovation before - but in this case, he's talking about the parties doing things that were obviously wrong - getting too far into debt, issuing too many AAAs - obviously you can't have THAT many rock-solid securities (if you do, you have no capital!), and you can't be taking THAT many risks and reasonably expect to come out ok. Sure, sky-dive, but don't just jump out the plane and hope to encounter a parachute on the way down...
The past does not equal the future - here, I think he's basically saying that, in contrast to "if you do the same thing you'll get the same result," "if you do something different, you'll get a different result." Wall Street thought housing was safe, because it always had been in the past - but housing had never been traded by Wall Street before, and that trading changed the game, and their was no model for that. He's saying a weakness of the financial industry as a discipline is that it only understands the past, it doesn't attempt to insert new variables and see how that might change things.
And finally, he says that the silver lining is that we're being forced to deal with the debt overhang sooner rather than later. what? Oh wikipedia... Ok, the debt overhang is when you have more debt than you have ability to pay it, and it de-motivates you to make good investments, because your creditors are just going to get all of your money anyway - so why bother working hard to make good investments? I don't entirely get this - when individuals are deep into debt, their incentive to get out is so they can get more credit, and so they will stop being called by debt collectors. Maybe high finance doesn't get harrassed the way people do...but with his comparison to Japan, he seems to saying that it took them 10 years to get it together and deal with the fact that they were out of money, and maybe we'll figure it out sooner than that.
GUY 2 Definitions:
CDO: http://en.wikipedia.org/wiki/Collateralized_debt_obligation
Securities: http://en.wikipedia.org/wiki/Securities
Debt Overhang: http://en.wikipedia.org/wiki/Debt_overhang
Long, and almost certainly wrong, the only question is how wrong, explanation of the CRISIS ON WALL STREET, Part 1
So, G. (no, wait, it's g.) posted an hour long YouTube video that took me about 8 hours to get through, because I stopped, looked stuff up on wikipedia, rewound and listended to again, etc. I wrote as I went along, too, and here's what I wrote.
My understanding of “Crisis on Wall Street” : Princeton economists review recent events on Wall Street and assess the implications for the economy and public policy – September 23rd, 2008
posted on Impolite Company: http://morisey.typepad.com/my_weblog/ and available on YouTube at http://www.youtube.com/watch?v=Wj_JNwNbETA
The “guys” referred to are Princeton professors. They have names, but since their names mean less to me than their order of appearance, I’m just referring to them as Guys 1-3.
Guy 1
Guy 1 in one Sentence:
"It's like the depression - panic feeds on panic and things spiral out of control."
Guy 1 in detail:
So, these companies that are making money for themselves and their clients (broker-dealers) are too into the short-term loan business (repo-market) and the market loses confidence. Suddenly it costs a whole lot more to get a loan (the haircut), and they have to scramble to get back into real money instead of taking out loans and re-loaning the money at a higher interest rate (delever). Chaos ensues.
The problem, he says, is that the existing regulations are all about how much real money (assets) you have divided by how much perceived money you have (capital) (the capital ratio), without taking into account how much of that capital could disappear literally overnight (because it's in the repo market) - and also that risk is assessed intra-bank and not inter-bank (VaR vs. CoVaR).
And ALSO, since none of the banks really knows how screwed the other banks are, they all start getting nervous and taking out insurance against each other so if the bank they've loaned to goes down, they're still ok. Except that the credit rating companies use the insurance (the Credit Default Swaps) to gauge how screwed the banks are (because they don't know either), and start saying they have bad credit, and everyone's like "I knew it! I need more insurance!", insurance rates go up, and then the cycle repeats. [So, why did AIG go under? Seems like the Credit Default Swaps should have the insurance entities in good shape, as their rates go up and up….oh, but I guess it’s like when the hurricane hits. Suddenly everyone needs the money because everybody’s fucked – but the fucking in part was created by the buying of the insurance. Nasty!]. He says if the US allowed CFD's (Contract for Differences), either bank-to-bank ("over the counter") or on the stock market (a clearinghouse model), that would allow a more informed notion of how screwed the other banks were (the Counterparty Credit Risk).
And THEN, he starts talking about the TED Spread, which is again about measuring risk (it's got to do with treasuries vs. everything else). And the banks look a lot riskier at the end of each quarter, I guess because they're all "omg, we need money to tell our stockholders about!" and start doing riskier things or whatever - so he says, if the TED spread is going to be greater at the end of the quarter, let's let banks report on the average instead of the snapshot.
Guy 1 Definitions:
Broker-dealers: http://en.wikipedia.org/wiki/Broker-dealer
Repo Markets: http://en.wikipedia.org/wiki/Repurchase_agreement
Market liquidity: http://en.wikipedia.org/wiki/Market_liquidity
Haircuts: http://en.wikipedia.org/wiki/Haircut_(finance)
Deleveraging: http://en.wikipedia.org/wiki/Deleveraging
Capital Requirement: http://en.wikipedia.org/wiki/Capital_requirement
Capital: http://en.wikipedia.org/wiki/Capital_(economics)
Assets: http://en.wikipedia.org/wiki/Asset
VaR (value at risk): http://en.wikipedia.org/wiki/Value_at_risk
CoVaR: the only reference I could find is here:
http://www.newyorkfed.org/research/staff_reports/sr348.html - basically, the value at
risk (VaR) of financial institutions conditional on other institutions being in
distress. (I notice that Markus K. Brunnermeier is a co-author. In other words, he
made it up).
Contract for Difference: http://en.wikipedia.org/wiki/Contract_for_difference
Counterparties: http://en.wikipedia.org/wiki/Counterparties
CDS (Credit Default Swap): http://en.wikipedia.org/wiki/Credit_default_swap
Credit derivative: http://en.wikipedia.org/wiki/Credit_derivative
Treasuries: http://en.wikipedia.org/wiki/Treasuries
TED Spread: http://en.wikipedia.org/wiki/TED_spread
My understanding of “Crisis on Wall Street” : Princeton economists review recent events on Wall Street and assess the implications for the economy and public policy – September 23rd, 2008
posted on Impolite Company: http://morisey.typepad.com/my_weblog/ and available on YouTube at http://www.youtube.com/watch?v=Wj_JNwNbETA
The “guys” referred to are Princeton professors. They have names, but since their names mean less to me than their order of appearance, I’m just referring to them as Guys 1-3.
Guy 1
Guy 1 in one Sentence:
"It's like the depression - panic feeds on panic and things spiral out of control."
Guy 1 in detail:
So, these companies that are making money for themselves and their clients (broker-dealers) are too into the short-term loan business (repo-market) and the market loses confidence. Suddenly it costs a whole lot more to get a loan (the haircut), and they have to scramble to get back into real money instead of taking out loans and re-loaning the money at a higher interest rate (delever). Chaos ensues.
The problem, he says, is that the existing regulations are all about how much real money (assets) you have divided by how much perceived money you have (capital) (the capital ratio), without taking into account how much of that capital could disappear literally overnight (because it's in the repo market) - and also that risk is assessed intra-bank and not inter-bank (VaR vs. CoVaR).
And ALSO, since none of the banks really knows how screwed the other banks are, they all start getting nervous and taking out insurance against each other so if the bank they've loaned to goes down, they're still ok. Except that the credit rating companies use the insurance (the Credit Default Swaps) to gauge how screwed the banks are (because they don't know either), and start saying they have bad credit, and everyone's like "I knew it! I need more insurance!", insurance rates go up, and then the cycle repeats. [So, why did AIG go under? Seems like the Credit Default Swaps should have the insurance entities in good shape, as their rates go up and up….oh, but I guess it’s like when the hurricane hits. Suddenly everyone needs the money because everybody’s fucked – but the fucking in part was created by the buying of the insurance. Nasty!]. He says if the US allowed CFD's (Contract for Differences), either bank-to-bank ("over the counter") or on the stock market (a clearinghouse model), that would allow a more informed notion of how screwed the other banks were (the Counterparty Credit Risk).
And THEN, he starts talking about the TED Spread, which is again about measuring risk (it's got to do with treasuries vs. everything else). And the banks look a lot riskier at the end of each quarter, I guess because they're all "omg, we need money to tell our stockholders about!" and start doing riskier things or whatever - so he says, if the TED spread is going to be greater at the end of the quarter, let's let banks report on the average instead of the snapshot.
Guy 1 Definitions:
Broker-dealers: http://en.wikipedia.org/wiki/Broker-dealer
Repo Markets: http://en.wikipedia.org/wiki/Repurchase_agreement
Market liquidity: http://en.wikipedia.org/wiki/Market_liquidity
Haircuts: http://en.wikipedia.org/wiki/Haircut_(finance)
Deleveraging: http://en.wikipedia.org/wiki/Deleveraging
Capital Requirement: http://en.wikipedia.org/wiki/Capital_requirement
Capital: http://en.wikipedia.org/wiki/Capital_(economics)
Assets: http://en.wikipedia.org/wiki/Asset
VaR (value at risk): http://en.wikipedia.org/wiki/Value_at_risk
CoVaR: the only reference I could find is here:
http://www.newyorkfed.org/research/staff_reports/sr348.html - basically, the value at
risk (VaR) of financial institutions conditional on other institutions being in
distress. (I notice that Markus K. Brunnermeier is a co-author. In other words, he
made it up).
Contract for Difference: http://en.wikipedia.org/wiki/Contract_for_difference
Counterparties: http://en.wikipedia.org/wiki/Counterparties
CDS (Credit Default Swap): http://en.wikipedia.org/wiki/Credit_default_swap
Credit derivative: http://en.wikipedia.org/wiki/Credit_derivative
Treasuries: http://en.wikipedia.org/wiki/Treasuries
TED Spread: http://en.wikipedia.org/wiki/TED_spread
World Domination in 24 Hours
Midnight: Sleeping. A girl needs her beauty rest.
1 AM: Wake. Pop a Provigil for the MS point (Provigil is the wonder drug that keeps me awake). (Sometimes).
2 AM: Finish downloading NPR podcasts, drive to airport
3 AM: Board super-fast jet for a quick lay-of-the-land trip around the world.
4 AM: Still flying (it's not THAT fast)
5 AM: Land, study the pictures taken from the super-fast jet. No ideas yet.
6-10AM: Nap. Provigil only goes so far.
10 AM: Awake, not at all refreshed. Pop another Provigil to approximate that refreshed feeling
11 AM: Remember Google
Noon: Half-way there, and world domination no closer. Click past page 8 of Google results for "taking over the world." Begin to think that Google doesn't have the answer.
12:15 PM: Realize that of COURSE Google has the answer, Google knows everything.
12:20 PM: Discover blueprints on taking over the world on page 11 of search results (luckily for me, most people don't get past the first page)
1:00 PM: Damn thing's in Powerpoint.
2:00 PM: And Ancient Egyptian.
2:00 - 7:00 PM: Brush up on my Ancient Egyptian (and Powerpoint)
7:00 PM: Get back in the jet
7:00 - 11:00 PM - Travel around the world again, collecting all of the underwear from all of the dryers in the world, like some bizarre frat-boy Santa Claus with a penchant for laundromats
11:00 - 11:30 ???
Midnight: World domination achieved.
1 AM: Wake. Pop a Provigil for the MS point (Provigil is the wonder drug that keeps me awake). (Sometimes).
2 AM: Finish downloading NPR podcasts, drive to airport
3 AM: Board super-fast jet for a quick lay-of-the-land trip around the world.
4 AM: Still flying (it's not THAT fast)
5 AM: Land, study the pictures taken from the super-fast jet. No ideas yet.
6-10AM: Nap. Provigil only goes so far.
10 AM: Awake, not at all refreshed. Pop another Provigil to approximate that refreshed feeling
11 AM: Remember Google
Noon: Half-way there, and world domination no closer. Click past page 8 of Google results for "taking over the world." Begin to think that Google doesn't have the answer.
12:15 PM: Realize that of COURSE Google has the answer, Google knows everything.
12:20 PM: Discover blueprints on taking over the world on page 11 of search results (luckily for me, most people don't get past the first page)
1:00 PM: Damn thing's in Powerpoint.
2:00 PM: And Ancient Egyptian.
2:00 - 7:00 PM: Brush up on my Ancient Egyptian (and Powerpoint)
7:00 PM: Get back in the jet
7:00 - 11:00 PM - Travel around the world again, collecting all of the underwear from all of the dryers in the world, like some bizarre frat-boy Santa Claus with a penchant for laundromats
11:00 - 11:30 ???
Midnight: World domination achieved.
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