Meltdown (2)

Then I have not made myself clear.

I have a clear distinction, because in one example a financial institute has been mislead by a deceitful market practice, where "subprime" mortgages have been compiling into a "collateralized debt obligation", given a AAA credit rating (which is bullshit), then sold as equity on the money market under another name.

An unsuspecting financial institute, believing its AAA, then purchases such CDO's without realizing its actually a sham. They then find themselves in trouble as a result of something that was not entirely their fault.

This is worth bailing them out for.

^^ Actually in respect to the above, for a thorough overview of the Reserve Bank of New Zealand's crisis management powers, see:

Section O. CRISIS MANAGEMENT

Reference:

http://www.rbnz.govt.nz/finstab/banking/regulation/3272066.pdf [/quote]

It should be noted that most Central Banks have extraordinary power over private banks to do almost anything deemed necessary.

I take the view that we should be selective when bailing out institutions, less we promote constant moral hazard.

One argument could be that if you cant understand the instrument enough to value it then you're an idiot to buy it, and deserve to be punished. Let the buyer beware is a basic axiom of business.
Of course one must distinguish this with outright fraud.

Admittedly it can be difficult to pinpoint exactly where fraud occurs but in general the rule is that you the buyer are taking the risk and if you can prove there was fraud you can sue for damages later or sometimes the transaction might be completely voided but the risk as a buyer is that you will hold the asset until redress.
I find it difficult to believe that the buyers of subsequently toxic CDO's didnt understand there was some risk. And risk is risk - once you accept some you accept it all because its merely a statistical likelihood from one extreme (value)to the other (worthlessness).

it all just proves that other axiom of the market place

that it is irrational

no?

Agree with this, but is it applicable here?



Which is what this AAA credit rating is, fraudulent. What are "subprime" CDO's doing with a triple A credit rating Peat?

When Standard & Poor's and Fitch Triple A = Credit risk almost zero

I don't see how that comes into at all.

What it exposes (if anything) is that there is imperfect information in the market.

Bird and Fortune on the Subprime Crisis

surely "the buyer beware" applies, and they made their own mess so tough shit. So what if the entire system collapses, it'll just hasten the revolution and then we'll build a better system. It's just more evidence that the system was unworkable in the fist place.

Buyer beware should not apply to something that is advertised as near zero risk and has a AAA credit rating.

This is more about false advertising, to blame the buyer in the example I have stipulated, seems misplaced.



The system will not collapse (though it will cause lots of ongoing problems) and if there is going to be any revolution, it will be the abolishment of fractional reserve banking and a return to specie backed currency. If not, a far more strict monetary framework with capital adequacy ratios and higher fractional reserve requirements. .

It seems the Austrians are right about this, just like they were with the Great Depression, which was predicted by both Mises and Hayek before it happened.

yeah, and the austrians would baulk at the idea of a govt bail out.

and Advertising, lol. S&P and others were giving their opinion on an AAA rating. It's up to the buyer to decide what their value is. Surely! It's not like an AAA is some sort of absolute guarantee that it's zero risk and will always be in some sort of absolute terms. It's an opinion nothing more, and it should be treated as such. Don't do it at your own peril.

Of course, but then under Austrian business cycle theory, if fractional reserve banking was illegal, there wouldn't be massive booms and busts to require government bail outs.



I don't think you guys understand how this crisis actually happened. These CDO's had been repackaged and sold under different names so many times, no one really knew what was subprime and what wasn't. Otherwise how did so many financial institutes fall for it?

And AAA was up until now supposed to mean near zero risk. See here:

http://en.wikipedia.org/wiki/Bond_credit_rating

I well aware of how it happened, and I'm also aware that the primary problem was that they were blinded by greed. If you don't know exactly what you're buy, then why buy it. You fuck up, don't go crying to mummy. You bought a lemon. Deal with it.



*note: I'm drunk, so don't take me too seriously*

I think your looking at things through a very Marxist lens, which kind of makes this discussion difficult, because you interpret the cause as greed.

Where as I don't think financial instruments like equity bonds et al. are always purchased with such intent, or an urge to overextend oneself at least.

To some institutes, purchasing these instruments is an investment that is supposed to keep a steady flow of revenue streaming in, when the housing market is in recession and lending tightens up etc.

Helps banks to balance their assets and put them in a better position for future lending potential. Regardless I think its misplaced to completely blame the buyer in this fiasco. Some can most certainly be blamed, but not all of them.

i see way too many 5 waves up followed by 3 waves down to believe this. Elliot wave theory FTMFW!

Thats what its meant to be , always!
But thats exactly what gets forgotten when the asset prices rise and the game turns more into pass the poison parcel.

quoting me from two weeks ago.... I started building my positions and now the payoff

USD absolutely hammered last night down 3 cents againt the Swiss Franc and 5c against the yen

and this is only the beginning

stock markets will not sustain the rally even last night they were down again....

Krugmann claims "we are now in the early stages of a third depression."

http://www.guardian.co.uk/commentisfree/2010/jun/28/21st-century-depression-greece-deficit

And this third depression will be primarily a failure of policy. Around the world – most recently at the weekend's deeply discouraging G20 meeting – governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

In 2008 and 2009 it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets.

And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.

groan.... scary times ahead with impacts starting to hit home (or so it seems from a roundup of my friends - redundancies all round)

meanwhile in NZ (hearld land)

Consumers feeling comfortable financially

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10656652

let's see what else the herald has to say:

ah yes

Jobless total 'played down'

More fraud as people try to keep up lifestyle

Economic signs in the US, Britain and Greece worse than expected.
Just google 'recession' hit the news tab and see what you get

However in news today Retail sales in NZ rose 1.3% in the June quarter, on a seasonally adjusted basis, the biggest rise since the March 2007 quarter
This is kinda surprising though may be attributed to everyone stocking up before GST rises.

aucklanders buying heaters - or would increased prices have an impact?

mainly cars actually bob_d

motor vehicle retailing also led the increase in sales values, rising 3.6 % or NZ$62 million.
Supermarket and grocery stores, up 0.9% or NZ$36 million, and accommodation, up 4.8% or NZ$32 million, were the two core retail industries contributing most to the 0.4%, or NZ$51 million, increase in core retail sales values.

discounting seems to have played a role in encouraging sales, especially for appliances. Vehicle sales continued to recover from very weak levels. Leung noted some of this might reflect people bringing forward the purchase of big-ticket items ahead of the October GST increase to 15% from 12.5%.

http://www.interest.co.nz/news/asb-sees-retail-sales-growth-broader-just-pre-gst-hike-spending

cars... blooody hell thats a lose right there

has anyone read the Sellout?

http://www.amazon.com/Sellout-Government-Mismanagement-Destroyed-Financial/dp/0061697168

Its apparently a real hard read for the layperson... I'm tentively eyeing it up and wonderig if me brain will cope

no I havent read that bob
last book I read in this area was George Soros <cut and paste from essay here> George Soros gives a good account of this in “The Crash of 2008, and What it Means” tracing it’s origins back to the Dot Com bust, the subsequent lowering of interest rates to very low levels whereby cheap money led to a housing bubble. The credit growth became even more exacerbated due to a lowering of lending standards, partly as a result of the securitization of these mortgages and hence the dissociation of loan writer and ultimate loan owner. Incentives became misaligned with responsible lending, there was excessive credit growth, poor quality credit which needed to be destroyed, and this started to tarnish the systems confidence in terms of faith in counter party liquidity, initiating an unwillingness to lend. <end paste>

I have no doubt you could read the Sellout ok. hes a journalist.
If you do post a summary here please. Or lend it to me :+)

have to buy/find it now and then read it... can't say its something I look forward to

http://www.nytimes.com/2010/09/06/opinion/06krugman.html

Krugmann argues that in 1937 FDR prolonged the Great Depression because of pressure from voters to cut stimulus spending and lower business tax, meaning the Depression in America eventually only lifted because of govt spending in the 40s due to WWII. Krugman see Obama stuck now with the exact same problem: the demand for austerity.

nassim talebs rules for moving forward:

What is fragile should break early while it's still small: Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks become the biggest.

No socialisation of losses and privatisation of gains: Whatever may need to be bailed out should be nationalised; whatever does not need a bailout should be free, small and risk-bearing. We got ourselves into the worst of capitalism and socialism. In France, in the 1980s, the Socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

People who drove a school bus blindfolded (and crashed it) should never be given a new bus: The economics establishment lost its legitimacy with the failure of the system in 2008. Find the smart people whose hands are clean to get us out of this mess.

Don't let someone making an "incentive" bonus manage a nuclear plant - or your financial risks: Odds are he would cut every corner on safety to show "profits" from these savings while claiming to be "conservative". Bonuses don't accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives.

The UK Coalition government has plans to impose cuts between £85 billion and £100 billion over the next four years. What is planned here will dwarf anything that was undertaken by Thatcher in the 1980s. If the coalition government starts introducing massive budget cuts, there will be massive unemployment in the public sector. As a conservative estimate, 750,000 public sector job losses do not look far off the mark. About 100, 000 of the jobs would be lost in Scotland due to its disproportionate bigger public sector. And those still in work will face wage freezes and cuts. Job insecurity will rise for nearly everyone. On the other hand, Corporation Tax is to be cut from its present level of 28 percent to 24 percent, which will give the UK the lowest level of corporate taxation in any developed country. Massive unemployment and lower wages imply lower tax receipts, and even bigger budget deficits and debt loads. Austerity and high unemployment also risks social unrest. Greece has already lost control of its streets, and a number of other eurozone countries is moving in that direction. It is very unlikely that introducing savage austerity measures while the economy is still on downward spiral will not resolve any problems-- the crisis will simply get displaced from one sphere to another. The austerity measures of the Coalition government are therefore at risk of damaging short-term growth prospects, and will increase the possibility for a double dip.

The government instead should concentrate on growth and let growth reduce the deficit. During the Second World War, the UK national debt reached very high figures of up to 150 per cent of GDP. It is normal practice that countries borrow more during the time of serious national and international crises, like wars, or economic upheavals like the one currently affecting the world, and pay back the debt over a period of time. In this sense, budget deficit can be an effective way to deal with such shocks like wars, financial crashes and recessions. If anything, the problem of low economic activity is the real, and more urgent, issue than the fiscal stability.

http://www.publicservice.co.uk/feature_story.asp?id=14896

OneHappy - If they actually attempt to implement these proposed cuts the Coalition government won't go the distance. The Lib-Dems will implode. Already Labour is back in front in the polls over there. Ed Milliband will be British PM by the time Dan Carter kicks off the 2011 RWC.

Yes, there's a bit of news about the coalition being in trouble already as the extent of austerity measures begins to sink in. My supervisor, a sociology prof, was saying today that euro newspapers are full of stories of malcontent and strikes (i think she said our media is largly ignoring it).


from interest.co.nz, a graph showing the crazy extent of speculation on housing in the US:

The really interesting thing i think is the sheer extent of the boom, which happened at a time when generally we were suckered into believing that capitalism was triumphant and invincible, when in fact it was digging a grave

Oh dear Italy where will this take us?

Next France?

http://www.guardian.co.uk/business/2011/nov/10/eurozone-crisis-threat-to-france

"The best-case scenario is a deflationary environment. The worst-case scenario is a collapse of the financial system," Soros told Newsweek in January. And in December, Soros said that developed countries are falling into a "deflationary debt trap" and the global financial system is in a "self-reinforcing process of disintegration."

http://www.huffingtonpost.com/2012/04/12/george-soros-european-crisis-more-lethal_n_1421636.html?1334267897


"One of the complexities on which Arrighi insists is the volatility of imperial transfer. These moments are not orderly passes of the scepter; the work is accomplished not within the whirring circuits of virtual capital, but all too often in the realms of blood and steel. It is Schumpeter’s creative destruction at the level of geopolitics. Last time around it took not one but two world wars to complete the exchange. It is not the sort of thing you root for, especially if your nation has been at the center and the top for a long while ... It is toward such a period that we drift now."

http://lareviewofbooks.org/post/7756129051/autumn-of-the-empire