I’m uncomfortable with where Richard Medley headed – he blames ‘math geeks’ for the financial crisis. It’s uncomfortable, so that is why I share it. Not that I necessarily agree.
Esquire: Richard Medley: Why Is Our Economy in a Recession? – The End of America’s Capitalist Fantasy and the Shape of Banks to Come:
There’s nothing new about greed — when Chuck Prince, who then headed Citigroup, said in 2007, “As long as the music is playing, you’ve got to get up and dance,” he was just saying what every person who had any access to capital was thinking — but technology comes in waves, and it made this intersection of tech and the free market particularly toxic.
From time immemorial, we’ve had a financial system run mainly by men in their fifties and sixties that worked like this: Banks made money by loaning capital and making deals and taking the risk that they would not be paid back or that the deal would fall apart. That was simple enough. But then along came the math geeks who convinced many of us that instead of making loans and taking risk, we could make loans, “securitize” them, and then sell those securities to idiots in Europe and China.
When the old guys asked how that would work, they were shown sheets of paper with equations on them, and instead of saying, “I don’t understand one damn thing on this page,” they said, “So you’re sure it’ll work?”
That opened the door to an entirely new concept for banking: Let’s make loans to deadbeats and sell them off in “tranches” to idiots in Europe who don’t even know what a “tranche” is but like the idea that the S&P rates them highly and that they can make 6 percent a year on one with no risk. (Come here, little kitty.) As long as everyone looked the other way and stock prices kept rising, there was no pressure to do anything differently. Once the house of cards collapsed, all they were going to have to do was claim to have been blinded by science and point to the nerds who designed the strategy. (Which is exactly where Congress’s investigation is heading.)
National Press Club: Paul Krugman presentation
Washington Post Editorial: Closing the Gaps – The cautionary tale of AIG’s downfall:
In hindsight, it is clear that government regulation was lacking in the early stages of AIG’s CDS boom. As they were building it, AIG executives regarded their CDS business as virtually risk-free — “like catastrophe insurance for events that would never happen,” according to the Post series. This something-for-nothing aspect of the business should have been a red flag for the government — and for the ratings agencies, too. Yet another lesson of the AIG saga is the sheer difficulty of comprehending the myriad pathways of modern finance. The trick in regulating financial derivatives will be to preserve their efficiency-enhancing attributes while eliminating those factors that tend to concentrate systemic risk where it cannot be easily detected. AIG built up its CDS business in the interstices of governmental authority; those gaps can and should be closed without choking the arteries of capitalism.
Washington Post: The Crash: What Went Wrong – Washington Post series drilling down into where things went wrong – in particular – at AIG
NYTimes: The Reckoning – New York Times series covering the Crash.
ScienceBlogs.com: Corpus Callosum: The Last Christmas of the American Golden Age:
…The percentage of persons on food stamps now, is similar to that seen prior to Clinton’s welfare reforms. In other words, we’ve lost whatever progress we made.
…Personally, I don’t care a whole lot if some executive is sitting in a beach house in the Hamptons, sipping 1979 Krug Clos Du Mesnil, paid for by his or her fellow citizens. What bothers me is the number of food stamps that can’t be printed for the $5,700 that the champagne cost.
No, it isn’t really that. What bothers me is how the collapse of the economic system will lead to unnecessary starvation. Most will occur overseas, but some will occur here. American MDs will have to acquaint themselves with treatment of kwashiorkor.
Yes, economic disparity is inevitable. Economic cycles and crashes may be inevitable. But it was not inevitable that we would waste our last, best chance for sustainability.
Salon: The economy crumbled:
There were warnings along the way. Cassandras who feared that exotic financial innovation, specifically unregulated at the behest of both Democratic and Republican politicians, was setting the stage for a major systemic shock. But their voices were drowned out by a chorus of status quo defenders who told us, again and again, that financial innovation was making the world a safer, less risky place.
By slicing and dicing risk and redistributing it across the world, we were told, the chance that any one shock could destabilize the entire system had diminished. Even better, ran the argument, policymakers had learned the lessons of the Great Depression so well that there was no chance there could be another depression. One of Ben Bernanke’s claims to fame was as the proselytizer of the idea that we live in the age of the Great Moderation, an era in which recessions would be mild, growth stable and financial panics a thing of antiquity.
They were wrong. If there is one lesson to take from 2008 it is that the majority of analysts, economists and Wall Street financiers were flat-out wrong. Instead of redistributing risk to make us safer, they tied the whole world up into such a tightly wound ball of interconnections that when one piece of the system broke, the repercussions spread everywhere, immediately.
As a consequence, the self-satisfaction bequeathed to Americans by their victory in the Cold War and their unchallenged status as superpower has been irretrievably punctured and replaced by fear. The world seems far more fragile than it did a year ago. It baffles comprehension that so much could go so wrong so fast.
Previously here at paradox1x.org
