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Tag: financial crisis (page 2 of 5)

Explaining the European bailout plan

The BBC’s Paul Mason explains the mechanics and implications of Europe’s huge bailout of Greece and the other step’s the EU and IMF are taking to forestall potential defaults by Spain, Portugal, and Ireland as well. Mason’s argument is that Europe is turning financial risk into political risk, you should read the whole thing. (Via The Browser.)

Honor thy mortgage contract

Is it ethical to walk away from an underwater mortgage? The New York Times’ Roger Lowenstein says it is. Stan Collender at Capital Gains and Games says it isn’t.

The financial crisis in a nutshell

When you nail it, you nail it. Commenter Chris from Felix Salmon’s blog explained the financial crisis in two sentences:

The person most willing to take on risk is the one unaware he is doing so. He charges no risk premium…

The resulting market equilibrium is that the guy who is unaware of the risk ends up loaded with it. Then the music stops.

Investment banks took risky investments and manipulated them until they looked like safe investments, then sold those “safe” investments to people who didn’t know better. Cynics could argue that this is the only purpose that securitization and derivatives serve.

What if there’s nothing to recover to

Robert Reich belatedly answers the question I asked in January — can the economy ever really be what it was? He says no:

My prediction, then? Not a V, not a U. But an X. This economy can’t get back on track because the track we were on for years — featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere — simply cannot be sustained.

The X marks a brand new track — a new economy. What will it look like? Nobody knows. All we know is the current economy can’t “recover” because it can’t go back to where it was before the crash. So instead of asking when the recovery will start, we should be asking when and how the new economy will begin. More on this to come.

On fraud

Former bank regulator William Black names fraud as the cause of financial crisis. I really liked his definition:

Fraud is deceit. And the essence of fraud is, “I create trust in you, and then I betray that trust, and get you to give me something of value.” And as a result, there’s no more effective acid against trust than fraud, especially fraud by top elites, and that’s what we have.

My complaint about this is that it seems everyone involved was mostly deceiving themselves. People applied for subprime and Alt-A loans so they could move into houses they couldn’t otherwise afford (or to buy houses as investments in hopes of selling them at a profit). Banks sold those loans knowing that people would lie because there was insatiable demand for mortgage-backed securities. Investors bought these securities because they kept going up in value regardless of how crappy they were.

I feel like this was in many ways a fraud we perpetrated on ourselves. People believed what was going on was normal and somehow made sense, when it was clearly unsustainable. So while the fraud explanation sounds good, I think mass self-delusion better explains what occurred.

GM mortaged the future

FiveThirtyEight.com has a simple explanation of why GM is dying:

GM was willing to cut its employees some very attractive deals in the 1950s through the 1980s — provided that they took them in the form of retirement benefits rather than salary, which wouldn’t hit GM’s books until much later and which until 1992 weren’t even required to be carried on its balance sheets all, making its financial statements (superficially) more appealing to its shareholders. That health care costs have risen so substantially in the United States have made a bad matter worse.

This issue is wrongly portrayed by both the liberal and the conservative media as one of management versus labor, when really it is a battle between General Motors past and General Motors present. In the 50s, 60s and 70s, everyone benefited: GM and its shareholders got the benefit of higher profit margins, and meanwhile, its employees benefited from GM’s willingness to cut a bad deal — for every dollar they were giving up in salary, those employees were getting a dollar and change back in retirement benefits. But now, everyone is hurting.

Links from March 23rd

There are a whole ton of links in the backlog today.

Can information beat out anger?

Frank Rich writes that an inability to manage populist anger could undermine everything Barack Obama hopes to accomplish. I agree. But in the process, he writes some stupid stuff that’s likely to encourage more populist anger. To wit:

Bob Schieffer of CBS asked Summers the simple question that has haunted the American public since the bailouts began last fall: “Do you know, Dr. Summers, what the banks have done with all of this money that has been funneled to them through these bailouts?” What followed was a monologue of evasion that, translated into English, amounted to: Not really, but you little folk needn’t worry about it.

Yet even as Summers spoke, A.I.G. was belatedly confirming what he would not. It has, in essence, been laundering its $170 billion in taxpayers’ money by paying off its reckless partners in gambling and greed, from Goldman Sachs and Citigroup on Wall Street to Société Générale and Deutsche Bank abroad.

Rich apparently doesn’t understand that this was the entire point of bailing out AIG in the first place. The thought was that if AIG failed to fulfill its contracts with its counterparties, the entire financial system would probably collapse. So we bought the company and gave them a bunch of money so that they didn’t default on their obligations. That money was never for AIG, it was for paying off AIG’s claims.

I agree with Rich’s larger point, though. It’s up the government to explain in as much detail as possible what it’s doing, who benefits, and why it’s going to work. The fact that a New York Times columnist doesn’t know what the AIG bailout was fundamentally about illustrates that they’re failing at that.

The future of Detroit

Today’s New York Times has an op-ed written by Toby Barlow on people moving to Detroit. Yesterday I linked to a photo essay that illustrates Detroit’s decline. The op-ed talks about Detroit’s possible rise.

Creative people who don’t want to have to worry about money have always flocked to places that are under severe economic distress. Go read Ed Ward’s old blog BerlinBites for stories of the artistic community that arose in Berlin after Germany’s reunification. People also flocked to Buenos Aires when Argentina’s economy collapsed in 1999.

Detroit is losing population rapidly, and the industries that built the city are unlikely to ever return. However, it’s a major American city where you can live incredibly cheaply. That’s an opportunity. Here’s the conclusion of the op-ed:

In a way, a strange, new American dream can be found here, amid the crumbling, semi-majestic ruins of a half-century’s industrial decline. The good news is that, almost magically, dreamers are already showing up. Mitch and Gina have already been approached by some Germans who want to build a giant two-story-tall beehive. Mitch thinks he knows just the spot for it.

The trouble with giving advice

Joel Lovell writes about the trouble with giving investment advice (professionally):

I mention this less as a confession of my own incompetence than as an example of how difficult it is to say anything with genuine authority these days, at least when it comes to financial advice. Should you jump into the market now and buy low? Should you keep everything in cash for the next year or two or five? Should you invest in China or natural gas or gold? Beats me. I’ve been writing this column for about a year and a half, so I’ve done my research, talked to a bunch of investment analysts and made an effort to understand what’s going on now and where we might be headed. But really, I can’t begin to claim to know. And when I think back on the advice I’ve given and realize that my readers would have been far better off if each month I’d said, “You know what, let’s stick with Plan A and just stuff our money into a satchel and bury it beneath the swing set” — well, it makes me feel like a bit of a fraud.

The trouble is that advice is almost always overvalued. I have an unwritten blog post in me about my general loathing of advice across the board. You’re usually better off without it, and giving advice is almost never a good idea.

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