I was very sad to read that Doris Dungey, a.k.a. Tanta, one of the two bloggers at Calculated Risk, has passed away. She represented everything that’s good about blogging. Erudite, witty, and incredibly informative, she did a great job of making the complexities of the mortgage market understandable to outsiders like myself. Nobody who followed her work over the past two years has been terribly surprised by the great unraveling we’re seeing unfold.
My thoughts go out to her friends and family.
Anand Rajaraman says that any startup that’s not growing is dying, and that if a startup isn’t going to succeed, it may as well die quickly. It’s outstanding tonic for the Sequoia RIP: Good Times presentation that seems to have been absorbed by everyone in the Internet business. I would guess that in five years, very few of the startups that decided to hunker down and wait for better times will be around.
Here’s the last sentence of a very interesting blog post:
Perhaps what Alan Greenspan needed, back in the day, was a livelier Internet.
It looks like Iceland faces a grim future. I honestly can’t imagine what it must be like for a country to essentially face permanent bankruptcy.
Earlier this year, National Geographic published an article about the industrialization of Iceland. One thing Iceland has to offer is cheap hydroelectric power. This has attracted aluminum smelters, because the process has enormous energy demands. There has been some tension in Iceland about whether it’s worth it to despoil its pristine environment in order to attract more industrial development. Something tells me that collapse of Iceland’s banking industry is going to lead to the construction of a lot more aluminum smelters.
Paul Krugman has argued that bank recapitalization is the most logical response to the financial crisis, and in his column today he credits UK prime minister Gordon Brown for leading the world down that path. The Dow is up almost 600 points right now, so maybe the markets like that move.
Nouriel Roubini explains how the provision that enables the federal government to directly buy equity in banks came to be added to the bailout bill. (You have to register to read the full article.)
The short description is that Democrats in Congress added the provision during the negotiations. Liberal economists like Brad DeLong argued in favor, and Tyler Cowen explained why the plan may not work in America.
In general, these are the times when all of the economics bloggers earn their stripes. Apart from software development, I’d say that economics is perhaps the best covered topic in the blog world (celebrity gossip notwithstanding). There are brilliant bloggers representing just about every school of economic thought, and for the most part they engage with one another rationally and without malice.
Over the next few months and years, we’ll learn a lot about which of the schools offer the best insight into what’s happening right now.
Here’s more confirmation that the inability or unwillingness of people to lend money to one another is what’s driving the ongoing bad news in the financial markets. It is essentially twice as expensive for IBM to borrow money this year than it was last year:
IBM raised $4 billion today with the sale of 5 year, 10 year and 30 year bonds. I will relate the story of the bond in the 10 year sector.
I shall begin with the IBM bond which matures in 2017, which is one year shy of the bond that the company offered today. It is not exactly the same but we can compare. That bond traded one month ago at a spread of about 170 basis points to the 10 year Treasury. Yesterday, a salesman with whom I converse, (and friend of the blog) sold some to a customer of his at T+265 basis points.
Today when IBM offers the new 10 year bond the market forced that gilt edged untainted by the credit crisis technology company to pay T+388 basis points. It was over 120 basis points cheaper than a comparable bond traded yesterday. That is a sign to me that the credit markets are in the direst state and that funding is drying up for corporate America.
As the author points out, if it’s this difficult for IBM to sell debt, most other companies are effectively shut out of the credit market entirely.
This is the first installment in a new series, “evidence that we should freak out.” I’ve even created a new “financial collapse” tag for future reference.
Grain is piling up in Canadian ports because the sellers will not accept the lines of credit normally used by buyers to guarantee the purchase. FP Passport has the details.
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Credit card issuers preparing to reap
My oversimplified theory of the financial crisis is that the economy has gone in the tank because the lending practices of the credit card industry came to be accepted in the mortgage lending industry. As I’ve pointed out many times, the now-infamous negative amortization mortgage was, essentially, buying a house on a credit card. Stated income mortgages made it possible to qualify for mortgages the way you qualify for credit cards — there was no verification of actual income. And the list goes on. The housing bubble was fueled by lending people more money than they could afford to borrow so they could move into houses that they could only pay for as long as houses continued to rapidly appreciate. This basic mechanism is what made it possible to create all of the other financial instruments that led to easy profits for a time and that are crushing banks, insurance companies, and just about everyone else right now.
Joe Nocera prints an anonymous letter that indicates that these bad practices will soon come back around and ruin the credit card issuers themselves. Here’s an example he provides:
I’m not sure the focus on preventing credit card companies from sending out so many pre-approved offers is the right plan, but I think he’s correct in predicting that the banks are going to be coming back to the federal government for more bailouts when the unemployed fill up their credit cards and start filing for bankruptcy.