The End of Wall Street’s Boom

Michael Lewis:

I was 24 years old, with no experience of, or particular interest in, guessing which stocks and bonds would rise and which would fall… Believe me when I tell you that I hadn’t the first clue.

I’d never taken an accounting course, never run a business, never even had savings of my own to manage. I stumbled into a job at Salomon Brothers in 1985 and stumbled out much richer three years later, and even though I wrote a book about the experience, the whole thing still strikes me as preposterous—which is one of the reasons the money was so easy to walk away from. I figured the situation was unsustainable. Sooner rather than later, someone was going to identify me, along with a lot of people more or less like me, as a fraud…

Well worth reading.

Niall Ferguson Lecture

For a variety of reasons, including illness, I have been unable to develop this blog as I have wanted to over the past few weeks., So I apologise for the lack of activity.

I have just watched a lecture given at the London School of Economics by Professor Niall Ferguson, introducing his book The Ascent of Money, which was broadcasts as part of the BBC’s Briefings series. He ends the lecture by summarising his key themes:

1. Money isn’t metal. It isn’t paper. It is a relationship based on trust. It exists to broker the relationship between creditors and debtors.

2. The bond market can still terrify any Government. Barack Obama please take note.

3. Stockmarkets are essentially mirrors of human psychology. The fact that we can go from euphoria to depression and from greed to fear in a day is the key to bubbles and busts.

4. You can insure against risk, but you can’t insure against uncertainty. And that’s a fundamental mistake that’s been made again and again.

5. The property owning democracy skews virtually everybody’s financial strategy in the English speaking world in favour of that one-way unhedged bet on a single pretty illiquid asset.

6. The future of planet finance… depends fundamentally upon Chimerica - the relationship between China and America

Overall a very interesting lecture, and a book I may very well ask for for Chistmas.

This American Life

Two episodes of This American Life contain some insightful commentry on the crisis.

Another Frightening Show about the Economy is, as its name suggests, devoted entirely to the topic.  It’s four acts discuss the events of 18th September when the commercial paper market froze, explain credit default swaps, go into the history of how these swaps came to be unregulated, and discuss whether the $700 billion bailout plan was a good idea or not.

In A Better Mousetrap, Act 2. Financial Mousetrap (21:50) debunks the Republican Dogma that “it’s all the Democrats fault”., while Act 4. The Not-for-Profit Motive (48:50) argues that, in its response to the crisis, the US Government is acting less like a government and more like a bank, and a badly run one at that.

Irony

I just noticed that the first external link of the Wikipedia page for “Credit Derivative” is to The Lehman Brothers Guide to Exotic Credit Derivatives (PDF Link.

How to Ruin the U.S. Economy

Ben Stein on How to Ruin the U.S. Economy:

1) Have a fiscal policy that creates immense deficits in good times and bad, burdening America’s posterity with staggering burdens of repaying the debt.

Motley Fool David Gardner has a contrary view. I’m undecided on the merits of his argument, or whether they apply equally to the trade and budget deficits.

2) Eliminate regulation of Wall Street and/or fail to enforce the regulations that already exist, instead trusting Wall Street and other money managers and speculators to manage other people’s money with few or no regulations and little oversight.

No argument here.

4) Have Congress mandate that banks and other financial entities lend money to persons they know in advance to have poor credit ratings or none at all.

Did they do that?

5) Allow investment banks, insurers, and banks to bet their entire net worth and then some on the premise that borrowers known to be improvident will in fact repay those loans.

How does this differ from 2?

6) Allow the creation of large betting pools called “hedge funds” that can move markets and control the outcome of trading, thus taking a forum for savings and retirement for families and making it into a rigged casino game that exists primarily to fleece suckers like ordinary working men and women.

The hedge funds are doing rather badly at the moment, being forced to sell into weakness. I’ll be frank that I don’t know exactly how hedge funds work or what their involvement in the fiasco has been. I should make a point of finding out.

9) Scare Americans into putting up $750 billion of their hard earned money to bail out the billionaires and their friends who created the market for loans to poor credit risks (The “subprime” market) and the unbelievably large side bets on those loans, promising that such a bailout would save the retirement savings of Americans, then allow the immense hedge funds to make the market crater immediately afterwards.

I have a problem with this “bailout” rhetoric. The word is being used to describe several quite different interventions by Government. There is, for example, a world of difference between extending central bank credit facilities to cash-strapped banks, and purchacing “toxic” debt from them. The former “bails out” depositers, the latter, shareholders. Neither group are necessarily billionaires.