Stiglitz: Banking Problems Worse than in 2007
Submitted by
CalculatedRisk on Sun, 09/13/2009 - 3:06pm (319 comments)
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Yeah, but what does he know?
2nd
He has more Nobel prizes than Krugman and his most recent book has a big pig on it.
Stiglitz +1
"Too often, we confuse ends with means. ... a financial sector is a means to a more productive economy, not an end in itself."
So much money to be made transferring the same wealth from pocket to pocket, over and over, and taking a cut for yourself every time. Until there's nothing real left.
Banks for the memories
The money you took and didn't say
Ridiculous bonuses in lieu of pay
A roll in the Malibu hay?
Stiglitz sounds like he has been reading dryfly's comments over the years!
CR, I was more excited by the improved measures of wellbeing than just the financial reforms, although both are important. Did you read the wellbeing measure paper Stiglitz referenced in the FT article?
Regarding the national service obligation thing:
Don't forget that there are still more 'security contractors' in Iraq/Afghanistan than there are US military. The bill isn't being charged to DoD for the most part, but hidden in State, DHS, intelligence, and DEA budgets, among others. This is already a rogue operation.
I was drafted in the Vietnam era, but enlisted in the USAF (4 yrs instead of 2) before the reporting date (possible credentials for my opinion).
Whether it's military service, foreign assistence, or domestic assignments (including WPA like stuff), I firmly believe in the value of being in an organized, well-trained unit doing national work. I would forbid 'security contractors', foreign or domestic assigned. This will bite us in the butt someday. I also distrust a purely professional military in the enlisted ranks - it needs leavening with non-lifers. Training requirements are higher today because of technology, so the military durations for national service in the military probably need to be at least 3 years - but the educational compensation post-service should allow for no-debt higher education.
Overseas gold markets are open and #79 is starting to climb again.
Bid 1007.40 Ask 1008.40
He's a fine man. He is.
patientrenter, yes, I read the whole article - and I recommend it.
best wishes
I firmly believe in the value of being in an organized, well-trained unit doing national work
Like the RNC?
One of the things everyone fears about alternative measures of wellbeing is the potential for subjective judgments and bias and mischief. For example, by weighting income equality very heavily, you could essentially turn maximization of the measure of wellbeing into a partisan political campaign. By weighting regulatory restrictions as a large negative, you could do the same in the other direction.
But that doesn't mean that sensible middle of the road people can't agree on major improvements in our measures, and that could lead to major changes for the better in our society. To get a good debate and outcome, you almost need to exclude the most extreme 20% on each side of the one-dimensional political divide here in the US. They add heat, not light, and tackling difficult subjective measures like this needs a balanced approach without the partisan noise.
So apparently Obama is going to use his speech tomorrow to call for more banking overhauls....should be an interesting Monday...what do you guys think?
The ft commentary echos what Robert Kennedy said about GNP years ago.
Too much and too long, we seem to have surrendered community excellence and community values in the mere accumulation of material things. Our gross national product ... if we should judge America by that - counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for those who break them. It counts the destruction of our redwoods and the loss of our natural wonder in chaotic sprawl. It counts napalm and the cost of a nuclear warhead, and armored cars for police who fight riots in our streets. It counts Whitman's rifle and Speck's knife, and the television programs which glorify violence in order to sell toys to our children.
"Yet the gross national product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages; the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile. And it tells us everything about America except why we are proud that we are Americans.
I wouldn't have known about this quote unless someone else here posted it. Is my reading comprehension off?
Vonbek,
Well financial regulations is something on the plate of Congress, and in fact they might get that done before health care and cap and trade. I'm not even sure if all of the authorizations for next year have passed either...
edittoadd:
He's just going to be saying the same stuff he did when he unveiled his ideas for financial regulation in June (?). Just now he'll be saying it in prime time so more folk will pay attention.
broward: Like the RNC?
No, I didn't mean the Brownshirts (paramilitary) or the SS.
Whether its Army/Marines or WPA-II, the service should be disciplined (with DIs for trainers) - not some ragtag operation.
Me thinks you understood that the RNC is a fine example of national disservice.
Here's that Financial Times/Stiglitz link. . .
FT.com / Comment / Opinion - Towards a better measure of well-being
I fully expect that our bubble economy can be reignited to make the USA a boomtown, once again...
YouTube - The Boomtown Rats - I Don't Like Mondays: Video
Just find the Stiglitz commentary combined with the President making a case for a banking overhaul (and why didn't we do this before the great money give away)...a little interesting. It's like the banking industry has been on a river headed for a waterfall...now that the rapids are approaching and we hear the rushing of water plunging downwards, we want to try to turn the boat around. I don't know...need to catch up on my weekend reading, enjoyed the football honestly, didn't pay much attention to anything else.
Me thinks you understood that the RNC is a fine example of national disservice.
If Dawg had made your comment, I've have used the DNC.
Banking has to be turned into a public service. At least the part where it collects deposits. This has turned into outright theft, the multiple ways of stealing the deposits by conceiving and trading back and forth "financial innovation" until deposits are put into risk by the slow erosion of commissions and losses.
Swiss style military service, or bedpan service. Delay it due to college or athletics, and owe more time.
Simple and sweet- everybody does it, no favorable assignments.
Combat still voluntary.
This would cure the Halliburton/Blackrock disease.
If we left the stan, and the sandbox, we could not downsize our military.
There is no peace dividend.
Stiglitz is right, but we need a collapse to make serious changes that are necessary.
Only more pain will bring the determination necessary to keep the pols in forward motion.
So pain it will be.
Someday this war's gonna end...
AMF,
JJ Evans for Federal Reserve Chair!
Bingo ! If more Americans took a look at U.S. National Debt Clock : Real Time
the revolution would probably be televised !
Enjoy Bill Laggner (Audio).
Bill Laggner
Dyno-Mite!
broward (homepage, profile) wrote on Sun, 9/13/2009 - 4:34 pm
reply ignore user
Me thinks you understood that the RNC is a fine example of national disservice.
If Dawg had made your comment, I've have used the DNC.
But I subscribe to the immortal words of Will Rogers; "I belong to no organized party. I am a Democrat." I'd have used ACORN.
One of the things everyone fears about alternative measures of wellbeing is the potential for subjective judgments and bias and mischief.
Doesn't hedonics in the current CPI do that already?
"Reluctant." That is so polite. One need only look at the people Obama has appointed to see where he stands on this issue.
Grrrrreatttt, Juvie.
Fess up Rob, you have used ACORN. I always thought there was a curious plethora of underage-looking El Salvadorians living in Section 8 housing around Ventura County... you're sure your not Rob "Heff" Dawg, El Jefe, de buenoventura?
There's no accounting for personal or national debt load in the GDP?
[band music] : saludo al jefe
proceeded, of course by 'ruffles and florishes'.
There were a bunch of ACORN people who falsely signed up
voters in S. Fla. Acorn found out and turned them in. They got
arrested.
Acorn haters ignore the fact that Acorn turned them in. Oh, yeah,
shouldn't have hired them in the first place. apparently the people
had no political agenda aside from getting money that they haven't
earned.
I don't imagine all together it was enough to appease a banker
for a day.
Wouldn't it be El Dawgadorians?
el jefe sounds so much better than 'dear leader', 'der fuhrer', or 'uncle joe'.
JimPortlandOR, sounds like your experience with respect to the draft is exactly the same as my own. Four in the states, vs. two in the jungle. I sat on the DEW line, waiting for Russki ICBM's.
I'd have used ACORN.
ACORN lacks the credibility of the RNC and DNC.
I prefer la Jefa, myself.
barfly: it was 1965 and well known that going to nam was a meat grinder. so I admit I choose an easier course that held promise of a life lasting more than a year.
I ended up as a Technical Instructor in USAF after basic training and made E-5 in 3.5 years. (harrah!).
It was still a life transforming experience, in the best way, I think.
The question then is who is going to finance the U.S. government,” Stiglitz said.
and wants to take you higher YouTube - 
$59 Trillion in unfunded liabilities U.S. National Debt Clock : Real Time
LL: I KNEW you'd say that, Liz. lol
What can't be paid back, won't be paid back.
Didja know I'd say that too?
I was inducted in spring, 1968, the height of the Tet offensive. Spent a year in tech school in Biloxi, then a year-and-a-half each in central Montana, and NoCal. Wouldn't have traded the experience for anything.
nah, Liz. but that is the most insightful, original, and breakthroughish economic observation of the day (hehehe)
Liz advocating radical default.
tsk tsk.
"What can't be paid back, won't be paid back."
And a nice big chunk of what can be paid back by borrowers will instead be paid back by future taxpayers.
Since we're exploring how predictable we are, I thought I'd add that, LL
barfly: started out at the (now defunct) Amarillo AFB, then transferred to Keesler. The tumbleweeds were much better than MS cockroaches.
They'll probably hear about the debt ceiling being raised and yawn.
Wouldn't have traded the experience for anything.
You must have done heavy drinking in Biloxi.
I didn't say should. I said can't.
That includes future taxpayers, except that maybe
they just won't.
broward: Biloxi was pretty sleepy in mid-60's, except for the gangter-controlled bars..
one night a friend and I went into a bar on the beachfront highway from Biloxi to Gulfport at about 11 pm, and the 'greeter' met us with a handgun and made it clear that yankees were not welcome.
after that, the NCO club was cheaper and safer.
maybe you were an instructor of mine at Keesler. I remember they still had "Colored Only" signs on the bathrooms and drinking fountains in town.
You know before these powerful bankers can be brought down, they
have to be made less powerful. Rather like the tobacco lobby. They
were immune in their day. Here anyway, and then the gradually lost
it, so now they are busily addicting the rest of the world.
Unfortunately, this means we have to take it on the chin too.
Is that how you got in trouble in Coconut Grove,
Broward?
No pooping or water drinking for white people!!
Well, the draft summary paper referenced by Stiglitz in his FT article is 92 pages, and I am finding it hard to absorb completely in 20 minutes. I may need to actually read it slowly. But it does seem to have good ideas. Maybe a little utopian, but lots of the discussions that we've had about what is not captured or is mis-captured in GDP is in there, with an intelligent discussion. Broward would appreciate it, between pool and other games
"...waiting for Russki ICBM's."
I knew someone on the other side who was waiting to chuck 'em, though perhaps not at the same time you were on the DEW line.
Stiglitz is asking,essentially, what wealth is for. If people can't agree about why they would rather be alive than dead, other than the brute existential reason (bad breath is better than no breath) then they will never agree about what wealth is for other than transitory satisfaction and alienated pleasure. The society they inhabit, or sometimes infest, will also be transitory and alienated.
By the way, in reading John Keagan's book The Face of War, I came across the well known sentiment of the mother of a prospective British soldier: I would rather bury you than see you in a red coat.
"I didn't say should. I said can't."
I wasn't trying to put words in your mouth, LL. I wasn't even disagreeing with what you said. I was just adding something (very predictable) of my own to what you said.
Liz, coming from the multi-cultural west coast, it was a shocker, I can tell you.
Sorry, tone is sometimes hard to judge.
yankees were not welcome.
I had a similar experience in Huntsville, AL, at the Plush Horse.
I avoided macing but my two pals wanted to go back and shoot the place up.
Paper cited in the NYT today:
SSRN-Enablers of Exuberance: Legal Acts and Omissions that Facilitated the Global Financial Crisis by Jennifer Taub
Enablers of Exuberance: Legal Acts and Omissions that Facilitated the Global Financial Crisis(69 pages)
Jennifer S. Taub
University of Massachusetts at Amherst
Is that how you got in trouble in Coconut Grove,Broward?
Definitely drank too much at the Coconut Grove but it was the only place that felt I should be punished for being an old white guy.
Here's a novel idea. This guy can't get the price he wants for his house the traditional way so instead he decides to raffle it off $50/ticket. If he doesn't sell the minimum number of tickets he'll refund the money less a 2% handling fee.
$1.6 Million L.I. Home Raffled Off For $50 - wcbstv.com
It has the aesthetic appeal of a mausoleum - but I guess I just don't have good taste....
Edit:
Adding the link to the raffle website for anyone who would like to take a gander...
Purchase a portrait and get a free raffle ticket that could win you the home in the portrait
broward (homepage, profile) wrote on Sun, 9/13/2009 - 4:47 pm
I'd have used ACORN.
ACORN lacks the credibility of the RNC and DNC.
Speak for yourself.
barfly: I remember they still had "Colored Only" signs on the bathrooms and drinking fountains in town.
I was strongly warned not to stray off the coast highway in MS at the pain of torture, dismemberment and death.
They never got over Eisenhower sending in the 101 Airbourne (as I recall) to Little Rock
When I was 14, in Baltimore, we went into a restaurant and all
the tables said reserved. We thought there was a big party or
something and went to leave.
Oh, no, they said, and swept the sign off the table. Later, we found
out that the freedom riders were supposed to come and they didn't
want to seat any black people there.
The public swimming pool and amusement parks were all white.
At 15 or 16, my Catholic high school first got some black kids. We
went to the debate club and a black girl attended. I drove them
bank in my mom's car, and a white girl got out first from the back,
so the black girl was sitting by herself in the backseat. We got some
really hard stares from black people. She laughed and said, ooh,
I know what they are thinking!
jim - I lived off-base, about a half block from the beach in a gingerbread house that was built during the Civil War with my brand-new, and newly pregnant, wife. We never had any problems. Our daughter was born at the base hospital, free of charge, of course. Good times!
Further research on the $1.6 million house shows that it last sold in 2005 for $566,500. Me thinks the raffle meister has used the old home as ATM and is HELOC'd to the hilt...
Sale History
The latest assessment has the house valued at $778,000
Market Values
Oh and the lucky raffle winner gets a 2007 Mercedes too....
The sad part is he has sold $500,000 worth of raffle tickets so far.
This is unusual, but it isn't new.
It makes more sense than buying a lottery ticket. Chances of winning are much
higher. If you like the house.
Plenty of prejudice when I was growing up in California in the '60s and '70s, just none of it de jure. I grew up around service towns, so there wasn't too much shit.
But towns like Napa, yeah, "Gateway to the Wine Country -- " that's where people went when they "didn't want to live around no niggers." And they'd tell you so straight out.
Post-college in the 70s I worked civil service in Solano County, next county over from Napa. One of my co-workers was an athletic black man, an expert baseball player (minor league and Mexican ball) and golfer. He liked to go over to Silverado Country Club and play the course once in a while because 1) it was the best one in the area, 2) it pissed off rich white bigots to see him there, and 3) he played better than nearly any them, which really pissed them off.
That was then, this is now. But does then really every go away?
I wonder if he's going for a short sale!
"Even the most intelligent, experienced individuals using complex mathematical models could not accurately price them or understand their risk because there was not enough performance history, transparency as to the amounts outstanding and they were incredibly interdependent. Indeed some estimated that it would take many days for a powerful computer to calculate the price of some collateralized debt obligations."
From the abstract of that paper referenced above by SNAFU.
There may be other points in that paper that are good, but when I see the argument above, I instantly know this person has only a superficial understanding of what happened.
To see why all those mathematical models merely formed sand around the ostrich's head, just take a look at this chart from Robert Shiller:
http://graphics8.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif.
Even lay people with any common sense could see that home prices were outside any historical norm, and the people buying homes were mostly doing so at the inflated prices because they were relying on finding a greater fool down the road. And professionals knew that they could either play the game and get paid, or.... not. The complexity of the instruments and models confused only those way down the chain who didn't have the capacity to understand what was really going on, and didn't have much authority. For those at the top, the complexity allowed the gravy train to continue with deniability.
stiglitz is spot on. I guess he didn;t like the meal at the WH as much as Krugman. Ironic that it is stiglitz who is preserving some semblence of respect for Columbia Business School while Glenn Hubbard defecates all over himself with his unquivical suppor for the Fed and arguably on e of the most lightweight editorials the WSJ ever published on the 5% mortgage program for everyone. HUbbard should be sent packing.
amen
So whose this Stiglitz guy?
I like what he says. Does he have credibility / position of influence?
I doubt it - he's too rational.
barfly: those were the days.....
I also recall watching the 1968 Dem Nat. convention in our NCO quarters day room when Daley's cops in Chicago were kicking sh*t out of the war protestors. It was a very silent group, since it was about half southerners wanting Daley to kill them and lefty Dems (like myself), outraged at the cop rioting.
I doubt today if any US military groups (with no Army draft-avoiders) are as split as they were then. To avoid conflicts, it just wasn't discussed.
"Stiglitz said the U.S. government is wary of challenging the financial industry because it is politically difficult..."
Oh, gee, I wonder why that is...
From OpenSecrets.org, Goldman Sachs, Citigroup, JP Morgan, UBS, and Morgan Stanley are all featured in the top 20 contributors to BO's presidential campaign. (Goldman Sachs is #2 behind the University of California).
When this nation continues to go down in flames, at least we will know who to blame: ourselves.
Yes we can.
OT : But here is a good example of how wrong everything is soon going to go : "Steel Prices Drop, Reversing Course in Sign Mills Ramped Up Too Quickly "
Steel Prices Drop, Reversing Course in Sign Mills Ramped Up Too Quickly - WSJ.com
Green shoots, withering, right before your very eyes.
patientrenter@
It is ironic that so many people bought into the market. If you consider that even if the avg hold period is 5-7 yrs, it does make one scratch their head wondeirng if all these people actually believed the garbage they were buying was really worth it? Sadly, they must have.Now they have a deflated assets - strike that deflating per Whitney on CNBS another 25% down at least - with an inflated tax basis. Talk about negative convexity. At least they had somethign in common with the investment banks
Hmm, I'll take 2 ton blocks to add to the
and 
stash.
They can sit on the front lawn. I'll say they are a sculpture.
M
stiglitz has a nobel in econ - prof at columbia b school
Liz: paint them green and surround with green shoots.
People used to ask me if there we getting cheated or not. Up to about 2005, I could
check the tax appraisals, do some estimating and give them a reasonable guess.
After that, I told them I used to do this, but now they were on their own.
I stopped believing my lying eyes for a while, it was just so incredible.
With Florida rain of late, they will be covered with green shoots in no time at all.
I grew up as an army brat in the 50s. Fully intigrated housing and schools. My parents had black friends over for dinner. I though this was normal.
When the 60s riots happened my parents had to explain discrimination to me. I did not have a clue at 14 that segrigation existed.
@M (profile) wrote on Sun, 9/13/2009 - 5:23 pm
So whose this Stiglitz guy?
I like what he says. Does he have credibility / position of influence?
I doubt it - he's too rational.
Yeah right...he's the only credible economist who said
Let banks fail, says Nobel economist Joseph Stiglitz
Let banks fail, says Nobel economist Joseph Stiglitz - Telegraph
The Government should allow every distressed bank to go bankrupt and set up a fresh banking system under temporary state control rather than cripple the country by propping up a corrupt edifice, according to Joseph Stiglitz, the Nobel Prize-winning economist.
Obama the messiah could have done the “right” thing in the first place and let the banks and insurance companies fail. But he and his lackey administration continued to prop up the 19 too greedy to fail banks in an attempt to try and keep the gigantic ponzi scheme US economy going rather than investing the $12 Trillion in infrastructure, education, health care, manufacturing and REAL wealth creating endeavors for Main St economic recovery !
NET NET: America is looking FUBAR and most Americans should be recalibrating their dreams
Stiglitz seems pissed that this administration is ignoring him as much as the last one did. There's still bad blood between him and Larry and Timmaay over that unfortunate misunderstanding about the Treasury / IMF response to the Asia crisis ten years ago. Joe was right. Larry was wrong. Joe got fired. Larry was, and now again is, in the administration.
Keep an eye on where Joe gets invited and who quotes him.
C
it appears Nikki isn't too happy about all this talk of a trade war
liz, choose a high place, since climate change is coming to a place near you. underwater glod is hard to bring to the surface. bye bye FL....
Come back Nikkei, come back!
Nikkei, come home! (I loved collie stories as a kid).
China will lose any trade war. I can't say I care too much.
I theoretically should care, but I don't.
Was at Ofc Depot. They make you walk thru an office supply
trinket aisle. Everything I picked up except one was made in
China.
Our house is on an 8 inch hill (for real). Will that help?
How much is it down?
for this year, liz. maybe not for five though
Liz, why would China lose a trade war?
We get most of our clothes, shoes, kitchen ware, TVs, computer games etc etc from China.
Right. So we can keep more stuff out than them. Or, raise more tariffs.
We got enough of that stuff anyway, except shoes.
And they can make shoes in Brazil. Brazillians are nice people.
lawyerliz
please send some of that rain north,we could use it. please.
friend of my daughter is trying to buy house,he wants it to live in,not as investment,or to flip, just to live in for the rest of his life. he seems to be having trouble since he wants to put a large down payment on the house,but people are trying get him to get larger more expensive house. he is getting p.o.with said idiots. is this the new norm or what? he's in orlando area.
"Everything I picked up except one was made in
China. "
You found one?
Just as a hobby, my wife is looking for an insulated coffee mug for the car that isn't made in China or a third world country. She's sworn she'll buy one as soon as she finds it, no matter the cost.
It's been a year. I don't think she's found one that wasn't made in China, even including the rest of the third world.
LL,
I'm looking at delayed quotes, but -1.4%
the problem with a trade war is that it could easily degenerate into a hot military and financial war. Not even the pacific fleet is safe from all those new quiet Chinese subs.
Aircraft carriers will be the new targets, like battleships at Pearl.
Did you all notice that a Chinese sub surfaced in the middle of of a US carrier battle group within the last few weeks?
If UE rate of 10+% becomes chronic. then the political and social landscape will change in ways we have not experienced. One big effect will be an enormous increase in the unaccounted for cash economy. In some countries where the unemployment rate is high, it is estimated that half+ money in circulation is 'black' . No receipts, no taxes, no record.
bummer. RIP Jim Carroll
YouTube - Jim Carroll Band - Catholic Boy
.
The Bank of Sweden sincerely apologizes for ever giving this leftist fanatic credibility and vows to return to its practice of awarding the phony Nobel Economics Prize only to captured Kool-aid friendly Harvard/MIT/Chicago ostriches.
There are some great deals in Orlando.
If he wants to live in Kissimee, which I don't recommend, I can give you
ummm, 17 comps where the values have dropped by roughly 250k.
Prices 68 to high of 170k.
There is no normal.
Bid low!
Gabyjan,
Great article in the WaPo this weekend about bad realtors (99.9% of them IMO). So your daughters friend is not alone.
I hate realtors and the NAR.
I need to read up on alternatives to realtors when buying a house like redfin.
Nikki is -1.64%. Nikkei.com is about 5 minutes from having to rescale the chart... Calling axis construction, we're gonna need the bottom rungs put back in to 10k, thanks Tomo.
C
Yep, real high in MiamiDade too. I've discussed it before.
Bob Dobbs: google for a german/dutch/danish/swedish insulated mug. probably have to buy it via the net.
I just bought a German (Krups) toaster/convection oven via Amazon. Amazing technology and design.
NYC legend, multi-talented. Peace.
I'd like a decent coffee pot. None of them seem to last.
Non chinese.
Any suggestions?
Stiglitz seems pissed that this administration is ignoring him as much as the last one did. There's still bad blood between him and Larry and Timmaay over that unfortunate misunderstanding about the Treasury / IMF response to the Asia crisis ten years ago. Joe was right. Larry was wrong.
Counterpointer,
Do you have a link or a reference? I don't remember that controversy.
It appears that all of the happy talk might not be having the intended effect. Google fills in the most common search terms starting with what you are typing.
Put in "Will the US"
Google's list of most common choices to complete that phrase is:
"Will the US economy collapse
Will the US collapse
Will the US economy recover
Will the US go bankrupt
Will the US dollar collapse
Will the US go into a depression
Will the USA collapse
Will the US survive
Will the US fall
Will the US recover"
Sounds like a pretty worried general audience on the web. Not even anything about foreign policy or wars.
Here's that article I mentioned, shows how evil realtors are.
The 'Buyer's Market': A Tale of Caution - washingtonpost.com
opening TOS to watch this action in Japan.
Liz, trade war with our biggest bag holder isn't what I would call a particularly WISE strategic move on our part.
Stiglitz is a first-rate economist that apparently is more of a rosbif eater, than a roast beef eater... if you know what I mean~
LawyerLiz,
What do you think of the West Coast of FLA? Any towns you like or dislike? Better/worse than the east coast?
"Everything I picked up except one was made in China."
Try to find drinking straws or smoked oysters not from China.
The Chinese plastic straws leak toxins and the Chinese oysters are farm grown in human excrement.
Yeah, I know, Rockster. I just can't bring myself to care.
I'd like to buy from our old trading partners. What are those people
doing?
"I'd like to buy from our old trading partners. What are those people
doing?"
The Japanese? they are still making cars and, right now, apparently selling stocks.
blessed be the sh!tstirrers, for verily they shall be a thorn in everyones' side...
blasted chinese... we would be able to make all those toxic products here if it wasn't for those pesky environmentalist liberals!
I know very little of the West Coast, except I think South Fla
will eventually recover, but the West Coast mostly has no reason
to recover. My son is in Tampa. Comrad Kristina is over there,
and so is the former poster, Cobra Driver. He posts with Dawg.
Did you all notice that a Chinese sub surfaced in the middle of of a US carrier battle group within the last few weeks?
Jim, have you got a link? All I could find is this article from 2007, which is admittedly a pretty good article.
The uninvited guest: Chinese sub pops up in middle of U.S. Navy exercise, leaving military chiefs red-faced | Mail Online
Yeah. Is there any philosophical reason why we shouldn't add a pollution tariff
on Chinese goods?
The "even the smartest people" argument really bugs me because it feeds the idea that this was some big accident.
Cheap tires and chickens does not a trade war make.
Book Tips:
"A Year Without "Made in China""
"The Man Who Loved China"
First salvo.
yes. you would be interfering with adam smith's invisible hands.
The "even the smartest people" argument really bugs me because it feeds the idea that this was some big accident.
It also feeds the idea that these were the smartest people.
A Harvard MBA does not make one smart.
liz rockyr
its getting to be like" oh well whatever"
no one listens lemmings racing for the dam clift.
Surprise News:
AP story - Car dealers fight slow sales after end of Clunkers
It must be a slow news day.
We could stir things by making biggish stickers and sticking them
on cardboard boxes, saying "Made in China" instead of the eensy weensy
printing on the bottom Wonder if it would make a difference?
jim, I said 1966 above, but I meant 1968. We definitely crossed paths at Keesler. I didn't have a TV then, living off-base, so I didn't even know it happened (Chicago) until much later. Odd to think of that now, as it is such a big part of our national psyche.
blasted chinese... we would be able to make all those toxic products here if it wasn't for those pesky environmentalist liberals!
yeah. Between them and those greedy Union jerks, we'd still be makin' s#!t right here in the good ol' USA!
"but the West Coast mostly has no reason to recover."
That's what I was afraid of, thanks. I guess the attempts at growing some tech companies in Tampa/Saint Pete didn't work out. I do have fond memories of vacationing somewhere near Clearwater and drinking Tequila Sunsets on the beach with a live band playing. Here in California, there is almost no place (other than a few private clubs) where you can get drinks delivered on the sand.
Well, Tampa might be ok.
Eventually.
Human beings interfere with Adam Smith's "invisible hand". If we can extract humans from economics, the "invisible hand" would actually work
Agronox - erm, links are behind my blinks... From memory Mallaby covers the Stiglitz vs IMF / Rogoff / Treasury / everyone else reasonably well in The World's Banker, about Jim Wolfensohn's tenure at the World Bank. The main flashpoint was policy on Indonesia. Stiglitz got given a lot of rope by Wolfensohn (until he wasn't), and was sharply critical of the Treasury/IMF approach, which in itself made sense according to the textbooks and hoary old verities, but which regrettably were a little short on country specifics, political economy, clientelist negotiation, regional and international fallout, and poverty impact of the recipe. Quite a screw-up. Plunged 15m Indonesian below the poverty line in a couple of months, sank the government, ruined the reputation of the IMF in Asia (possibly for ever).
About the time I was working in Indonesia the joke was something like "welcome to Jakarta, your President this week is..."
C
"Keep an eye on where Joe gets invited and who quotes him."
I like the way you think! But we can't forget that this can be misdirection too...
Yep, should be an interesting speech tomorrow.
barfly
you would have thought the union would not have let jobs be outsourced, you would have thought gov would not have let jobs be outsourced. you would have thought congress would have not let jobs be outsourced
what happened?
price, service, quality, pick any two.
What rich geek said that?
Jobs?
"The "even the smartest people" argument really bugs me because it feeds the idea that this was some big accident."
Bond Girl: have you articulated this in a larger post elsewhere?
price, service, quality, pick any two.
I always heard it as:
looks, brains, sanity
As applied to whom?
No way I'd ever drive on foreign tires -- I'm stickin' with my Michelins, buddy!
A friend is a world-class caver and he's been under it all, all over...
He's been to China maybe 5 times, and the Chinese Government pays his way, because most every cave comes equipped with flowing water, and they are looking for sources every which they can.
gabyjan, business trumped all three. It was death by a thousand cuts.
It really is a bizarre way of deflecting blame. We aren't talking about celestial phenomena here. Someone structured these things, and they knew what they had.
"Bob Dobbs: google for a german/dutch/danish/swedish insulated mug. probably have to buy it via the net."
I'll take a look. But more and more of the fine German/European cookware/utensil marques are moving production to China. We have a top-quality kitchen store near us, and we've seen the "Made in China" tag appear on more and more venerable mittel-European brands. Including their insulated mugs.
Even Zyllis, maker of cool plastic kitchen gadgets from Switzerland, has moved production to China.
Did score a plastic kitchen colander made in Sweden last month. That was a shock.
okay so we got tbtf and we also got to big to listen or tbtl
U.S. stock futures are down a bit. I'm sure Obama speech on how to improve the banking system will cause bank stocks to snap back.
Stiggy might as well have come from Mars.
Although being right in the past does not guarantee future results, being utterly wrong in the past should force you to the back of the line, until someone who has been generally right in the past screws up. But Dick Fuld the capitalist all-star is "worth" at least 80 times what Stiglitz the academic by the impeccable logic of the invisible hand.
I dig canned mandarin oranges, and most every last can comes from China now, except for the Spanish ones @ Trader Joe's...
51 people expired from dodgy Chinese toothpaste in Panama a few years back, like i'm gonna trust em' with food?
Are you referring to my Baseline post?
muling a trade war... tires, chickens... and CARS.
Predicting a crisis is different from predicting how the crisis will unfold. Lots of people understood that the imbalances were unsustainable; nobody I know of predicted the way things transmitted from one part of the economy to another. In fact, most stories trying to explain the crisis get the facts wrong. We will never be able to prevent a crisis that we don't understand.
"U.S. stock futures are down a bit. I'm sure Obama speech on how to improve the banking system will cause bank stocks to snap back."
ha! yeah. if you think US stocks are going down on the day the supreme leader makes an address to The Street, i have a bridge in Alaska to sell you.
BG: No, but I'll go check it out if it is.
Yes. It is one thing to say you knew there was a bubble and another to quantify how that will affect an investment. But that argument only goes so far here. You have what were perceived to be top credits now completely worthless. That's not complexity; that's idiocy.
Book Tip:
"My Adventures With Your Money"
BG: I don't see a way to find it easily. Do you have a link?
" nobody I know of predicted the way things transmitted from one part of the economy to another"
There was a whole cottage industry that studied "contagion", and which seemed to have ramped way up in the years that led to 2007. Great use of grant money that was, eh?
An Economist who says prices and trends are predictable is stupider than one who admits they can't be.
"I'd like a decent coffee pot."
I have Krups.
let me ask a question. could obama have said "no way am i going to president with this going on? i resign as of now! "
gabyjan, I believe it all started when Nixon went to China, and opened trade relations in a big way. That was followed by unfavorable rulings against labor by the NLRB. Of course, big business lobbying Congress and the formation of APEC didn't help. Basically, we gave away the store.
It's more of a Trait War, than anything else.
Imagine if you threatened to kneecap a loan shark that you owed boucoup bux to, if he didn't stop lending you money?
Rajesh,
Did you see the comment I posted in regard to your question about whether we'll see Geithner's signature on banknotes?
BFF #92 Lacy, WA thread @ 9:59 pm EDT, turn south at the pig ...
The solution to the growth problem is for housing to fully crater. When people have more money to spend on things other than housing, they will begin to feel secure and consume. With wages decreasing, the only way out of this mess is for housing costs to fall MUCH, MUCH farther than they have already.
Health care costs, now that's another problem altogether.
bloomie and reuters are attributing the carnage in Japan to the Yen. as if this recent currency move happened over the weekend.
Remember the annual votes in Congress for Most Favored Nation trading status; it like the Super Bowl for business lobbyists.
Then Bill Clinton ruined the party by making the trading status permanent.
could obama have said "no way am i going to president with this going on? i resign as of now! "
"Is there any philosophical reason why we shouldn't add a pollution tariff on Chinese goods?"
Just as soon as the rest of the world adds a financial pollution tariff on US goods and services.
Art,
That's not the only way out. Anything which is a fairly substantial part of spending could drop. That includes gas and medical as well as housing.
I did a calculation a year ago when gas prices were dropping. The savings per year to the whole US was huge, and most of the loss in income went overseas. It was a bigger net benefit than home prices dropping.
"The "even the smartest people" argument really bugs me because it feeds the idea that this was some big accident."
If you don't behave, we'll have to give you stronger meds.
It really wasn't on this topic. Are you the same Uncle Billy that frequently comments on Baseline?
BG: Yes
Are you the "Uncle Bill Mental GIDGET" who comments in the LA TImes blogs?
Talk about incentives
"We will never be able to prevent a crisis that we don't understand."
Understanding all the downstream details isn't necessary to understand the nature and magnitude of the problem, and the ways to avoid it. If you have loans of 5 trillion dollars made against RE that is only worth 2 or 3 trillion dollars at best when comparing to long term averages, and underwriting standards etc, then any amount of remixing the payment stream is not going to make them worth more than 2 or 3 trillion dollars.
Samdog: Probably... but I don't think I've done that recently (like in the last year)
"An Economist who says prices and trends are predictable is stupider than one who admits they can't be."
Well, then maybe only non-economists can figure out the likely future price implications of something like this:
http://graphics8.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif
at what time will the messiah ascend the mount tomorrow?
OK, I don't remember how long ago I saw that, but I was thinking "this has got to be the same guy" ....
I work in the area and was told to expect difficulty entering the area between 8am and 1pm. I'd guess he begins speaking right around 9:30am so his handlers can judge the impact of his speech based on the number of Dow points...
The bad mortgages were a problem but by themselves they were manageable. However, the losses in this one sector exposed the shell games asset-backed security issuers and rating agencies played. It wasn't just MBS that imploded, it was also Credit-card back securities, non-mortgage CDOs, covered bonds, the list of different types of paper goes on and on. All of it somehow rated AAA, higher than most real world corporations.
Samdog: I found it. Someone had remarked "Greed got us into this and greed will get us out." I got pissy and wrote "Greed got us into this and greed is getting us into something worse"
Yeah but where's your trusty sidekick Kona?
"I'd guess he begins speaking right around 9:30am so his handlers can judge the impact of his speech based on the number of Dow points..."
damnit. stocks will rally no matter what. i can't imagine this administration suffering a dump after delivering a speech.
If you predict that too much speculative investment in real estate will be made, resulting in a nasty bubble, and people take listen so that there is only moderate investment, were you right?
"The bad mortgages were a problem but by themselves they were manageable."
I. Strongly. Disagree.
I feel sure that I can disprove what you just said, unless by "manageable" you mean we can take our losses and move on. No matter how bad any financial hit is, we will eventually get past it. That was even true for the GD. So just about any conceivable outcome is manageable in that sense. But we had a massive reversion to the mean coming in home prices. Combine that with home loans that were very high CLTV (not to mention the other underwriting problems), and a few trillions of losses on home loans was coming, and a crash in perceived household wealth, a drop in consumption, a big drop in home building....
The US government will finance the US government, silly.
Market participants understood how those deals work, however, and that ratings on complex transactions are effectively negotiated.
"If you point out that too much speculative investment in real estate is being made, and is inflating a nasty bubble, and people listen so that there is only moderate investment, did you limit the bubble and the damage it does?"
Greed over comes common sense.
i can't imagine this administration suffering a dump after delivering a speech.
I'm not so sure; if the speech proposes new laws or regulations it wouldn't surprised me if the banks started shorting the S&P immediately thereafter, as a sort of "Hands off, Obama!" warning shot across the bow.
Of course, the more likely contents of the speech (i.e. pablum) might very well sky the markets, who knows?
"Perceived" being the operative term. A paper loss of illusory wealth doesn't proximately cause a building to rot. You can always reorganize a financial system. Regaining credit with trading partners does not come from printing currency to prop asset prices.
Yogi: We're both rare lately... I think he hangs out on Yves' blog a lot.
It doesn't matter what the administration proposes - as long as TBTF exists the banks cannot be punished in a meaningful way. They won't do anything that interferes with the banks' ability to make money.
Being regulated is just another cost of doing business.
"did you limit the bubble and the damage it does?"
Yes, but the current asset-holders, profiteers, and their cheerleaders will say "you fool there was no bubble that you predicted."
Catch 22, the best there is.
A recent article in Der Spiegel hinted at what is going on. It reported that the tens of trillions of dollars in credit default swaps which were at the heart of the financial defibrillation have increasingly been concentrated in the past months at J.P. Morgan itself which presently, the magazine reported, held over $80 TRILLION in such instruments. Why would J.P. Morgan assume such grotesque exposure?
Daily Kos: The Insolvency of the U.S. Banking System
I don't know what the President's speech will be about. It could be a political speech primarily, designed to harvest maximum benefit for the President and his party from the crisis management that avoided a total financial crash, and the recovery in the markets and the GDP numbers (with a nod to the continuing problem of UE). Or it could be a speech to introduce the new directions necessary after dealing with the immediate crisis, like changing the role of banks etc.
I'd make a bet it's about harvesting the maximum political gain, but I hope it's about the new directions. Given what his team has done, and his continued support for them, it's unlikely that the President will push hard for fundamental financial reform.
I've watched a lot of financial bubbles small and large, and read of countless others...
But they were all based upon items that really didn't matter in the scheme of things, as opposed to homes, which is the most expensive thing 99.99% of us will buy in our lifetimes, and usually bubbles are dead and forgotten in short measure, but this one has a half-life of everlasting financial radiation that's going to go on for a long time~
Why would J.P. Morgan assume such grotesque exposure?
Because Unca Sam is backstopping them?
Uncle Billy Mental Widget (homepage, profile) wrote on Sun, 9/13/2009 - 9:43 pm
Samdog: I found it. Someone had remarked "Greed got us into this and greed will get us out." I got pissy and wrote "Greed got us into this and greed is getting us into something worse"
Yes, and I might add that was quite a brilliant comeback ...
I think Dailywhateveritis got that number wrong, but it did look nice
" and a few trillions of losses on home loans was coming," [puts pinkie to corner of mouth]
A few trillions really are no big deal.
There is $2 quadrillion (thousand trillion) outstanding in derivative bets on paper.
Anyone have a link to that?
Please be aware that JPM is taking on as much risk as the US Government.
Share the gain, share the pain.
"this one has a half-life of everlasting financial radiation that's going to go on for a long time~"
JD is correct, I think. I would be very surprised if any bubble in history comes even close to the one we just had. People didn't live in, or eat, tulips in Holland. This bubble swept up a majority of US households, affecting their single biggest asset, and all the derivative financial (loan etc) assets based on that. it affected major regions of the US in a massive way, with doubling and tripling and quadrupling of home prices, net of inflation, over periods as short as 10 years. It affected other major countries, like the UK, Spain, Australia, France.... some also in a quite extreme manner.
We aren't going to walk away from this in just a few years. The traces of this episode will be visible in our financial system many decades from now, just as we can trace the current institutional framework of our current financial system to the GD.
Maybe this JPM thing is just a natural evolution -- TBTF is now becoming "Way Too Freakin' Humongous to Fail."
Gotta keep up with the Joneses (and the Lewises, et al ...).
CDS are a major tool for implementing masssive credit bubble formation. That's why the Fed and Tresaury freaked when AIG went down. You are holding billions of securiterized debt obligations but you feel OK because you also purchased CDS. Now imagine if the CDS were worthless.
JPM is taking on different kinds of risk than the Federal Govt.
It is difficult to compare bankruptcy risk with military risk.
"Now imagine if the CDS were worthless. " Easiest thing I have done all year. Now What ?
"A few trillions really are no big deal.
There is $2 quadrillion (thousand trillion) outstanding in derivative bets on paper."
The primary losses are the loans that are not repaid. And trillions is a huge number. The entire capitalization of the US stock market (all sectors) is only 10-20 trillion. Adding all the derivatives' nominal value is like adding all the transactions in the US to estimate GDP. It would be a ridiculous overestimate, because the underlying real goods and services that are produced and exchanged would each be counted many, many times over. The entire stock of household assets in the US amounts to maybe 30-50 trillions. You can verify for yourself on the Fed's Flow of Funds report.
Blurt,
I have a somewhat different view of CDS, perhaps a minority view. The massive growth of CDS was partly driven by the fabulously large compensation obtained by people who really understand it, or by people who can get their company to account for it more favorably. The same swap can be on two different firms' books at rather different values.
Re: where's your trusty sidekick Kona?
Poor bastard went off the deep end
"It is difficult to compare bankruptcy risk with military risk. " I'm sure Rome and Argentina can see the distinction.
JP Morgan was already in that category...
i'm signing off. now, when i wake up in the morning, i expect to see
kicking nikki's ass.
"CDS are a major tool for implementing masssive credit bubble formation. "
Hmm... They were a convenient tool to confuse the masses about the basic problem - lending too much against overvalued collateral, mostly home loans. Unfortunately, some of those masses worked high up in the regulatory bodies/ authorities. Some are even still there. Mr Bernanke? Mr Dodd? Mr Frank? Where are you?
Doc: Good article. Great comparison. Great use of "fire sale" in the article.
"Adding all the derivatives' nominal value is like adding all the transactions in the US to estimate GDP. It would be a ridiculous overestimate, because the underlying real goods and services that are produced and exchanged would each be counted many, many times over."
Exactly.
The multiples must be written down. On someone's balance sheet.
In dollars.
Got a pen?
UB,
You were always the stronger one.
Re: Dissociative identity disorder (DID) is a psychiatric diagnosis that describes a condition in which a single person displays multiple distinct identities or personalities (known as alter egos or alters), each with its own pattern of perceiving and interacting with the environment
I've been to a number of countries where homes went up 4-5x this past decade, just like here...
And what this bubble did was make people think they were successful, which is a common trait with all bubbles, but most bubbles are penny-ante affairs and the players few.
The only country in the developed world whose people didn't get on board the housing bubble was Germany, but their banks picked up the slack by slathering money hither and yon and beyond on dodgy real estate loans.
It was truly a worldwide affair~
Notional value. Nets out and it doesn't. Depends on your counterparties.
Investor guy - in my mind, the most likely expense to drop would be housing costs.
I don't see any tax cuts on the horizon, so piece of the pie going to taxes stays about the same (likely to increase at some point.)
Don't see a reduction in health care costs in our future either. No matter what side of the issue you are on, there is no getting away from aging boomers and what they are going to cost to care for.
Don't see a reduction in gas either, in fact a rise if anything.
That leaves the largest expense - housing - as the only place with any "give." Those who own mortgage free rental property will lower the rental rates to whatever they need to to retain occupancy. They will set the bottom end for rents. The more of those places there are, the lower rents will go. Rental units that are heavily mortgaged will perish because they can't meet the rents offered by those with no or a small mortgage. As the rents settle to their natural bottom, they drag the housing prices down with them. Near as I can tell, the demand isn't there for rental housing, I've got at least 3 signs in my neighborhood of SFR for rent. Every apartment complex has banners and reduced rate offers to move in. I was up in Sherman Oaks last month and every condo building in the area had signs out front for available rentals.
What does having your monthly housing payment cut by 1/3 do to your household budget? What do you do with that extra money?
That is, institutions have a net notional exposure in theory. But they are separate contracts.
PatientRenter,
I'm trying to figure out how to explain this without lots of equations and taking forever.
A loan loss doesn't necessarily trigger a default swap, particularly if you are talking about a single residential mortgage. The swaps are generally on counterparties, or a particular series or maturity of debt of that counterparty.
Both retained loans and securitized loans have/had a margin of safety in them. There is an expected portion of loans defaulting, and of losses given default. It's when losses go substantially above expected that you can get default. For a mortgage, the sequence is typically: small loss affects owner, a somewhat larger loss goes to a guarantor (such as Fannie, or PMI), bigger losses affect the banks or mortgage backed security holders directly. Even if the loss is small and affects only the owner of the house who is selling, other people in the stream lose potential future income (mostly interest and guarantee fees).
usually bubbles are dead and forgotten in short measure, but this one has a half-life of everlasting financial radiation that's going to go on for a long time
Without question.
How many bubbles allow J6P to leverage up 25x income (or more)? How many boost the monetizable wealth of 2/3rd's of the people far in excess of their annual incomes?
So many have said that they'll just blow another, bigger bubble. Well, in terms of broad economic impact there are no bigger bubbles to be blown. It's only a matter of time before the sister bubbles -- stocks, derivatives, USD/UST -- go too, then it's all downhill from there.
"The multiples must be written down. On someone's balance sheet.
In dollars."
Zero.
All the derivatives add up to zero. Each derivative is just an exchange of payments. What shows up as a payment received by one person is a payment made by another person. The only real impact is that the derivatives spread risk, and introduce counterparty risk. But it all adds up to a big fat zero. Moving the risk does make some difference, but not as much as creating risk. I am not trying to defend unlimited or poorly regulated derivatives, just pointing out that they are merely an accessary to the crime, and are in danger of being used as a distraction by those who want the basic game to continue.
So,
I'm kinda torn between floating here like a virtual pixel ghost or making real-live chocolate cake with my little chef...
Doc: that seems to nail it. Many wanted you to stick with just one identity. Good to see you!
Now, back to Jamie Dimon and his plan to rule the world...
Next thing you know Stiglitz is gonna be saying,
Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
All fine and dandy, but grow a pair and make specific arguments.
How many pairs of shoes have you bought for yourself in the last year or two?
Parents buy new shoes for most kids every year, at least a couple of pairs.
Out of every 100 kids walking into any school, if two are wearing shoes made in Brazil, it's a lot. The other 98 will be wearing shoes made in Asia.
2 quadrillion; come on, I thought it was only 1 quadrillion!
some investor guy (profile) wrote on Sun, 9/13/2009 - 7:14 pm reply Ignore user Blurt,
I have a somewhat different view of CDS, perhaps a minority view. The massive growth of CDS was partly driven by the fabulously large compensation obtained by people who really understand it, or by people who can get their company to account for it more favorably. The same swap can be on two different firms' books at rather different values
All contributing to the cause. Propping up the credit bubble and acting as glue for the house of cards.
Art,
When you say the cost of housing is dropping, I think you mean the price of homes. It will interact with interest and vacancy rates. If prices go down and interest rates go up, mortgages might even rise.
For already-built real estate, if interest rates stay level, a reduction in price is a straight wealth transfer or loss. If a home goes from $500k to $200k, someone who wants a home is saving $300k vs buying in prior years. They might or might not be saving money vs renting a similar home. The larger the loss, the larger the portion which comes from a lender's pocket.
In the big picture, very large lender losses will partly be transferred overseas. Some will be nonagency MBS losses. Some will be losses in investments in banks which made US loans.
Art Eclectic - nice argument above, re: rentals. Makes perfect sense.
Sure, net it all out.
JPM owes GS a trill, GS is covered by 1.1 trill from AIG. AIG has 1.3 trill on loan from the FED. The Fed can get 1.4 trill from their dealer JPM.
And so on.
And so on.
Madoff netted it all out. That 60 billion went to somebody. What's the problem?
Stiglitz: I keep remembering that he's a member of the "Pontifical Academy of Social Sciences" with Kenneth Arrow. What in the world do they talk about at their get-togethers?
"For a mortgage, the sequence is typically: small loss affects owner, a somewhat larger loss goes to a guarantor (such as Fannie, or PMI), bigger losses affect the banks or mortgage backed security holders directly. Even if the loss is small and affects only the owner of the house who is selling, other people in the stream lose potential future income (mostly interest and guarantee fees)"
investor guy, I see what you saying, but I am not sure what you're getting at. I understand that the whole loan payment streams are sliced an diced, but one of my points is that, no matter how you slice and dice $5 trillion in loan payment streams, you can't avoid several trillions in losses showing up somewhere if the underlying collateral is only worth $2-3 trillion when adjusted in any reasonable way for cyclical peaks (bubble prices). And it really doesn't take a genius to understand the risks of the kind of overvaluation as seen in http://graphics8.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif
Am I responding accurately to your point?
PatientRenter,
NO. They don't add up to zero. If you look at both parties to a single CDS, they can have very different current values on their books. That's partly because they are using different models to estimate their value.
I would be willing to bet that if you added up the estimated values for large portfolios, you would find that they were quite significantly above zero. The differences in people's models of value are driving them to take particular positions, and to believe they are more valuable than what the counterparties believe.
Aww, Doc, I was expecting you to string yogi along for weeks on that one...
Spoilsport.
UB - they do white smoke and black smoke futures.
C
CP: Up in Smoke Futures (in honor of CurrentlySmokingCannabis)
So.... did we ever figure out if Ed Liddy is related to G. Gordon?
"They don't add up to zero."
Actual payments add up to zero. Sure, someone gains and someone loses, but no value is created or lost in the national accounts.
PatientRenter,
Not only are losses sliced and diced, some losses are purely on paper. It's the difference between realized and recognized losses.
If the prices of all homes in CA drops by half from 2007 to 2010, and then returns to 2007 levels in 2015, who lost money?
He's talking about the notional value of the contract, which is different than the market value of the contract. The notional value is the value that is used for calculating payments (kind of like the principal on a bond).
Many of these cancel each other out in theory because a bank gets into a contract and then turns around and arranges the opposite position (or something akin to it through multiple transactions). This all works out until one bank for some reason cannot make good on its obligations. Then it is a game of dominos. Looks cute in theory.
nice one
CDS are in part a fiction. They coud not all possibly be honored. There is not enough money in the world. But they lower the risk and cost of borrowing. When the facade cracked with the failure of AIG, the USG had to step in to keep the story going. it's about as bogus a concept as fiat currency. But as long as everyone buys it, then it is "real.".
Frictional costs, while small as a percentage of CDS notional, are significant.
Frictional costs == fees and commissions?
Blurtman,
You couldn't honor all CDS for their current cash value at the same point in time if you insisted on actual cash. But money is bigger than paper bills and coins. Netting positions using DTC gets rid of an awful lot of electronic transfers.
Everything has slowed down a bunch. Any reason for this.
Frictional costs = fees, commissions, custody/clearing, trading costs, etc.
because CDS are time sensitive, they must be renewed, at greater or lesser premiums based on the current risk factor. It's all priced in. But what do I know? It may be that they are renegotiated whenever the seller says so.
I assumed that Jas, Michael, and Guest were different forms assumed by the Devil, Luci in the sky.
Anyone with Widget is his name can only be the imaginary construct of an Economist fool on the hill. But a useful one.
Yogi is smarter than the average baseball catcher and salutes the Sun King, but only physically.
You are talking about netting payments, not positions.
You can net out CDS only when all the terms line up: rates, terms, conditions. The first quadrillion of this crap was made up on the fly, written on index cards, and stored in desk drawers (literally). There is no chance of netting it out. Remember the vain attempts to do so when Lehman was failing?
It is small consolation when the NEXT reactor leak will be detected, when you already have a quadrillion rads in your body.
I suppose people will also hedge their CDS positions which may hedge underlying securities (or not) with other CDS hedges or other hedges. But this is all just buliding a staircase to nowhere. Implements of the great bubble machine.
With a bank savings account, for example, even with the fractional reserve system, the FDIC steps in even if there is a run on the bank. The Fed and Treasury in a sense acted as the CDS FDIC equivalent when AIG went down, but it is as fictional as fiat currency, and even less as positions are not as protected.
Payments are netted out of convenience - it does not restrict money that can be used gainfully elsewhere. But there is also the argument that exposure nets out - that is different. Not an issue of convenience, but mathematical posturing.
liz: Too many Widgets
"Madoff netted it all out. That 60 billion went to somebody. What's the problem?"
That's actually a very interesting question, yogi. (Although I suspect you weren't thinking about my answer when you asked it.)
Where did that $60 billion go? Well, based on the spending habits of Madoff and his family, which were quite modest compared to someone in his position, it is unlikely more than $1 bill went on Madoff family consumption. Did the trading counterparties he traded with make off with tens of billions? Well, apparently there were very few trades, so it's unlikely that a significant amount went to GS and MS and JPM and pension funds and other entities that might have been counterparties to a normal hedge fund trading operation. So, where did most of the investors' money go?
Most of the Madoff investors' money went to other Madoff investors. Here were all these people, believing that they had an inside privileged track to high returns at a low risk - the ultimate free lunch. They thought those 10-12% risk-free returns were coming out of the pockets of the rest of the investing world, picked by wily Bernie. In fact, they were just picking each others' pockets. So how much was really lost in aggregate? Probably about a billion or two. But some investors will get to keep their ill-gotten gains at the expense of others. I would love to see numbers, but my guess is that maybe 20-40 billions will be transferred from one group of investors to another when all is said and done.
excellent point on germany. the culture of faux ownership here is as much to blame as credit standards, leverage, etc. god help us if the german consumer is the only one left standing in the developed world.
Has anybody actually paid off on a losing one?
How much?
Nitey-nite.
At least I think.
Gotta read what's posted above.
Ok, I'm going to really swing a cat into the pigeons, disagree with Bond Girl, and agree with Blankfein.
(sound of jaws dropping)
Ahem, here goes: Mr Kiss My Sacred Harvard Ring recently told a group of euro sharks that TBTF was not in and of itself a problem, or at least one for which there was not a potentially effective and sustainable market solution. And, I'm probably now ad libbing, a solution that could cut through the gordian knot of regulators and regulations attempting (when all goes in practice as in theory) to regulate within the bounds of law and regulation and stay not too many steps behind innovation, accounting changes and norms, procedural and administrative law, multiple jurisdictions, and politicized fights about the center of gravity, whether it be bonuses, compo, nepotism, the revolving door from biz to gov and back etc etc.
He's right.
The answer is less in a compliance-driven million-rule and monster regulator model than a rather simpler, radical, clean, and total transparency and disclosure model, for everything, including working drawings, guesses, and disclaimers. No OBSEs, SIVs, SPVs, conduits, no trickery for "hard to value" assets, just disclosure. The big, effective, and aggressive may well survive, if transparency confers confidence, not just hold your nose cashflows. The others won't, don't deserve to, and won't get that big again. It would be like the Ceberus redemption song chorus with the amps turned way past 11.
However, since that won't happen any time soon, TBTF remains a colossal menace and macro-prudential oversight is pissing into a gale.
C
and if my aunt had balls...
and, in any case, this kind of opacity and self-dealing is the way things are very consciously designed by the fed.
WASHINGTON — When President Obama travels to Wall Street on Monday to speak from Federal Hall, where the founders once argued bitterly over how much the government should control the national economy, he is likely to cast himself as a “reluctant shareholder” in America’s biggest industries and financial institutions.
U.S. Is Finding Its Role in Business Hard to Unwind
U.S. IS FINDING ROLE IN BUSINESS HARD TO UNWIND - NY Times
The Chinese government sometimes organizes blog postings to defend its own policies. But some postings on the tire decision have been implicitly critical of the Chinese government, making it unlikely that they are part of an orchestrated effort.
“Why did our government purchase so much U.S. government debt?” said one posting signed by a “Group of Angry Youths.” The item continued, “We should get rid of all such U.S. investments.”
China has accumulated $2 trillion in foreign reserves, mostly in Treasury bonds and other dollar-denominated assets, and held down the value of its currency, which has kept Chinese goods quite inexpensive in foreign markets. China’s exports have soared — China surpassed Germany in the first half of this year as the world’s largest exporter — while China’s imports have lagged, except for commodities like iron ore and oil that China lacks.
Worries that China might sell Treasury bonds — or even slow down its purchases of them — have been a concern for the Bush and Obama administrations as they have tried to figure out how to address China’s trade and currency policies.
China Moves to Retaliate Against U.S. Tire Tariff
China Moves To Beat Back A Tire Tariff - NY Times
JPM is one Fat Domino.
Their super-duper, senior, AAA rated, FDIC guaranteed tranch of toxic garbage is AAA insured and backed by the full faith of US Treasury credit. Secured by a Federal Reserve line of credit. The insurance is covered by AAA insurance, which is guaranteed.
Are you buying in? Do you want to be protected by the illusory safety net or netted shit out of luck?
TBTF isn't a problem in and of itself, as long the American government is willing to tell the banks to go f--- themselves and Americans are OK with depressions.
I think we can have financial crises with small banks too. TBTF just makes it really easy.
Banks become TBTF in the first place by owning inefficient regulators. That's the irony there. But he should know all about that.
He has more Nobel prizes than Krugman and his most recent book has a big pig on it.
Does anyone else find the obsession with pigs, and the end of capitalism ironic?
AIG was not too big to fail. Why do people still pretend that a big bank cannot be taken over without catastrophic consequences for the system? If we had nationalized and slowly wound down the worst banks covering 30% of all bank assets back in late 2008, and recapitalized the best of the rest, we'd be doing fine now. We wouldn't have to go with the chaotic liquidation of Lehman. Something more like AIG would have worked. Still could.
So.... is Bill Gross making any money these days?
Of course all exposure nets out on paper. Peter pays Paul and desperate South American pre-teens die of exposure in the Arizona desert.
Who nets the bonus money. Where's the fat domino.
Lehman -- absolutely correct. No issues then from Reserve Primary or State Street...
Investor guy - I'm talking across the board cost to keep a roof over your head. The price to rent a 2 bedroom apartment has to be lower than to rent a 2 bedroom house in the same area. The price to rent a 2 bedroom house in a given area places a bit of a floor on pricing because the investors who need loans funded will start buying when the price/rent ratio is good. Investors who come to table with all cash can grab the best properties and if they can set a rent at whatever keeps the place occupied.
The level of real demand for housing will ultimately set the floor on prices. The price to buy has to be in line with the price to rent the same property and keep it fully occupied.
later
Separately, Nikki in the sh!tter. -2.47%. Kospi and Hang Seng pushing -1%, ASX over 1% down. Yen really flexing biceps at US 90.44c. Regional commodity currencies sliding hard, NZD off -1.34%. Carry trade, wot carry trade!?
Back on thread, AIG absolutely was TBTF. Deliberately, concertedly, militantly, effectively. Would have taken down US and Europe simultaneously.
C
yogi, I can tell my explanations of derivatives - that the total payments add up to an enormous number, but the payment obligations net out, so the only real issue is a significant but much smaller one of risk transfer and counterparty risk - are not making any headway. It probably won't help you that I've worked as a risk manager for a financial institution, and examined all these issues as part of my job. If that does help you believe what I am saying, great. If not, I'll have to move on and leave it to others....
Folks, thanks for illuminating text on CDS. One of the better/enlightening threads on the mess that I've read in a while.
I'm curious to see what happens with the dollar and gold/PM now that China and the US butt heads.
This moment had to come and I expect that it's mebbe the crunch time that many have been thinking was coming.
Yep, this could really be entertaining. Think that this is factoring in Nikkei?
"capitalism" is a very poor label for our economic system in the past 15 years.
"AIG absolutely was TBTF"
But it has failed. It can be wound down now with relative safety. That could have started as early as 2q 2009.
But perhaps Blankfein can use his own firm as an example and start his own movement. Disclose everything, etc.
Separately, Nikki in the sh!tter. -2.47%. Kospi and Hang Seng pushing -1%, ASX over 1% down. Yen really flexing biceps at US 90.44c. Regional commodity currencies sliding hard, NZD off -1.34%. Carry trade, wot carry trade!?
LOL. If the yen is worth 90.44c then we are really screwed!
But at only 90.44 to purchase a dollar, we may yet get some exports out of it.
RE: one identity. Good to see you!
I'm good w/ that, and now back to looking for dirt...
Experts embroiled in a situation are sometimes the wrong ones to diagnose it.
Lots of
but seriously, can anyone see a path through this that will get us safely through the next 5 years without serious unrest, or a lot of people going hungry, or martial law?
Can we just muddle through? Or do we have to face the music?
patientrenter - the trades only net out if they are all recorded, known, booked, shared etc. They might even need to be true, or at least fair and reasonable. Some parties might (horrors!) be booking claims that do not exist.
C
"Disclose everything"
I used to believe that disclosure was really the key. But I no longer think that disclosure is the magic solution. Some organizations are so complicated that it is hard to really understand what is going on. I had occasion to review one such organization within the last year, and it was mind-numbing. Even GS and JPM and others didn't appear to really understand it all. We need some simple rules as well.
First!
the trades only net out if they are all recorded, known, booked, shared etc
And symmetrical.
I'm not an expert but I get a definite sense of asymmetry in how the contracts are written.
So win@contract A may appear to be equivalent lose@contract B but... not really.
"capitalism" is a very poor label for our economic system in the past 15 years.
Actually, it is extremely accurate. Capitalism is the ownership of the means of production, where surplus vale is extracted from the difference between user and exchange value, alway through labor.
The capitalist are merely becoming more efficient, and absorbing the least effective players.
Capitol needs a strong central state to enforce its rule, and has never existed without one.
The last 15 years has been a capitalist wet dream
"Some parties might (horrors!) be booking claims that do not exist."
Fair enough, so add operational risk to counterparty risk and risk transfer. But my basic point stands, that those who look at derivative notionals of quadrillions or whatever, and compare to underlying assets of mere trillions, and conclude that all the issues of importance must lie in the derivatives, just misunderstand the derivatives.