- Overview of how financial regulation works in the US, so you know who to point the finger[s] at.
- Marginal Revolution is, in my lofty opinion, the best blog for following all the antics. It’s written by a couple of econ professors who normally talk about curiosities (similar to Freakonomics), but lately they’ve been doing a great job of consolidating (and generating) economic commentary on the various implosions and bailouts going on.
- The Conglomerate is giving some of the best coverage from a legal perspective.
- If you want something on a higher level, read Calculated Risk, which is what all the bankers have been reading (especially now that they have nothing else to do).
Any other recommendations to share?
Have you seen any insightful comparisons / contrasts with Japan`s 1990s problems (or do you have any yourself)?
This American Life’s best explanation of this disaster:
http://www.thislife.org/Radio_Episode.aspx?sched=1242
NPR’s Planet Money blog/podcast:
http://www.npr.org/blogs/money/
Profile of Einhorn who called Lehman’s bluff a long time ago:
http://nymag.com/news/businessfinance/47844/
Profile of Roubini who predicted this disaster back in 2005-6:
http://www.nytimes.com/2008/08/17/magazine/17pessimist-t.html?partner=rssuserland&emc=rss&pagewanted=all
Excellent coverage on Charlie Rose, especially whenever Roubini is on:
http://www.charlierose.com/shows/2008/9/15/1/a-discussion-about-the-crisis-on-wall-street
http://www.charlierose.com/shows/2008/9/8/1/a-discussion-about-the-takeover-of-fanny-mae-and-freddie-mac
Lots more here:
http://www.themoneymeltdown.com/
First, the single best source for people who can’t seem to get their head around the crisis is the “The Big Pile of Money” episode of This American Life. It is simply phenomenal.
The WSJ had an interesting article comparing Japan bubble vs. US crisis, so you can subscribe and check there. NYT had one about Sweden that I haven’t read yet but I personally prefer their approach to the Paulson plan. But there are some important differences. One is that the Japanese authorities took years to act whereas the US is more or less “taking its pain now” as someone on CNBC said. The scariest difference that I will mention is that in the late 80s Japanese people were still overwhelmingly net savers, which is most certainly not the case in the US. Without housing equity or access to credit it will be very hard for people to maintain their lifestyles.
Bloomberg News is best for breaking updates. No logging in, no fees, no nothin.
The Big Picture and Nouriel Roubini are good blogs to keep up on (Roubini’s latest conference call was particularly concise).
Paul Krugman’s blog and columns are indispensible, as are Dean Baker’s. They disagree on whether the bailout should pass (Krugman yes, Baker no) but you can try and make sense of the situation by reading them both.
For the best soul-searching type of pieces that look at the big picture and see it from more of a moral standpoint, watch or listen to the recent archives of PBS Bill Moyers Journal. There is an excellent piece on how America’s consumer culture is fueling its militancy and will one day kill us all.
Regarding the Japan comparison, I was a bit surprised to see Nicholas Kristof of the NYT (who used to be a Japan correspondent and was in Japan for a good chunk of the “lost decade”) point to Japan’s lack of a massive government bailout as a reason to go for it.
http://www.nytimes.com/2008/10/02/opinion/02kristof.html?scp=2&sq=kristof&st=cse
I don’t have much else to add, since Joe and Adam have already suggested most of my go to sources in this area, which isn’t too surprising considering how many links we send back and forth.
Thanks.
My initial reaction was similar to that of Kristof – not doing much certainly didn`t help Japan, so why not “go for it”? The “why use my taxes to bail out a bunch of rich white guys” point seems to have a great deal of cultural cred, however, and is difficult to argue against.
“Without housing equity or access to credit it will be very hard for people to maintain their lifestyles.”
This is a very good point and seems to be at the heart of some of those “soul searching” epics that were mentioned. I have seen various estimates, but it seems as though Americans have been spending nearly $1.40 for every dollar that they earn (and piling up credit card and other types of non-mortgage debt). This, obviously, is not going to continue. One has to wonder how much of American`s respectable GDP growth since 2000 is actually due to this funny money buttressing consumer spending. Japan, for all its economic dark spots, seems in a good spot to ride things out, given that (admittedly flat) consumer spending is not as closely tied to easily available credit as it has been elsewhere.
Hmm I tried to post a comment with a bunch of links. Not sure if it came though…
Comments with a bunch of links tend to get flagged by our filter… your comment is up now
Yeah, I agree with all of Adamu’s recommendations.
To get into personal views for a moment, I’m not really an expert on Japan in the 90s, but my unqualified opinion is that it all comes down to transparency. Japan’s banks were able to hide the full extent of their losses from the bubble’s collapse for much longer because they were operating in a byzantine manner and didn’t have a great deal of effective regulatory oversight. Nowadays the feds and the auditors are in everyone’s business (both in the US and in Japan) so it’s harder to pretend that losses haven’t been incurred.
Asset-backed securities also have the fun feature of being marked to market for accounting purposes, much like publicly traded stocks, resulting in a lightning-fast impact on investors’ balance sheets once the market tanks. This is in contrast to traditional loans, where it’s easier to conceal the actual value of the investment on the books, particularly when feds and auditors aren’t looking too closely.
So in a sense, I think you can partly blame efficient regulation for the speed and impact of the current crisis on Wall Street.
Now I personally direct most of my blame at the credit rating agencies who enabled banks to hold and trade ABS at badly inflated values. The other key parties in the run-up to the crash (homeowners, investment bankers and mortgage brokers) were just doing what made the most sense for them to do while the housing market was on a wild upswing. But if the true risks involved were being properly calculated and disclosed, the banks would not have been able to take all these ABS on their books, which would have kept the mortgage brokers and credit card companies on a tighter leash, and accordingly would have kept the market more under control.
Yeah, everyone was being a greedy leech in this cycle, but people are going to be greedy leeches as long as the system makes it easy.
I sort of agree that this bailout should be passed, but this is a bad deal. We should be furious that we have to ask how high when Henry Paulson of all people tells us to jump.
Kristoff’s simplistic Japan comparison is really annoying, but I don’t have time to get into it right now. He wastes space with a frivolous mention of “no panties shabu shabu” but never even details how Japanese politicians “dithered” on a bailout. He just mentions that they did and moves on to “most Japanese did not initially appreciate how devastating a banking crisis could be…” Fact is, Japan’s banking crisis came a full decade after the bubble burst, mainly because the banks successfully hid their bad assets with creative accounting.
If the bailout doesn’t work we might STILL have to recapitalize these firms, meaning all the fear mongering will have been for nothing.
When Obama is president (knock on wood) he needs to use his first 100 days to fix this thing.
I wish Obama the best of luck because he will need it. I think this is beyond anyone’s ability to fix, unless they want to induce another kind of bubble to mask it. It’s going to require a very long-term fix to restore fundamental soundness to the economy so it doesn’t need to rely on speculation.
This whole catastrophe speaks to the decades-old practice of Americans to live on credit. That plus the fact that Americans spend a lot more than they produce since the 80’s, plus Greenspan’s disastrous interest rate drop which fueled the housing bubble and related mortgage-product shenanigans means that indeed the hole is so deep, we have no idea how deep it really is.
As an American friend of mine said to me, “we [Americans] were all born on third base in this country and too many of us think we hit a triple.”
The short Charlie Rose interview with Mort Zuckerman and Andrew Ross Sorkin, to which Calculated Risk links, succinctly outlines why a lot of media coverage is barking up the wrong tree by not focusing on the issue of liquidity and instead fixating on bad investments.
This article just published in NYT is another must read:
http://www.nytimes.com/2008/10/03/business/03sec.html?hp=&adxnnl=1&adxnnlx=1223026916-OllnvgJpVW4I1tPbBmm9TQ&pagewanted=all
In short, a little noticed decision by the SEC in 2004 allowed investment firms to increase their debt/capital ratio in exchange for greater oversight-but the government didn’t take advantage of the oversight, never did the inspections, and Bear Stearns ended up with a debt/capital ratio of 33 to 1!
“Kristoff’s simplistic Japan comparison is really annoying, but I don’t have time to get into it right now. He wastes space with a frivolous mention of “no panties shabu shabu” but never even details how Japanese politicians “dithered” on a bailout. ”
Check this.
Crisis Pushing Asian Capitalism Closer to U.S.-Style Free Market
By Nicholas D. Kristof, [17 January 1998]
http://www.hartford-hwp.com/archives/55/078.html
Back then,THIS was what Kristof was writing about how the Japanese should overcome the financial crisis.
“Japan is still the country that is most hesitant about rapid change toward a more market-driven system, with Japanese wary of the brutality of market mechanisms. The old system protected a way of life that is often inefficient — with the tiny rice shops and futon-makers that charge ludicrous prices and with lifetime employment for workers of big companies — but that is also central to the ethos of Japan. ”
“Yet Asia is not suddenly going to look like America. Young Japanese, Taiwanese, Koreans, Chinese and Thais already wear Western clothes, eat American hamburgers and pizza, enjoy baseball or basketball, watch American movies and listen to American music. Within a few years, they are much more likely also to face the risk of layoffs, and to rotate jobs with American-style casualness.
“All this will make Asia’s labor markets, finance and industry resemble America’s a bit more, but Americans do not become more group-oriented or respectful of their parents when they put on a Sony Walkman. “
I don’t think Kristof is out of line in the two pieces mentioned above. The no-pan shabu shabu reference wasn’t gratuitous: he it used to illustrate the contempt that the Japanese public had come to have for bankers and bureaucrats which was one reason the use of public money was so controversial. His most recent article argues for swift government action in the US because he believes that delays in Japan cost the country dearly. Whether you agree with the argument or not, it’s a widely held point of view both inside and outside Japan.
We’ll have a chance to compare the two approaches from now on. There’ll be a few differences. When the chickens came home to roost in 1998, the world’s attention didn’t linger on Japan because the dotcom boom dominated the next few years. When the dotcom boom ended, we had the property and BRICs boom. Looking backwards, the US S&L bailout mostly took place during the peak years of the bubble so most recent financial crises have been accompanied by a boom elsewhere. It’s difficult to see where the boom might be this time.
It’s also been interesting to see how the crisis is being described as an Anglo-Saxon problem despite the fact that is is reverberating around Europe and has already claimed institutions in Belgium and Germany while also pretty much bringing down Iceland.
I told some of my law school friends about no-pan shabu shabu, and many were convinced that it was just an urban legend (like nyotaimori). Now they’re all reading about it in the NYT. Good times.
Anyway, I don’t know whether it’s right to call any of those times “booms.” They were all bubbles of one sort or another, and while there was some net gain in the long term, it wasn’t nearly as much as people believed at the time. I can’t even begin to speculate where we might find the next bubble: the whole world seems to be dazed and confused, at least beyond the Persian Gulf. I can’t help but think that we finally have a slow and painful unraveling on our hands as we discover how much unfiltered bollocks has been fueling the global economy.
I know almost nothing about it, but I have heard that Iceland is economically far closer to the Anglo-American than to Europe proper.
Iceland became one big leveraged buyout fund. The bank they’ve just bailed out finances a number of British retailers who will be watching current events closely. A lot of the financial machinery used around the world may have originated in the City or on Wall Street but the fact that there are problems in France, Belgium, Iceland, Greece Germany and Ireland, and bitter exchanges between members of the eurozone over deposit guarantees, suggests that “Anglo-Saxon” is a fairly poor description. I find a lot of these national labels as useless as the political ones at the moment. Credit crises have occurred in numerous countries around the world run by governments of many different hues so I’m not sure how far we get by bringing them in.
I read a J-Cast English language article describing how Lehman Brothers didn’t suit Japanese business practices. In particular, it described how Lehman financed Livedoor which the writer claimed no Japanese institution would have done. There were in fact plenty of Japanese banks willing to do the deal but Livedoor thought Lehman terms were superior. Actually, they weren’t and the company would have been better advised to go with Mizuho where the upfront cost was higher but ultimately cheaper.
Well, for what its worth, the bloggers at
http://blog.mises.org/blog/
have been anticipating all of this for some time.
All the posters are good, but in particular check out Frank Shostak:
http://blog.mises.org/archives/author/frank_shostak/
People like Peter Schiff and Jim Rogers have both been harping for years that this would happen. Just search their videos at YouTube.
There’s a good video of Peter Schiff in 2006 being treated like a eccentric for suggesting a recession was on the way:
http://www.youtube.com/watch?v=LfascZSTU4o
I think as things develop people need to have a hard look at what has passed for capitalism, basically, either Keynesian economics or at watered down version of Keynesian economics via Milton Friedman. Both of these are ultimately policies allowing for heavy government intervention in the market:
http://www.lewrockwell.com/rothbard/rothbard43.html
The mix of big business using big government to further its ends can only end by either total socialism or separating out the functions entirely. People better start thinking about which they’d prefer.
As the crisis unfolds and people lurch towards the left for help, people need to go back and look at great defenders of liberty like F.A. Hayek and discover, for the first time, that he argued vigorously for a gold standard. Why?
Well, aside from preventing what’s happening on the market today, and aside from the fact that all other schemes he came across had worse defects, there were three reasons:
One, it creates an international monetary unit without the need for a monetary authority. Two, it makes monetary policy automatic, and thereby predicable. Three, contrary to what is often said, it’s supply generally moved in the right direction.
People need to have a fresh look at some old ideas, here’s a start:
http://online.wsj.com/article/SB122273029076687929.html
Andrew Sullivan just reposted this letter from Obama to Bernanke and Paulson from March of last year. Worth looking at when thinking about which of the two candidates has a better grasp of the issues here. (Probably not “I don’t know much about economics” McCain.)
http://andrewsullivan.theatlantic.com/the_daily_dish/2008/10/dear-chairman-b.html#more
Roy,
It’s just a cat mouse game. I’m no fan of clueless John “bomb, bomb, bomb, bomb, bomb Iran” McCain than I am of the presidential appearing Obama.
However, in all fairness:
In 2006 John McCain addressed the congress and said:
“I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole. I urge my colleagues to support swift action on this GSE reform legislation.”
Search google for the quote.
Personally, I think a vote for McCain is a vote for Obama. A vote for Obama is a vote for McCain. Both represent the status quo.
Though I’d much rather sit and listen to Obama than McCain, he’s far less grating.
This “the two candidates are the same” line is pretty tired and has been decisively proven wrong by the last eight years. Could you imagine Al Gore screwing things up this badly? If you have paid attention to this year’s campaign at all you’ll see how different McCain and Obama are as people and in terms of leadership style. Most simply McCain is really old and picked a lunatic for a running mate.
“If you have paid attention to this year’s campaign at all you’ll see how different McCain and Obama are as people and in terms of leadership style.”
I agree for people who only wish to be lead, then leadership is all that counts. Good point.
As far as Gore, my answer is yes. Only it’s would have been a different kind of screwing up.
“As far as Gore, my answer is yes. Only it’s would have been a different kind of screwing up.”
Does anyone seriously think that Gore would have gone into Iraq? What kind of screw-up could ever equal that? If Bush had left the American economy at an all time high… education… wait a minute, is there anything that didn`t get screwed up in the last 8 years?
I think that we can state safely that neither candidate represents a radical departure, despite their their clear differences on some issues. I mean, it is not like Obama would dramatically slash military spending or anything. Within the American “box”, however, Obama just plain makes more sense on just about every issue.
I had high, high hopes for Gore (to at least continue the Clinton status quo sans cigar) and now have high, high hopes for Obama. I don`t get to vote, however.
I shudder thinking of president Palin. The hockey moms that I know are bad enough. But a fundamentalist hockey mom with a gun!?
Back to the topic of links. This American Life has just put out a follow-up program called “Another Frightening Show About the Economy”:
http://www.thisamericanlife.org/Radio_Episode.aspx?episode=365
Matt Dioguardi wrote: “As the crisis unfolds and people lurch towards the left for help…”
Why assume people will “lurch” to the left? Why not “lurch” to the right as we saw in the thirties? You might be inclined to argue argument that way because you are only considering the US where the incumbent is on the right. In Europe, the right is often in opposition so assuming simplistically that people will blame the incumbent won’t give you any clear-cut guide to future political direction in the world.
“Why not “lurch” to the right as we saw in the thirties?”
Here we reach the limit of labels. Hitler was a national socialist. To me that’s on the left, but yeah clearly he was on the right. Uh … that’s not right, I mean left … right.
My point is we need more not less of the free market. If you check out my blog, you can get a better idea of my opinion on this. I think F.A. Hayek’s _The Road to Serfdom_ addresses this well. Both Germany and Russia had similarities in that both embraced a large degree of central planning. And both England and America also moved towards central planning in attempting to allow the state rather than free enterprise to fix their financial problems. So in that sense the problem was the same all around.
Currently Ben Bernanke is operating under a monetarist philosophy. He believes that the 1920s were a fine time, and the depression that followed was only because the Fed didn’t provide liquidity. However, I agree with the Austrians (Hayek, Mises), that the problem was the easy money policy of the 1920s which created a bubble. Bernanke has faith that monetary policy can be centrally planned, neither Hayek or Mises did (in the 1920s they predicted the approaching downturn). If Bernanke is right, the stock market should not be crashing today, it should be fine and dandy (he can save everything with more and more liquidity), if Hayek and Mises are right, we’re going to see the dollar on the ropes soon, potentially hyper-inflation (at least of the dollar, but possibly other fiat currencies as well). Instead of saving things, Bernanke will merely be adding inflation into the mix via money creation. Everyone keeps saying Bernanke is an expert on the depression era, and he is, but only through a monetarists lens. But what if that monetarism is wrong? What good is being an expert in flawed philosophy?
Because people relate monetarism to capitalism (it’s not), they will blame capitalism for the bad results of monetarist policy.
Obama, who seems to be the most viable candidate, top financial adviser is from the Chicago school. The Chicago school is where the monetarists comes from, only his adviser seems even further on the left than the usual monetarists. So I don’t see any fundamental help coming from Obama. In fact, I expect he and his advisers to thrash about a lot, heroically trying all kinds of things that won’t, while Obama speaks to the American people delivering inspirational sermons. The blame will never fall on the Fed for its monetarists policies, but instead on stupid Bush and capitalism. People will be so desperate, they’ll beg for just what they don’t need, more government.
Of course, this will be better than McCain. The old flint can’t tell socialism from capitalism. In a republican debate, Ron Paul suggested we ought to consider a commodity based currency (you know, like gold). That’s a free market solution to monetary policy. McCain was so idled he spat at Paul, “You’d better read Adam Smith.” He thought Paul was offering a socialist solution or something. Who knows what McCain was thinking. You should have saw Paul’s expression. Of course, Bush these days looks like a man whose had his puppy tortured and killed in front of him. He clearly hasn’t a clue, and just does what he’s told.
At first I was excited about Obama, because not only did he seem intelligent, he seemed antiwar. But since getting the nomination, I think he’s grown more and more belligerent. He wants more troops in Afghanistan, he wants to attack Pakistan, and he insists on a non-nuclear Iran. And his financial policy is basically the Chicago school (only more towards the left), which is what we’ve got now, and would continue to have under McCain.
So, I’m not optimistic about McCain or Obama.
Sorry for being so long winded.
The Economist speaks
Speaking of “OH FUCK”:
NYT: “The worst day for European stocks, until now, came when Gorbachev was ousted. That led to the fall of Communism. Today’s larger decline signals worries about the future of capitalism.”
WSJ: “[When the UK found itself bankrupted after WW2 and turned to the US for help,] the U.S. … dictated terms that amounted to a withdrawal of Great Britain from the world stage. The U.S. is not yet in the position of Great Britain… [b]ut absent a more humble and realistic attitude toward capital in Washington, that is the path we’re headed down.”
Links: http://norris.blogs.nytimes.com/2008/10/06/from-the-collapse-of-communism-to/
http://online.wsj.com/article/SB122325757745406687.html
Oh fuck is right. It is times that this that I am glad that I don`t have any money to invest….
Au contraire, I heard that the canned goods industry is about to make crazy profits. Firearms are also a good investment.
My friend Corey told me he moved his entire portfolio into the cardboard box and fingerless glove industries.
From AERA Oct 6.「田岡俊次の特ダネ記者魂」
米国の金融危機は世界史の転換点か、ウォール街の覇権を日本と中国が争う？
ｘｘｘ
９月15日、米国の証券会社リーマン・ブラザースのハタン、メリルリンチの身売りで表面化した金融危機は、単に「金融問題」にとどまらず、世界史の転換点になる可能性をはらんでいるように思われる。
リーマンは最後に韓国産業銀行に救済を求めて断られ、万策が尽きた。モルガン・スタンレーは中国の政府系投資ファンド「中国投資」に出資増を求める一方、三菱ＵＦＪフィナンシャル・グループにも出資を要請し、同グループは焼く９千億円を出資して筆頭株主になる見込みという。米国と東アジアの財力での力関係が逆転した1週間だ。
米政府は最大７千億ドル（約７５兆円）の不良債権を金融機関から買い取るなど、機敏で大胆な対策を打ち出している。だが来年度の財政赤字が４８２０億ドルと予想される米政府にその体力はなく、国債を増発するしかない。サブプライムローンの傷が大きい西欧も米国債を買い増す余力が乏しいから、巨額の外貨準備を持つ中国（約１・８兆ドル）日本（約１兆ドル）ロシア（約５千億ドル）などに頼らざるを得ないだろう。
米国が今回の危機を乗り越えたとしても、昨年８１５６億ドルもの貿易赤字を出し、年間２千億ドルもの戦費を費やす米国の経済・財政体質は急には変えられない。これまでは、ドルの威信があって海外からの資本が集まり、米国への資本の流入と流出（米国からの海外投資）の差が昨年６７７５億ドルあった。それで赤字を埋めてきたが、これは集めた金の大半を経営者の生活費にあてるネズミ講に似て長くは続かない。今回の危機はついに来るべきものがきた、と見るべきではないか。
ドルへの信用が失われれば、米国への資本の流入が減り、自転車操業は破綻する。旧ソ連はドイツの侵攻をはね返した軍事的威信をテコに東欧に君臨していたが、アフガニスタンでの敗北で威信を失い、本国までが崩壊した。ドルの威信の喪失もそれに近い影響を生じかねない。将来日本と中国がウォール街で覇権を争い、対立と協調を繰り返す形すら考えられる。ｘｘｘ