Wednesday, February 18, 2009

Risky business.

I'm assuming you all watched FRONTLINE: "Inside the Meltdown" last night?

Completely amazing.

I mean, I knew everything on there, but put into contextual sequence like that really brought it home.

Utterly baffling.

Lack of regulations? Hell. What completely leaps out is the complete lack of oversight.

It's as if the parents left the house to a bunch of 10 year olds for a few months, with the instructions "to behave." Leaving the key to the liquor cabinet hanging from a hook, and the combination to the safe written on the door.

Risky business, indeed.


Bewert said...

Dunc, you not following the storyline about how it's all the fault of those millions of idiots who got bigger mortgages than they could pay...

Duncan McGeary said...

Well, the neighbor kids got in on the act. But it wasn't their liquor cabinet....

Bewert said...

That was sarcasm, Dunc. The mortgage thing is nothing compared to the CDS's, CDO's, and all the other creative derivatives built by the newest Masters of the Universe. One is a $25 billion problem and the other is a $600 trillion problem.

Bewert said...

Using your analogy, it's like the kids made up "insurance certificates" that would be paid if and when the liquor was gone, and sold these to the neighbor kids hundreds of times more often than their was actual liquor. They said if we manage to finish the liquor, this insurance you paid for will buy more.

Then they took all that money and mailed it to a secret account in the Cayman Islands, drank all the liquor, and when the neighbor kids came to get their insurance money, they pulled out their empty pockets and said "sorry--go ask Obama".

Duncan McGeary said...

The mortgages were just the 'key'.

And I'm not sure there is a safe lifeboat off this wreck.

Bewert said...

Re: The mortgages were just the 'key'.


Yes, the starting point. Then they added in credit card lending and even student loan lending, creating bundles to sell, all with AAA ratings.

Now this we might have survived if it had stopped there. But it didn't. To hedge the risk, they created CDS's or Credit Default Swaps. Insurance contracts that paid off if the debit bundles defaulted. And even this we might have survived, but for the final step.

And this one requires a suspension of disbelief that it was ever allowed to occur: not just the holders of debt bundles bought the insurance, but many hundreds of non-holders did as well. It would be like all your fellow downtown shop owners, landlords, etc. buying life insurance on you. Some of them buying several policies on your impending demise.

Which the sellers of those insurance policies made big bucks off of, but not enough to actually cover the policy if you actually died. And they took that money and gave themselves bonuses and corporate jets and such instead of investing it in nice safe T-Bills or something so that they would have the money when needed to pay off those policies.

Now that is the final source giant sucking sound of the world's economy going down the drain.

And, no, there isn't a clear way out of it.

tim said...

There is never, ever enough oversight. If we had "enough" oversight, we'd be a Kafka novel of red tape and oppressiveness. We'd also be inefficient, as we'd be 2/3 regulators and 1/3 productive.

The key is to not back crazy stuff with Federal money. Backing house loans with Freddie and Fannie lead to ridiculous housing prices. Backing school loans led to ridiculous college tuition.

Everything we try to "encourage" by backing it with federal money is merely a transfer of wealth that ends up hurting the people we're trying to help.

We should stop "encouraging" things by backing them with federal money. Other ways should be found to help people.

Linda McGeary said...

That is easy to say, but how, and who?
If it is left up to individuals to help people, are you willing to help pay your neighbors mortgage when he loses his job through no fault of his own?
Or is it just ok to let them try and find a camp ground and live in their car?

tim said...

Linda, not sure what your point is. All I'm saying is every time we use federal money to promote something, it ends up being more expensive, because the federal money is there.

Do you think it was good that we reworked loans so that minorities could buy houses? Seems like we just hurt them. They would have been better off renting without the federal distortion.

Did we do students any good with loans? Only for the first couple years. After that, the schools adapted to all the money by raising tuition to match the federal money. Again, more people would have been better served without the federal distortion.

On the positive side, we have some really outstanding Frank Gehry architecture on college campuses, build on the blood, sweat, and misery of overextended students.