As described by the Institute of Chartered Accountants in Australia. If you’re still confused about what happened, it’s a good primer. Look for the chart and the narrative as it follows the mortgage from Mr. and Mrs. Jones to their local bank, and their local bank to an investment bank and upward. And what happened. The chart is a keeper.
Some commenters justly note that the presntation leaves out the crucial role of Fannie and Freddy in amplifying the disaster. Maybe I can find material that will complement the shortcomings of this primer. But even as is it does show the interrelatedness of the financial world and illustrate how pursuing an apparent social good like “affordable housing” can really lead to a nightmare. What formerly prevented failed social engineering schemes from having a global impact was the disconnectedness of command economies. They were self-limited in the amount of havoc they could cause. But in a world linked by vast financial systems and information architctures the consequences of an ill-conceived plan can cascade progressively. The problem with relying on more regulation to solve the problem is that it puts the very same political class which generated the problem in charge of preventing it.
If you wanted to store eggs while saving on wicker, you would put all your eggs in one big basket rather than in two smaller ones. It would be the right thing to do if you were sure you wouldn’t drop the basket. In situations where danger is considered minimal, convenience is often given priority over safety. This accounts for the difference between the design of a cruise ship and an aircraft carrier. One is optimized for comfort, the other for survivability.
A cruise ship contains many large spaces — the better to have theaters, restaurants and function rooms. The absence of likely danger makes it possible to allot relatively less tonnage to engine power, less steel to the framing and hide many of the utilities behind decorative paneling. Aircraft carriers, on the other hand, are ridiculously overpowered, subdivided into a maze of watertight compartments, and have their utilities exposed to maintenance access whenever they are not covered with armor plate. Aircraft carriers are noisy, industrially ugly and very uncomfortable to live in. They are also very hard to sink.
It is actually possible not so see something that is really there if the signal it emits does not match the human visual spectrum and/or our visual signal processing system eliminates the sight of it as noise. We can’t see patterns that our brains have filtered out. When a terrifying creature from outer space has these attirbutes in a science fiction/horror movie the result is something like the Predator. In movies of that type, much of the action revolves around learning how to see the monster and the remainder on how to defeat it. The Economist article entitled “The Confessions of a Risk Manager”, written by a risk manager at a “large global bank” describes how this can happen, not in a science fiction/horror movie, but in the actual world economy.
In January 2007 the world looked almost riskless. At the beginning of that year I gathered my team for an off-site meeting to identify our top five risks for the coming 12 months. We were paid to think about the downsides but it was hard to see where the problems would come from. Four years of falling credit spreads, low interest rates, virtually no defaults in our loan portfolio and historically low volatility levels: it was the most benign risk environment we had seen in 20 years.
The Washington Post describes an angry crowd at a Republican political rally in Wisconsin — angry at Obama for what they believe he represents — and more interestingly, angry at McCain for waltzing around with him in the ring like a sawdust dummy.
WAUKESHA, Wis., Oct. 9 — There were shouts of “Nobama” and “Socialist” at the mention of the Democratic presidential nominee. There were boos, middle fingers turned up and thumbs turned down as a media caravan moved through the crowd Thursday for a midday town hall gathering featuring John McCain and Sarah Palin. “It is absolutely vital that you take it to Obama, that you hit him where it hits, there’s a soft spot,” said James T. Harris, a local radio talk show host … The crowd of thousands roared its approval.
“I’m mad! I’m really mad!” another man said, taking the microphone and refusing to surrender it easily, even when McCain tried to agree with him.
“I’m not done. Lemme finish, please,” he said after a standing ovation. “When you have Obama, [House Speaker Nancy] Pelosi and the rest of the hooligans up there going to run the country, we have to have our head examined.
“It’s time that you two represent the rest of us. So go get ‘em.”
Nassim Nicolas Taleb, the author of the Black Swan, quotes from his own book to show that he has been warning against a systematic collapse of the banking system for a long time. But the collapse was not an instance of a Black Swan, which is an unpredictable rare event. Instead he has long maintained that the collapse we are now witnessing was the result of epistemic arrogance which he defines as “a measure of the difference between what someone actually knows and how much he thinks he knows.” Taleb wrote: “to me a banking crisis –worse than what we have ever seen — was unavoidable and NOT A BLACK SWAN, just as a drunk and incompetent pilot would eventually crash the plane. And I kept receiving insults for 12 years!” His own book had this to say about Fannie Mae, bankers and epistemic arrogance. It was devastatingly cutting writing and now seems justified by events.
An overwhelming desire to live “just so” seems to have infected Western civilization. A woman who immigrated to Britain from Afghanistan has been given £170,000 a year to live in £1.2m house,” according to the UK Telegraph, because the government regulations require that a family with seven children must live in a five bedroom house. And only house available in the neighborhood with five bedrooms was a mansion.
Toorpakai Saindi, who has seven children, has been granted an estimated £400 a week in child and local tax benefits, while her landlord receives £12,458 a month because there is no other suitable property available. …Landlord Ajit Panesar, who is acting within his rights, fixed a value for his Acton property so that the Rent Service – an executive agency of the Department for Work and Pensions - could advise the council what it should pay. It came up with a figure of £12,458 a month. …
Her son Jawad Saindi, 20, said although it felt like they had won the lottery, his mother complains that the house is too big to clean. “If someone gave you a lottery ticket would you leave it? No. You take what you get given,” he said. …
The Saindis were first housed in a three bedroom property in Enfield. Four years later they moved to a five-bedroom house in Ealing and three months ago were placed at their current address which they are entitled to have by law given the size of their family.
Stephen Green writes, “Instant analysis? McCain won, but not by nearly enough to matter. He was up against a punk kid, and barely came away on points. Barely. McCain is answering the questions for real. I’m not sure it serves him much better than Obama’s smooth (if silly) segue.” For some on each side of the aisle the fine points of the policy debate are less important than beating the opposition. This is the intensity which some viewers would have preferred the debates to have been conducted but Gary Cooper’s gone and Sarah Palin’s not running for President this year.
Fear and loathing everywhere. The sky is falling. We’re all going to die.
Richard Fuld, the disgraced head of Lehman Brothers, was punched in the face in the office gym amid the bank’s collapse. “He was on a treadmill with a heart monitor on. Someone was in the corner, pumping iron and he walked over and he knocked him out cold. And frankly after having watched [Mr Fuld's testimony to the committee], I’d have done the same too.”
“Jim Cramer, the wildly animated cheerleader for the stock market, who on his popular television show tends to be more bullish than most analysts, retreated yesterday, urging stockholders to dump their holdings as quickly as possible. ‘Whatever money you may need for the next five years, please take it out of the stock market right now, this week,’ he said.”
During the past week, we have tipped over the edge, into the middle of the abyss. Systemic collapse is in full train. The Netherlands has just rushed through a second, more sweeping nationalisation of Fortis. Ireland and Greece have had to rescue all their banks. Iceland is facing an Argentine denouement. The US commercial paper market is closed. It shrank $95bn last week, and has lost $208bn in three weeks. The interbank lending market has seized up. There are almost no bids. It is a ghost market. Healthy companies cannot roll over debt. Some will have to sack staff today to stave off default. As the unflappable Warren Buffett puts it, the credit freeze is “sucking blood” out of the economy. “In my adult lifetime, I don’t think I’ve ever seen people as fearful,” he said. We are fast approaching the point of no return. The only way out of this calamitous descent is “shock and awe” on a global scale, and even that may not be enough.
M R Venkatesh at Rediff asks whether China’s accumulation of 2 triillion in US dollar reserves has an ominious purpose and whether that card is about to be played. The close linkage between economic and foreign security has rarely been subjected to close scrutiny. The recent financial crisis raises the question whether appointing Barney Frank to his position isn’t at least as important as appointing a General Petraeus to his.
This gargantuan build-up of forex reserves by China has strangely received very little attention of economists, policy analysts, currency traders and, of course, geo-strategists around the world. … After adjusting for all known sources of reserve accretion, experts conclude that approximately an excess of $200 billion could have flown into China as ‘hot money’ — read inexplicable flow of funds — in this period. The Economist — in one of its issue in recent months — quotes Michael Pettis, an economist working in China, who explains how and why hot money flows into China. According to Pettis, hot money comes into China when companies overstate FDI and over-invoice exports.
Samuel Johnson once wrote that “the prospect of hanging focuses the mind wonderfully”. Although the onus for the recent financial crisis has been heaped upon one party by the MSM — the Republicans – the very gravity of the situation can demolish frivolity and produce unexpectedly clear thinking. This YouTube video clip shows Alec Baldwin blaming Barney Frank and the Democrats in large measure for the subprime crisis. He is entirely correct in saying there’s enough blame to go around on both sides of the aisle.
