Posts Tagged ‘credit bubble’

Symbiotic twin killings

11 June 2009

What caused the crisis?  It seems like most of the plausible answers I’ve heard come down to one of two basic explanations:

(1) “We were living beyond our means” — Congressman Dan Maffei (D-NY), in a WRVO Community Forum in Syracuse last week that included, um, me.  Sounded very reasonable coming from Congressman Maffei, less so coming from stockbroker/ investment advisor/ author Peter Schiff on the other night’s “Daily Show”, probably because of the diametrically opposite policy prescriptions the two draw.  Maffei backs the stimulus bill and wants to see the economy recover as soon as possible; Schiff is an adherent of the Austrian school and thinks a good old bloodletting (oops, “liquidation” or “correction”) is just what the doctor ordered.  Either way, this explanation has a lot going for it, as it explains the rash of subprime mortgage borrowing, home equity loans, maxed-out credit cards, etc.

(2) A “global savings glut” led to stock and housing bubbles, which finally burst — Fed Chairman Ben Bernanke, Nobel economist / NYT columnist Paul Krugman.  The idea here is that while we spendthrift Americans were running up huge debts, people in other countries, notably China and Japan, as well as the minority of wealthy Americans with high savings rates, had large pools of savings seeking a good risk-adjusted return.   And they invested much of it here, in Treasury bonds, thereby keeping U.S. interest rates low; in the stock market, reinflating the late 1990s bubble; in the corporate bond market, lowering rates on all bonds, even junk bonds; and in real estate, largely through securitized collections of other people’s mortgages.  (By some accounts, demand created its own supply of mortgage-backed securities — after the 2001 stock debacle, investors were looking for an alternative to stocks and thought real estate looked promising.)  A particular problem here seems to be that many investors opted for wildly risky investment vehicles, like investing in “diverse” portfolios of dodgy mortgages or blindly handing their money over to a Bernie Madoff or a Robert Allen Stanford, without realizing they were risky.

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Two disgraced but insightful peas in a pod?

15 December 2008

I couldn’t resist posting these two items together:

Henry Blodget, the disgraced former equity analyst for Oppenheimer, busted by then-New York Attorney General Eliot Spitzer and the U.S. Securities and Exchange Commission for securities fraud, has a compelling, thought-provoking essay in the December 2008 Atlantic, titled “Why Wall Street Always Blows It.” To be sure, it’s often self-serving, especially his claim that we’re all guilty, not just financial professionals (shades of those great scenes on “The Simpsons” when Homer, after totally screwing everything up, says, “Now let’s not play the blame game”).  But it’s informative just the same, and a good read too.  I thought his point about a larger credit bubble was well taken:

“Why did the housing bubble follow the tech bubble so closely? Because both were really just parts of a larger credit bubble, which had been building since the late 1980s. That bubble didn’t deflate after the 2000 crash, in part thanks to Greenspan’s attempts to save the economy.”

Spitzer, the more recently disgraced former New York Attorney General-turned-Governor, has begun his rehabilitation just as Blodget did:  by writing a column for the online magazine SlateSpitzer’s first column is a critical look at the financial industry bailouts, which he sees as cascading from excessive consolidation in the industry, to the point where so many financial institutions become “too big to fail” that policymakers have almost no choice but to perform these lavish bailouts when things go bad.  It’s an interesting point, a bit different from the usual point about excessive deregulation, as the banking industry had been consolidating well before the Gramm-Leach-Bliley deregulation of 1998.  But I don’t buy Spitzer’s conclusion that antitrust action to break up the big banks is needed.  There do seem to be significant economies of scale in banking; I think it’s no coincidence that the banking industry is also highly concentrated, in fact more so, in the European social democracies.

(modified a bit on 18 December 2008 )