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Soros: Financial crisis as bad as the Great Depression
April 28, 2008 10:09 AM   Subscribe

The Financial Crisis: An Interview with George Soros. "We are in the midst of a financial crisis the likes of which we haven't seen since the Great Depression." (video, April 4)
posted by stbalbach (56 comments total) 8 users marked this as a favorite

 
Buffett says recession may be worse than feared.
posted by stbalbach at 10:09 AM on April 28, 2008


What the hell does he know? He probably spent all his money on margaritas.
posted by Viomeda at 10:12 AM on April 28, 2008 [2 favorites]


George Soros, just offering his disinterested criticism for us as always.
posted by resurrexit at 10:12 AM on April 28, 2008 [2 favorites]


reaction
posted by cavalier at 10:17 AM on April 28, 2008


Stiglitz agrees
posted by psmealey at 10:20 AM on April 28, 2008


Maybe if Obama starts wearing a flag pin on his lapel the recession will go away.
posted by spicynuts at 10:21 AM on April 28, 2008 [5 favorites]


Buffett says recession may be worse than feared.:

"'I think this is going to be fairly long and fairly deep, but who knows,' [Buffett] said."

Chilling. Simply Chilling
posted by mr_roboto at 10:24 AM on April 28, 2008


It'll be okay for Buffett. He'll ride it out. We taxpayers will just bail him out, along with the rest of the trade.
posted by Blazecock Pileon at 10:29 AM on April 28, 2008 [1 favorite]


I remember one of the "moderators" in the ABC debate saying that taxes were going to be the big economic issue in this election. No, the big issue will be trying to find the new FDR to help us through the new 1930s.
posted by East Manitoba Regional Junior Kabaddi Champion '94 at 10:33 AM on April 28, 2008 [2 favorites]


Can anyone say PEAK OIL?
posted by kristinahoge at 10:34 AM on April 28, 2008 [1 favorite]


The deeper the recession, the better for those able to wait... and wait... and then buy anything they want from those who have no choice but to sell.
posted by anthill at 10:39 AM on April 28, 2008 [1 favorite]


Folks will be here posting here any moment to tell us all that the worst is over.
posted by ornate insect at 10:42 AM on April 28, 2008


The worst is over.
posted by mazola at 10:46 AM on April 28, 2008 [6 favorites]


Folks will be here posting here any moment to tell us all that the worst is over.

Wha? I don't know what MeFi you belong to, but the one I frequent has a Doomsayer to Pollyanna ratio of about 2 to 1. Frequently, the discussions on these topics aren't event between the two groups; they're between two or more Doomsayers trying to outdo each other for the bleakest possible end scenario.
posted by psmealey at 10:51 AM on April 28, 2008 [11 favorites]


The rich are just trying to get us all to sell our stocks in a frenzy.

Clearance sale, anyone?
posted by shownomercy at 10:55 AM on April 28, 2008


Blazecock, are there stories about Buffett being bailed out in the past?
posted by zippy at 11:01 AM on April 28, 2008


Blazecock, are there stories about Buffett being bailed out in the past?

If he owns as many outlets for conspicuous income purchases as the article implies, and the situation is as genuinely bad as he's suggesting, then he's in for some juicy tax write-offs, at the very least.
posted by Blazecock Pileon at 11:07 AM on April 28, 2008


Can anyone say "Pee Coil?"
posted by dances_with_sneetches at 11:08 AM on April 28, 2008 [1 favorite]


Didn't Buffet buy up a bunch of Municipal bonds when no one else would take them (earlier this year), without which many local governments would have been hurt.
posted by drezdn at 11:19 AM on April 28, 2008


Wha? I don't know what MeFi you belong to, but the one I frequent has a Doomsayer to Pollyanna ratio of about 2 to 1. Frequently, the discussions on these topics aren't event between the two groups; they're between two or more Doomsayers trying to outdo each other for the bleakest possible end scenario.

um, this thread?
posted by ornate insect at 11:19 AM on April 28, 2008


Blazecock - do you mean the same Warren Buffet who thinks that the rich ought to pay higher taxes and that despite his own lack of tax shelters, he's not paying enough?

Like drezdn said, Buffet is more likely to ride in and bail out the US Gov't than the other way around...
posted by junkbox at 11:23 AM on April 28, 2008


um, this thread?

I'm still not seeing it. That thread mostly consists of a (very good, thorough, detailed and footnoted(!!)) lecture on securities trading and market dynamics by Mutant, who is something of a MeFI icon in this regard. I didn't see much "the worst is behind us" talk.

I think anyone that considers him or herself to be in expert in this field agrees that wishing ior the ordinary ebbs and flows of the business cycle won't make these problems go away. We're proper fucked, though we can argue if the apocalypse is around the corner or a few quarters away, or else it's just going to be pretty painful for the medium term.
posted by psmealey at 11:28 AM on April 28, 2008


Buffet is more likely to ride in and bail out the US Gov't than the other way around

Buffet is one of the good guys. I'm not sure he deserves mention in the same breath as those Bear Stearns clowns. At least based on what I have read about him, if his business ever went belly-up, I imagine that he'd be the first to own up to culpability and not take the bailout. I could well be wrong, but that seems to be his nature. For all of his beaucoup bucks, he and his family live remarkably unostentatious lives.
posted by psmealey at 11:30 AM on April 28, 2008 [2 favorites]


"Frequently, the discussions on these topics aren't event between the two groups; they're between two or more Doomsayers trying to outdo each other for the bleakest possible end scenario."

I give us six months before we're digging up cemeteries just to eat the dead.

Luckily, I'll have a stash of Cormack McCarthy books to cheer me up.
posted by klangklangston at 11:32 AM on April 28, 2008 [4 favorites]


Good old George Soros, one of the few native speakers of Esperanto. I often wonder whether it made his mental processes more efficient to have first learned a somewhat sensible primary language.
posted by ikkyu2 at 11:36 AM on April 28, 2008 [1 favorite]


I give us six months before we're digging up cemeteries just to eat the dead.

Too high in fiber, not enough protein and other nutrients. Suggest roaches instead.
posted by psmealey at 11:37 AM on April 28, 2008


"You have to find the right kind of balance [between regulation and open markets]... that's the message I am trying to get at." "What kind of system will evolve from this is a very open question." -Soros

This kind of vague commentary makes me even more cynical concerning our national economy. I imagine, of course, that there are some fairly specific recommendations he would make in his book, but the over-arching theme here seems to be that we need to derail the old economic theory in favor of something sustainable (and likely more liberal) whilst also dealing with political posturing in our polarized culture.

"Obama has the charisma and the vision to radically re-orient 'America' in the world, and that is what we need." "... I look forward to being critical of the next administration."-Soros

If this is the road we need to take, to which I assent, then I think I see his rationale for supporting Obama in '08. However, aren't the Clinton criticisms self-fulfilling concerning stubborn old-mules not getting along down the path to change?

What's my point? I don't know, just felt like sharing my concern.
posted by quanta and qualia at 11:41 AM on April 28, 2008


psmeasley--yes Mutant is, by hos own admission on that thread, "an incurable optimist," but he seems to think the worst is indeed over:

So while many in banking knew as far back as 1996 there was a high degree of probability of a US recession, many today think its coming to an end.

My own perception is that the opposite of this statement is true: many in banking are preparing for things to get worse before they get better, for Wall Street to shed 40,000 jobs (based on a recent report), for housing to continue to fall, for consumer confidence to stay low, and for the dollar to continue to slide. But I agree that no one has a crystal ball.
posted by ornate insect at 11:46 AM on April 28, 2008


Well, I for one can recall that Soros has called for the collapse of global capitalism before; in 1998 he wrote The Crisis of Global Capitalism: Open Society Endangered, in which he argued that open, unregulated markets would ultimately destroy capitalism (of course ignoring for the most part his famous and personally very profitable attacks on Pound Sterling).

A few years later Soros conceded in a New York Times interview that he got it all wrong, and the global economy didn't collapse. In fact his exact quote on the topic was ''Basically, I got carried away in thinking that the system might actually collapse.''

So he's at it again? Hard for me to get excited, really. Especially so when we're seeing the markets stablise, across multiple indicators.

On the other hand, it is an interesting interview. Buffet, by the way, doesn't so much as corroborate Soro's views, as he does waffle ("I think this is going to be fairly long and fairly deep, but who knows").

And Soros has been pushing that "Theory of Relfexivity" about for close to two decades now; in The Alchemy of Finance (1987), he had some rather intriguing comments:

"I did not observe reflexivity in financial markets but developed reflexivity as an abstract philosophical concept before I entered the financial markets. " which sorts seems like a solution looking for a problem, but what do I know.

Another curious excerpt from that book: "By proposing a general theory of reflexivity, I may have gone too far too soon. I claimed that economic theory is false and social science is a false metaphor. These are exaggerated claims.".

But I will grant that he does have no small amount of insight into the way market participants think, so it will be interesting to see how things shake out over the next few months.

Reflexivity, by the way, is intriguing as apparently its a mechanism / framework that helps adherents understand feedback between our understanding of reality and our own actions. Soros claims this can be scaled up from the individual agent, to the enterprise or sovereign level.

A good read; many thanks for posting this.

Incidentally, curious that in multiple interviews & articles Soros seems to be taking credit for reflexivity; as far as I know, some of the original work in this area was done by Merton (1948) based on work be Thomas (1923), and followed up by Modigliani (1954) and then by - well, I'm sure you get my point.

This is hardly primary research done by Soros.

---

Merton, R. K. ,1948, 'The self-fulfilling prophecy', Antioch Review
Thomas, W. I., 1923, 'The Unadjusted Girl : With Cases and Standpoint for Behavior Analysis, Little, Brown
Grunberg, E., Modigliani, F. , 1954, 'The predictability of social events', Journal of Political Economy,
posted by Mutant at 11:58 AM on April 28, 2008 [3 favorites]


many in banking are preparing for things to get worse before they get better, for Wall Street to shed 40,000 jobs

While I'm not as expert in finance as Mutant, that's typical behavior (I spent a few years in the business starting at the end of the 80s boom, through the Bush 1 recession and Gulf War I through part of the Clinton recovery). Large financial institutions (save Goldman) almost always over-hire during good times and understaff in bad. When recessions hit and no new growth is projected, it's typical for banks to cut pretty much to the bone. The Bear Stearns thing (as well as SocGen and Credit Suisse) sent a chill through the industry, and basically you're now seeing what fincos do at the end of the business cycle. It's just been a while since we've seen it.

As for the rest of it, it looks pretty bleak, but not merely because the issues that you mention will likely make this recession deeper and longer, but the more alarming never-happened-before stuff like $120 oil and rising, 10 year droughts, worldwide food shortages and price spikes point to some thing other than just a "correction".

As the old curse goes: "may you live in interesting times". That, we certainly do.
posted by psmealey at 11:59 AM on April 28, 2008 [1 favorite]


On the other hand, I'm sure that everything's gonna be just fine.
posted by psmealey at 12:01 PM on April 28, 2008


Mutant--maybe, just maybe, Soros was right the first time, but was off by 10 years. This recent article seems to suggest that we have been moving bubble-to-bubble for some time now.
posted by ornate insect at 12:06 PM on April 28, 2008 [2 favorites]


It is not as bad as Soros and other lefties say. this week we get out 600 bucks, via Buash, and that will turn the economy around. Or fill the gas tank on my two Hummers
posted by Postroad at 12:14 PM on April 28, 2008 [2 favorites]


ornate insect -- "My own perception is that the opposite of this statement is true ... "

Yes, ornate insect, in that finance thread you informed us all that you have "been following this stuff closely for some time now."

But my exact statement was "Now, however, the yield curve is looking pretty healthy. That by no means implies the recession is OVER. But the yield curve is predicting it will come to an end. Nothing more."

Later on, in response to three internet news articles you provided, I elaborated "If you can take a few minutes to read it, and if you research the yield curve somewhat (feel free to ask any questions you'd like) you'll see that we consider the Yield Curve to be a "predictor", not a concurrent indicator. What's the difference you might ask? Well, your news is current, while the yield curve looks forward.".

So, yes, the yield curve (amoung other indicators, look at Libor or Fed Funds, just to name a couple) is signaling a return to "normal" economic conditions.

Curious - did you finally get a chance to read the paper on the predictive power of the Yield Curve that I linked to? Good stuff, done by Estrella from The New York Fed. Very credible and respected in the field, and in this work he quantified and formalised something we've known for decades - the Yield Curve does predict the business cycle. Which, from a corporate finance perspective, of course makes sense. But a great achievement if an economist can mathematically prove a relationship holds. So its worth your time (and we'd have a far more productive chat on the topic if you did take the time to read the material at hand ... )


Thanks psmealey, but I'm hardly an expert. More a "Student of the Markets". And you're absolutely correct, we're going to get through this just fine. It seems that every day we see signs that this is beginning to look more and more like 1973 than 1929.

On preview: ornate thanks for the Harpers link, I haven't seen that. I'm well aware of financial bubbles, we had a very interesting thread about bubbles perhaps a week before you joined. Bubbles are a very, very interesting topic in finance, one that cuts across pure econometrics deep into psychology. Lot of money to be made in that area of finance.
posted by Mutant at 12:30 PM on April 28, 2008 [2 favorites]


Has anyone read The Roaring 2000s by Harry S. Dent? His finds a strong correlation between United States citizens in the prime of their spending ability and the strength of the economy and his theory is that the recent wave of baby boomer spending is beginning to taper off. So, all the spenders are slowly going into retirement. This, according to Dent, will lead to an inevitable crash (not a recession, crash) several times the magnitude of the Great Depression.

I'm not saying his argument fails to account for some of the more complex issues involved, but it is interesting nonetheless. Anyone else read it? Maybe I'm struggling with his main point, I haven't read the book for years.
posted by not applicable at 12:30 PM on April 28, 2008


Of course, George Soros is a bit of an expert on disastrous recessions. He's help cause them before.
posted by Viomeda at 1:11 PM on April 28, 2008


not applicable -- "Anyone else read it? "

I haven't read that particular book (know of it as well as Dent though), but have heard this argument before. In fact there was a notable debate on the topic between Jeremy Siegel and Michael Miliken a couple of years back.

Seems like Dent is taking Siegel's side (or vice versa, can't say who came up with this position) and Miliken is arguing the opposite side.

IIRC Siegel contended that the liquidation of portfolios by retiring baby boomers will give rise to a prolonged bear market, while Miliken positioned that investors in emerging nations would purchase American shares (due to the superior growth prospects) in large enough quantities to stave off a prolonged bear market.

Interesting paper - I'll try to find a free link, but the complete citation is :

Siegel, J., M. Miliken. 2006. 'Baby Boom—Baby Bomb? A Jeremy Siegel-Michael Miliken Debate', Miliken Institute Global Conference
posted by Mutant at 1:12 PM on April 28, 2008


every day we see signs that this is beginning to look more and more like 1973 than 1929.

What a relief! So its business as usual then?
posted by Fupped Duck at 1:20 PM on April 28, 2008


not applicable, compare this US population graph. Baby Boomers are defined as those born between 1943 and 1962 (roughly) so that is the roughly 40-60 category. When you look at it, where is the baby boomer population bubble? Maybe a small one. I just don't see it being a huge crash, plus people are living longer than ever so the boomers will keep on spending longer.
posted by stbalbach at 1:21 PM on April 28, 2008


George Soros is a bit of an expert on disastrous recessions. He's help cause them before

You misspelled Alan Walters, though Thatcher, Major and Hurd share the blame. They insisted on keeping the pound fixed despite an inflationary interest rate policy. It was an obvious short sell opportunity.1

Then they did the real damage -- they decided to hold the ERM peg when it was obvious to the world that it wasn't going to hold. They spiked interest rates to 8%, then 10%, then 12%, then 15% -- within a week, IIRC, and they were muttering about 18%, but everyone knew that they could never, ever hold those rates without shattering the pound, and worse, nobody believed that they would. So, instead of buying and holding, dealers kept borrowing and selling pounds.

I think the 15% rate lasted seven hours, then the UK caved and withdrew from the ERM. The pound dropped, interest rates rose, and all those people who shorted the pound were in the money. If the UK hadn't defended the untenable for so long, they would have actually *made* money on their foreign currency reserves, but they spent most of that defending the Pound -- and there would have been far few players squeezing the pound down by shorting.

It is Soros's fault? Hell no. Yes, he made a bunch of money -- betting that the UK couldn't hold the peg. He wasn't the only one betting that way, hardly *anybody* was betting for the peg, because it was stupid -- they could see the UK government desperately dumping reserves into holding the peg, and they knew when the UK would run out.

1) The opportunity: Borrow pounds, sell them for DMK or USD. Wait until the inevitable withdrawal, caused by the fact that the DMK-GBP and USD-GBP exchange rates were being held above market by the UK government. When the peg fails, allow pound to fall, then buy pounds with the (now worth more) DMK and return them to the loaner -- Since it will take fewer DMK to buy them than you got for selling them, you profit.

The risk -- the peg holds, or worse, the pound appreciates. Then you have to buy back those pounds at a higher cost when the loan is called. Oops. If the UK hadn't defended the peg for so long, the opportunity wouldn't have lasted long enough to really make a massive profit.
posted by eriko at 1:55 PM on April 28, 2008 [1 favorite]


eriko: It is Soros's fault? Hell no. Yes, he made a bunch of money -- betting that the UK couldn't hold the peg.

I agree that the real culprits are those who were in charge. ("But no!" cries Mr. Major. "It's a good thing we went ERM then, because it was good for character, and eventually created stability! Sometimes you have to pay foreign investors three billion sterling for stability in the financial markets!") Yet: taking a billion dollars out of the economy of the UK overnight, 'honest' or not? I wouldn't want any part of it, and it seems to me that it takes some hubris to justify that to yourself. Hubris like, oh, let's see, "I can do more good in the world with this cash than anyone in the UK." Not that I'm accusing Mr. Soros of that.

But then, there's a reason I'm not much of an investment hound.
posted by Viomeda at 2:23 PM on April 28, 2008


stbalbach: Dent's statistics refer to when baby boomers would be in the prime of their spending ability - roughly when they reach their late 40s through their 50s. So 1943 to 1963+50 years works out to right about now.

The problem is, Dent's statistics are very general. I was just hoping someone could provide some additional insight.
posted by not applicable at 2:42 PM on April 28, 2008


Bear in mind that those of us who believe in economic cycles oscillate regularly between Doomsayer and Pollyanna.

A couple of years ago I was regarded as a miserable pessimist for saying things like "even though they're not making new land, house prices can still go down" and "even though the economy's booming now we can't just spent unlimited amounts of money".

Now I'm an incorrigible optimist for suggesting it's not a good idea to put your life savings into cabbage seeds and rifle cartridges.

No-one can predict exactly when a boom will become a bust or vice versa. But I'm pretty sure within a few years I'll be back being regarded as a miserable doomsayer, when I start trying to explain that the latest bubble isn't a Permanent Shift to a New Paradigm after all...
posted by TheophileEscargot at 2:55 PM on April 28, 2008


Mutant: every day we see signs that this is beginning to look more and more like 1973 than 1929.

Fupped Duck: What a relief! So its business as usual then?


Well, I don't there's anyone who lived through and had to deal with that period of high inflation and high interest rates that would call the post-1973 period "business as usual."

I wonder what Mutant thinks about peak oil...
posted by KokuRyu at 2:57 PM on April 28, 2008


Doomsayers trying to outdo each other for the bleakest possible end scenario.

We've been in a debt-fueled party since Reagan started us on permanent deficit spending. The party has been getting bigger ever since, to the point of multiple financial manias and ensuing partial panics, offset only by the Fed's ongoing massive intervention to keep the party going. You can't, however, party forever.

The global system runs on debt, and the new debt creation has far outstripped the ability of the real economy underneath to service it. We require more and more and more debt every day just to keep the system running. We've grown a whole new class of paper-pushers that move abstracted forms of debt around, extracting ever larger chunks of the real wealth in the economy in exchange for precisely nothing but moving the debt.

The crisis here is that new debt creation has been impaired, because banks are figuring out that the economy can't pay things off anymore. So the system, which has come to require huge injections of debt, constantly, is in terrible shape, and getting worse by the day. The real, wealth-producing economy that was originally underneath has been largely suffocated, outcompeted by the low-risk, easy payoffs of manipulating financial assets instead. Our ability to generate new debt that's any good is now very limited... but the system absolutely requires gobs of new debt every day, far more than what the economy can actually provide.

When you see the government bailouts, like Bear Stearns and the British handing out free bonds in exchange for worthless assets... the governments are trying to restart the debt-creation engine. I'm still not sure whether or not it will work. Maybe we can resume partying for awhile longer. But we will end up right back where we are now, but worse, because the United States' real ability to generate wealth has been mostly destroyed. The world's central banks are trying to keep the shell game going, but both the US government and the US economy are bankrupt. They can't pay their collective debts, and the governments of the world are trying to fool everyone into thinking that it's business as usual. It isn't.

From a slightly different angle: the nature of compound interest is such that if you take on more debt than productive capacity to pay it off, even by a very little bit, and continue that process for long enough, you will go broke, much faster than you would think. I wouldn't characterize our financial profligacy as a 'little bit', and we've been at it for more than twenty years.
posted by Malor at 2:58 PM on April 28, 2008 [6 favorites]


Oh, and I've been saying for years that we've been headed for either 1929 or 1973, but in either case, it's going to be a lot worse. If they fail at getting the global debt-creation engine restarted, we'll go into a deflationary debt collapse. I suspect that won't happen, though, given the central banks' ingenuity at destroying the dollar, so I think we're headed the other way... at first it will look like 1973, but it's going to be tremendously worse and last far, far longer. I strongly suspect we'll end up very much like Zimbabwe.

Why? We're trying to extract more wealth from the economy than the economy can provide, and we're doing it by manipulating the money supply. This always, always eventually fails, because money isn't wealth.

We are using fake money to support wishful thinking. If you continue that long enough, you get Zimbabwe.
posted by Malor at 3:08 PM on April 28, 2008 [1 favorite]


I can't speak to the stock market ups and downs, but I have spent the last several months researching and writing about the foreclosure mess. It made me very crabby living day in and day out reading about it. I noticed part of Soros' theory depends on the housing market.

Here is an article I found interesting, in light of all the media hoopla.

To quote a bit:

Data from Countrywide Financial Corp., the nation's largest mortgage lender, backs up this point. The No. 1 reason its customers have been defaulting on mortgage loans is because their income was cut. That accounted for almost 60 percent of its loan defaults in the first 10 months of this year; add in sickness and divorce and the total jumps to more than 80 percent.

Way down on the causes-for-foreclosures list at Countrywide -- just under 2 percent -- is a payment adjustment.


There are so many large groups out there now to help consumers and also state programs, and the subprime mess is quickly being turned into a judiciary issue as non-profit consumer advocate organizations challenge the foreclosures in court with charges of predatory lending. In fact, I noticed a while back that Paulson & Co., who made money predicting this crisis, is now funding a legal defense group for homeowners. This is announced here and other places. I wonder what this is all about, maybe someone here can inform me. Is John Paulson doing this out of the goodness of his heart?

Also, it should be noted that the HOPE project is funded by the big lenders, but the actual work is farmed out to people at the CCCS and former CCCS offices throughout the country, most of whom are under the umbrella of Money Management International (MMI). They get paid grant money from HUD to provide consumer housing counseling. They do that for free; however, they do charge for their debt management programs. Some of the reviews on these programs are mixed, depending on which MMI franchise you go to.

HUD provides a listing of free housing counselors, and if you go look at their site, you will see that CCCS dominates the list for every state. There are several community action programs, including here in Maine, but the average homeowner, according to my research, does not even contact their lender for forbearance. Those that do have horror stories of wading through the loss mitigation department, who are overburdened and do not respond, or deny requests for adjustments, thus resulting in foreclosure. One wonders why the companies can provide funding for a 1-800 hotline that goes to an already existing service provided by our government instead of beefing up their loss mitigation department staff. Apparently they would rather foreclose and write it off than work with Mr. or Ms. Average Homeowner.

All this feel-good stuff and hand waving feels a bit sour to me after all I've read, and I'm certainly not as intelligent as many of you folks. Soros' remarks feel very off and vague to me and I feel sorry for anyone who is in a little financial trouble and has to deal with the big lenders.
posted by Marie Mon Dieu at 3:16 PM on April 28, 2008


Mutant--I lurked before I joined, and read the thread about bubbles you linked to. Like the collapse of the Berlin Wall, which few if any Sovietologists predicted, a week before the Bear Stearns collapse I know of no financial "expert" or economist who predicted it. My own rather uncontroversial view is that the Bear collapse, like the Enron collapse, is indicative of a fundamental instability in the market that represents a runaway speculative bubble brought about by irresponsible practices (hedge funds, subprime lending, etc) in the investment banking industry--practices encouraged by years of deregulation and lack of oversight. Most Wall Street experts tend to want to ignore any systemic long-term problems, and have a vested interest in reinforcing the notion that the market is merely correcting itself. The fact is that the Fed has been keeping the financial sector afloat since the Bear collapse, and have been doing so to stave of a panic. Whether this is right or wrong is another matter, but the official tally for bank write-downs since last years is, according to the New York Times, well in excess of $300 billion. And there is every indication that that figure will continue to grow over the next 6 to 12 months. Maybe I'm wrong, and maybe we've turned a corner, but as you say there is room for more than one viewpoint in the world.
posted by ornate insect at 3:24 PM on April 28, 2008 [2 favorites]


Homeowner Vacancies Hit Record High
posted by ornate insect at 3:39 PM on April 28, 2008


Those who are able to are fighting back. You can find stories of those who can't all over the 'net.

There's no doubt about the housing crisis, the question is who are the players and what game are they playing now? How do you feel about Payday loan places, are they just games for suckers or are they usury? Note that none of the government programs allow assistance for investor-owned properties, they are all for houses that families live in.
posted by Marie Mon Dieu at 4:09 PM on April 28, 2008


KokuRyu -- "Well, I don't there's anyone who lived through and had to deal with that period of high inflation and high interest rates that would call the post-1973 period "business as usual."


Yeh, at the risk of betraying my age (*cough* a young, energetic 51 *cough*) , I not only lived through the 70's but also was active in the markets then. That's why my message about those who claim to observe a "new" situation or problem is (almost) always, "this isn't new", and "no, this won't be the end of the world".

It seems this reminder is always directed towards a vocal minority who insist that we live in "special times".

Well, these times aren't special and they aren't unique, at least not to those that look back and study the history of finance. Variations on a theme, really. Even last summers credit crunch. It (a credit crunch) has happened before. Not on the same scale, not with the same instruments and obviously not with the same parties. But credit crunches? Sure, same theme, they've happened before. And they'll happen again. Absolutely. Nothing new under the sun if you look back at the history of finance.

So yeh, I've long thought we'd end up with a 1970's style bout of inflation, followed (perhaps) by a period of stagflation. We're now seeing indicators flashing strong probability of stagflation ahead, so folks look to your history and figure out how to position yourself.

And business as usual? Of course, of a sort. No, not what we've been used to over the past decade or so. That was a period of rather exceptional returns, to say the least.

But the world didn't end in the seventies. No, interest rates spiked up to 20% or so, inflation was a monster lurking around every corner, folks had to change their behaviours drastically to get through, but guess what? Couples were married, babies were born, sadly people died but somehow the world muddled its way through. It won't be much different this time.

Sure, inflation is high and probably will get higher. Not a surprise, really.


"I wonder what Mutant thinks about peak oil..."

Goshl, I (unfortunately) haven't really had the chance to study this topic in the depth it deserves, wish I did have. Hubbert's curves are indeed attractive for many reasons and he's got the track record (wrt US Oil Reserves), but on the other hand some folks argue that he ignored probable technological advances. I used to have papers on Peak Oil but can't cite source any longer (different market focus).

So I'm not sure. However, there are some traders here on MeFi that have opinions on Peak Oil and are putting their money on one side of the issue or the other (we mail each other about the finance threads sometimes). Sorry for waffling, I don't want to betray confidences, will shoot a MeFiMail over to them and see if they care to comment.



ornate insect -- "...a week before the Bear Stearns collapse I know of no financial "expert" or economist who predicted it."

Yeh, it seems like a left field event, to be sure, and Bear's stock was indeed attractive for a while there. But can you really say that nobody predicted the collapse?

We all saw the share price (precipitously!) decline, from June Bear's stock was getting mauled, dropping from north of $150 / share down to about $40 right before they announced the deal (and then the abyss).

But at least one expert certainly knew something was up with Bear - the market. Like my arguments about the predictive power of The Yield Curve, folks sometimes forget the equity markets also have tremendous predictive powers.



"Bear collapse, like the Enron collapse, is indicative of a fundamental instability in the market..."

Gosh everything I'm reading and hearing says Bear was brought down due to a liquidity problem, but Enron, however, was nothing more than accounting fraud,

Seems like the collapse of Enron has little or nothing to do with "instability in the market". Fraud is fraud. Broad market volatility usually has nothing to do with fraud (we call the former systemic risk and the later specific risk).



"Most Wall Street experts tend to want to ignore any systemic long-term problems, and have a vested interest in reinforcing the notion that the market is merely correcting itself."

Wow ornate insect I do hope you're not trying to corral me into that corner ("Most Wall Street experts"); others have tried to categorise my arguments as "orthodox", implying that I'm somehow part of the problem.

I can't apologise for being (somewhat, still learning, don't you know) knowledgeable on this topic. And to be brutally honest, when you consistently link to Yahoo! news as "evidence" supporting your arguments, I don't really see a depth of expertise behind that opinion. An interest, sure, you clearly read a few blogs and from time to time take in some financial news, and, well, I find that commendable. Seriously (btw, have you read Estrella's paper yet? Would probably get a lot out of it ... ). But you're going to have to provide more rigour in your arguments to convince me of the veracity of your views. The Bear / Enron confusion is an example.

But back to your statement; in reality any Wall Street expert would NOT want to "ignore any systemic long-term problems" as they could directly and personally profit from such problems. Exploit them. Remember, investment banking is largely a rewards driven game. No shortage of folks here on MeFi have raised this moral hazard in the past.

No, should such systemic problems exist, I'm sure we'd see evidence of the ruthless exploitation of such market opportunities (until they no longer exist, having been arbitraged away but that's for another thread).



"Whether this is right or wrong is another matter, but the official tally for bank write-downs since last years is, according to the New York Times, well in excess of $300 billion. And there is every indication that that figure will continue to grow over the next 6 to 12 months..."

Sure, its possible the final bill will be bigger. Probable, I'd say.

But a few questions - what percentage of the total market is $300 billion? And there is a difference, a BIG difference between a write down and a write off. The former implies a total loss, while the latter a mere reduction.

So before I'd get concerned I'd like you (after all, this is your argument) to tell us percentage wise what a hit to the total market this $300 billion is, and how much of that is a complete liquidation of equity, of funds lent.

My view on the subject can be expressed this simply : there are few properties that are worth nothing now that were worth something great than nothing six or twelve months ago.

Worth less? Probably. Worth zero. Few or none.



"...but as you say there is room for more than one viewpoint in the world."

Sure, ornate insect, one thing I like about MeFi is that everyone is always willing to entertain informed views.

My own (oft expressed) opinion: diversity makes a market. And there are some great deals out there now, when retail money runs scared is the time to hold your positions, add to existing positions or go long in (carefully selected, no banks please!) asset classes.
posted by Mutant at 5:43 PM on April 28, 2008 [1 favorite]


mutant--I can only be condescended to and patronized so much. Maybe if you were less glib and less self-satisfied it would be easier for me to respond to your questions. As it is, I can't help but interpret your Mandarin glibness and self-satisfaction as indictitive of a bad case of fiscal-ese: you apparently have convinced yourself that the financial sector is far more complex than it really is.
posted by ornate insect at 7:12 PM on April 28, 2008


Personally, this doesn't bother me too much. If it keeps people from building and buying more crap it can only be a good thing in the big picture. Of course, that's pretty easy for me to say as I have hardly anything to lose.
posted by Jess the Mess at 7:53 PM on April 28, 2008


I can only be condescended to and patronized so much.

Well, if what you said made more sense it wouldn't be necessary to knock it back a few notches. I think Mutant did a good job of exposing the weaknesses in your points, with grace, wit and entertainment to boot.

Mandarin glibness

Silly Orientals!

you apparently have convinced yourself that the financial sector is far more complex than it really is

Under control, all figured out, no worries, carry on.
posted by stbalbach at 8:39 PM on April 28, 2008


TheophileEscargot writes "Now I'm an incorrigible optimist for suggesting it's not a good idea to put your life savings into cabbage seeds and rifle cartridges."

Really? Damn. Well, I guess it's tulip futures for me!
posted by krinklyfig at 9:32 PM on April 28, 2008


ornate insect -- "...it would be easier for me to respond to your questions."

Ok, then please allow me to put your factoid into some perspective, and help you understand why I'm not panicking (at least a the present, in this business who knows what tomorrow will bring) at the write downs.

Caveat: While I can present data to back up this argument, I'm only going to provide a single source. Others don't differ in size that markedly, perhaps are more current but somewhat less complete.

As of 2005 the Bank for International Settlements (BIS) sized the US Mortgage Market at roughly $8 trillion [.pdf]. While its safe to conclude the market grew in size up until the correction, lets work with this figure as is so our analysis will have conservative results.

So taking the previously stated write down of $300 billion, we see that perhaps 3.75% of the outstanding mortgage debt is at risk of being revalued. Not lost, as would be the case in a write off, but simply having the value changed. I still don't see anything earth shaking, we all knew housing was overvalued, I said as much to Business Week magazine in 2006, and this wasn't solely my view, no, lots of folks were warning of the housing bubble.

Further, and as we previously discussed, in 2006 many of us in banking suspected there was a high degree of probability of a US recession, perhaps driven by housing. The Yield Curve that I keep mentioning was but one quantitative indicator (there are others). Another, less quantitative indicator (but one I value very much as its after the Peter Lynch school of anecdotal indicators): banks and other financial institutions were hiring specialists in liquidations, restructuring and distressed debt in record numbers, folks that largely sat on their asses for about a year until the crap hit the fan.

So no surprises there, no reason to panic.

But lets take this further. Let's assume that a full ONE TRILLION of the outstanding mortgage debt will be written down. What might appear to be a pessimistic view is indeed consistent with the scale of the recapitlisation going on presently in banking (e.g., rights issues, secondary offerings, etc) as well as the estimates of some banking analysts.

So then we'd have 12.5% (one eighth) of the outstanding mortgage debt being written down. Ok then, now we're getting up there, a material (to use an accounting phrase) difference, to be sure.

But panic time? Before the crying and gnashing of teeth starts (plenty of time for that later), let's look closer.

First, if you're long a particular bank (or the entire sector), holy shit big time panic as you're getting diluted! Which is a polite way for those of us in finance to tell shareholders they're getting screwed.

Second caveat, and perhaps more important - the fundamental difference between write downs and write offs that was illustrated before. The banks aren't writing off one trillion of their debt. They are writing it down, marking it's value DOWN.

That McMansion that was sold for one million dollars? Now the market - and the bank - values it at 40% less, lets call it six hundred million. So they are changing the value of the property the mortgage was written against.

And under the portions of Generally Accepted Accounting Principles (aka, GAPP) applying to the Impairment of Long Lived Assets, when banks write down loans, the assets in question are still carried on the balance sheet, just at (perhaps sharply) reduced value.

The loans are not written off, removed from the banks balance sheets, but revalued. No, such loans are impaired assets by definition, as the present value of all payments to be received during the term of the loan (e.g., but not necessarily always a mortgage )is less than the current market value of the asset.

So since we're talking about reductions and not total elimination, and, taking the long view, this NOT the first time that The United States housing market has crashed. No, these times aren't "special" and sorry, but I just don't see a need to panic at the write offs that have been announced (or the un-announced write offs the markets are pricing in; its tough, but avoid investing in banks until the dust settles somewhat ... ).

The history of finance tells us that people who get excited, who panic or get greedy in these circumstances lose. Those that take calm, measured analysis' of the situation, model the scenarios against possible actions, folks who arrive at decisions fully cognizant of risks and rewards, will do well.



"...you apparently have convinced yourself that the financial sector is far more complex than it really is..."

Well, I don't know your background ornate insect, but speaking for myself, yeh, I'm a Student of the Markets, I have always been fascinated by the subject.

I've never claimed to be the brightest bulb in the pack; in fact I know myself well enough to realise that unlike other folks, I've got to work hard - very hard - at many things, finance included. There are lots of other folks in the field who are brighter and more capable than myself; I'd be the first to admit this (but hey, what a looker I am) .

However, I am fortunate enough to be interested, passionately interested in my field - besides contemporary art, travel to Developing Nations and cooking, finance is about all I'm interested in - and blessed enough to work in banking. And my passion borders on near total consumption at times. How bad can it get one asks? Well, most rooms in our flat have a Macintosh displaying real time market data & news for starters. And then there's the print publications, research papers, finance books to be read. Truth be told, I'm almost always overwhelmed by how much there is to be learned .

So yes, I do have a healthy respect for what I perceive to be the complexities of finance.





You haven't provided any information in your profile that clues me into your location, and I do like my comments to be as concise as possible. So as an American who moved to London about eleven years ago, I'd just like to point out that in the calculations presented I've used the American convention - e.g., one billion is 1,000,000,000 and a trillion is 1,000,000,000,000, and one trillion is one thousand times one billion.

By contrast the British system considers one billion as 1,000,000,000,000 and one trillion as 1,000,000,000,000,000,000, with one trillion is one million times one billion.

Just thought I'd mention this as I suspect from some of your comments that you're UK based; when I started teaching part time at a British University I actually tripped over this a couple of times. Confusion and madness ensued. Or at least a few bad explanations, on my part. And there is no need for me to be causing that on MeFi.

posted by Mutant at 5:00 AM on April 29, 2008


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