Financial Turmoil

Just remember, whenever you hear the phrase: "THIS IS THE GREATEST FINANCIAL DISASTER SINCE THE GREAT DEPRESSION!", you are near the bottom. This phrase came wafting, heavily italian-accented, out of my car stereo last night, and I knew immediately that the markets would rally the next day, and they did. As usual, it was the local NPR affiliate. It was some frustrated Italian NYU economist, they were interviewing,. He went on to blame 'free-market capitalism' for everything that has been going on on Wall Street this week. Look buddy it's not our fault that you couldn't get that cushy Banco di Roma job, and you now have to take the bus in from Weehauken! [I realize now that that voice of doom was none other than Nouriel Roubini. Ok ! maybe he wouldn't have takesn that job at Banco di Roma anyway-ed].
Is it just me? Or does it just feel as if every time NPR is reporting on any downturn in the stock market, they can barely contain their joy.


I've posted two articles below that go a long way to explaining what has happened in the last few days. Eventually, I'll stick the articles themselves onto my file share site:

The first is a NYT blog entry from the freakonomics guys. They get at the mechanics of how AIG and Lehman and Bear stumbled. Their explanation for why the Fed was able to rescue Bear and not LEH was interesting too.

Most of the commentary on the radio and in the media has been circling about two old scapegoats 'greed' and 'excess'. Recently a new scapegoat called 'predatory lending' has been invited to dance. The idea is that you have various functionaries that care more about fees generated from making and repackaging Home loans than about the soundness of the underlying loans. They find hapless victims and predatorily lend them money they cannot possibly pay back in the hopes that they will recover a minor fee of a few percentage points. It's like getting mugged, but you don't have to use any of your own money. The actual money has been coming in from international predatory investors as well as from soon-to-be retiring predatory baby-boomers in search of better returns than the stock market.
But I believe I found the real culprit. It was hiding out in an old 2005 article from FORTUNE magazine. I started reading the article today and then was shocked. Shocked, shocked shocked! to realize it was from 2005! The fourth horseman of this mini-apocalypse is a concept called 'Moral Caution'. It happens when your government insinuates that you should not do something, but implies that it will help you if you get into a big mess anyway. It's a little bit like giving out condoms to highschoolers, but in financial markets, that's really like giving out bubble gum flavored [CENSORED] instead! In any event, as you will read below, the two freddies are government-sponsored entities designed to take loans, repackage them as securities and then free up more capital by selling them on the open markets. The fact that they are government sponsored is where everything goes to hell, since, implicit in this relationship is the insinuation that the government would kinda sorta act as ultimate guarantor of these loans, not really, but only if it really really really has to and it has no choice at all . . . as it just has.
It would have been impossible to have carried out this entire charade without this last piece of the puzzle. Because the smart money knew and hoped that these investments would ultimately be safe. For all the criticism the rating agencies have been getting for mis-rating these securities, it seems that they knew something after all. They knew that the government would eventually step in and save the day. So if anybody starts talking about a lack of oversight, know this, that the perpetrator of this whole mess was literally the mother, the big daddy, the fattest cow in the history of all government sponsorship and oversight. These guys were the engine that generated these loans. I'm not saying that there were not a few bad apples on Wall Street, but this was the rotten apple tree. These Freddies are 5 parts lot's of big goverment lovin', 2 parts nominally for profit, and another 8 parts encumber the whole thing with an outsized social conscience driven by mandate, a recipe for disaster if there ever was one.
Isn't the old maxim, 'charity begins at home' far superior to 'I gave at the office' ?
Incidentally, there are more limousine liberals per square inch in those two institutions than . . . than . . . than . . . [ I need a simile here]. For more on this see this excellent article by Jonah Goldberg. The Obama connection is priceless!! I just can't believe McCain isn't using it.

happy reading!