Doctor Science Knows

Wednesday, September 24, 2008

Meltdown in Progress: Useful links

I am spending too much time reading about the financial crisis/bailout/meltdown. I hate money.

Good links that may help explain things:

Paul Krugman's blog, always.

Stirling Newberry on "The Crooked Deals that Made This Financial Meltdown Inevitable", Part 1. He promises Part 2 will be RSN.
The underlying problem then, is not the housing bust, since that could be dealt with by a relatively modest FDIC bail out of banks and changes to Freddie and Fannie, nor even the wall of paper that was created, since that could be dealt with by cleaning up a few toxic funds. It is that the very basic bet of the economy was wrong.

The very bet was that war and debt were all that was needed to grow for ever. Because every cent was being poured either into the war, or houses, or into gambling double and triple that these would expand forever, there was no money for anything else.

Nouriel Roubini on "The shadow banking system is unravelling".
Last week saw the demise of the shadow banking system that has been created over the past 20 years. Because of a greater regulation of banks, most financial intermediation in the past two decades has grown within this shadow system whose members are broker-dealers, hedge funds, private equity groups, structured investment vehicles and conduits, money market funds and non-bank mortgage lenders.

Like banks, most members of this system borrow very short-term and in liquid ways, are more highly leveraged than banks (the exception being money market funds) and lend and invest into more illiquid and long-term instruments. Like banks, they carry the risk that an otherwise solvent but liquid institution may be subject to a self-­fulfilling and destructive run on its ­liquid liabilities.

But unlike banks, which are sheltered from the risk of a run – via deposit insurance and central banks’ lender-of-last-resort liquidity – most members of the shadow system did not have access to these firewalls that ­prevent runs.
Roubini emphasizes that the crisis will necessarily involve European financial institutions, as well.

Jerome a Paris is one of the people best placed to say "I told you so." Over the past couple of years, he has been talking about The Anglo Disease:
The Anglo Disease is the label I have been using to describe the current situation, whereby too much debt has made the financial sector dominant, and starved the rest of the economy of oxygen - and not-so-coincidentally transfering massive wealth from the working classes to the very rich: debt, managed by the financial sector, and working under assumptions of ever increasing returns, is both the core tool of very obvious policies and the very instrument to hide these from view; feeding the ideology of selfishness, and hiding (temporarily, but for much longer than even its creators dared hope, I think) the empoverishment of the many, it is both self-sustaining and popular for the masses, is it has become a full scale addiction.

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