Weekly “Economic Crisis” Thread

I thought I’d kick off this week’s “Economic Crisis” thread. I’m sure we’re going to see alot of cut & paste clips on how it is “all over but the singing” and how is “will get much worse before we see the new dawn”… and this is a good thing – I like the opposing viewpoints, especially when I see them both backed up by something other than our own rhetoric 🙂

That said, I was hoping we could perhaps go back a little bit on the timeline and look at the underlying causes. I’m not particularly interested in seeing the “he/she called it first”, but more “How this all came to be” in a legal & technical sense. I think we all agree “something” happened to the economic fabric as we’ve understood it for several decades, but I’m sure not alot of us know exactly what that was. Let’s see if we can enlighten our little corner of the blogosphere with some information, not just the buzz words our politicians and media keep spinning our way.

For my part, I have two sources of information – one slightly humerous and the other slightly… let’s just say the anti-capitalists will like it (-*wink*-). However, I chose both of these because they discuss the underlying reasons the economy tanked the way it did. I was forwarded the first one by a friend and chased down the second because it filled in a blank (what the hell a “credit default swap” is) I had in my overall picture.

Humorous Information:

Slightly Hysterical Information:

In its simplest form, a CDS is just a bet on an outcome. Say Bank A writes a million-dollar mortgage to the Pope for a town house in the West Village. Bank A wants to hedge its mortgage risk in case the Pope can’t make his monthly payments, so it buys CDS protection from Bank B, wherein it agrees to pay Bank B a premium of $1,000 a month for five years. In return, Bank B agrees to pay Bank A the full million-dollar value of the Pope’s mortgage if he defaults. In theory, Bank A is covered if the Pope goes on a meth binge and loses his job.

More at the Rolling Stone.

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55 Responses

  1. As others have said – this may be a recession, but all that means is that the economy is not growing – and the contraction is not that much.

    I am not denying that it is bad out there – and I have quite a few mates who are losing their contracts tomorrow and there is no work around. Just that we do need to keep some perspective on this.

  2. Joe’s lost? Surely not.

    Battle for the soul of the Liberal Party
    Jacob Saulwick
    March 30, 2009

    To watch Joe Hockey, that big friendly man, lead the attack on the Government’s economic agenda in the last days before Parliament’s recess was almost to feel sorry for him. He huffed, puffed, and grunted with effort and outrage on every point going. But like an enthusiastic bear playing tennis with a ping-pong paddle, all the purpose produced little result.

    For a start, the Pacific Brands job losses were handled badly. The Liberals were so quick to gloat, to enjoy the irony that Wayne Swan’s “shocks and jocks” stimulus had failed to save these jobs, that when Swan rounded on them – “It is almost as if you can hear the glee in their voices, so they can score a cheap political point about such a serious matter” – it rang true.

    The Pacific Brands attack was symptomatic of a patchy approach. It was not really Hockey’s fault, just as it was not the fault of Julie Bishop, his predecessor as shadow treasurer. The problems the Liberals face on economics are much deeper than personnel. At the risk of sounding like Kevin Rudd, they are the problems of the political right worldwide.

    As I see it, there are two conundrums the party confronts that help explain their confusion. First, the Liberals are collateral in a broader crisis of economic thought. Economists are casting the collapse of Lehman Brothers as the defining moment of the turmoil. But almost as shocking, from the point of view of politics and ideas, was Alan Greenspan’s mea culpa in admitting to his misguided faith in the efficiency of financial markets.

    When the supremely confident Greenspan does not know what to believe, it is no wonder Australia’s right struggles to articulate just what exactly it stands for. Neo-liberalism was always a bit of a furphy. The state never ceded power to the market; it just regulated in different ways, favouring finance and squishing organised labour. But that set of ideas is on the back foot, and there is no obvious replacement, particularly for the right.

  3. Interesting read

    Special Report
    http://a330.g.akamai.net/7/330/25828/20090318195802/graphics.eiu.com/specialReport/manning_the_barricades.pdf
    Manning the barricades
    Who’s at risk as deepening economic distress foments
    social unrest

  4. Will China come to the rescue? They may have to.

    Billionaire Soros sees risk of Britain needing IMF bailout
    http://business.smh.com.au/business/world-business/billionaire-soros-sees-risk-of-britain-needing-imf-bailout-20090330-9ftf.html
    Hungarian-born US billionaire George Soros says it is “conceivable” that Britain will have to resort to a bailout from the International Monetary Fund.

    “It’s conceivable,” Soros said in an interview with the Times published on Saturday.

    “You have a problem that the banking system is bigger than the economy … so for Britain to absorb it alone would really pile up the debt.”

    Soros said that “if the banking system continued to collapse, it’s (an IMF bailout) a possibility but it’s not a likelihood.”

    The man who made $US1 billion on selling the pound on Black Wednesday in 1992 described the current recession as a “once-in-a-lifetime event”, particularly in Britain.

    “This is a crisis unlike any other. It’s a total collapse of the financial system with tremendous implications for everyday life.

    “On previous occasions when you had a crisis that was threatening the system the authorities intervened and did whatever was necessary to protect the system. This time they failed.”

  5. *sigh* So much for an education-focused thread…

  6. *sigh* is that what it’s supposed to be? Sorry I thought you were going over old ground. I’ve covered CDS’s etc all before.

  7. Brian

    In just over a decade these privately traded derivatives contracts ballooned from nothing into a $54.6 trillion market

    The $55 trillion question: Will this be the next disaster?
    https://blogocrats.wordpress.com/2008/10/14/the-55-trillion-question-will-this-be-the-next-disaster/
    Posted on October 14, 2008 by johnmcphilbin

    Yesterday we learned that our big banks ignored sub-prime troubles

    What I didn’t raise was another article by SMH’s Michael West exposing another major potential liability that banks face, that to date, has gone largely unnoticed. West writes:

    Australia’s Big Four banks are all exposed to the default of Lehman Brothers via credit default swaps (CDS) – a noxious bull-market derivative which threatens further contagion in the ailing global financial system.

    National Australia, ANZ, Westpac, Commonwealth Bank and the nation’s biggest insurer AMP are listed on the ISDA’s (International Swaps and Derivatives Association) Lehman Protocol. The five have written “adherence letters” to the ISDA asking the Association to act as their agent in settlement negotiations arising from the Lehman default.

    This Wednesday is the deadline for lodging settlement notices for CDS trades and October 20 is the date for settlement.

    Little known is the fact that the amount at stake in the credit default swap [CDS] market is actually greater than the world’s annual economic output.

  8. …apologies, I meant Ben. I don’t know why I get your name mixed up all the time.

  9. His name’s Ben…

    BEN..!!!!!

  10. Can someone put up a “Ben” youtube song by the artist who was formerly black? Maybe that will help Johanne McPhilbin hehe.

  11. So is it Michael or Ben, Joni?

  12. Okay Rebster (wink) I get it now. I did apologise after I realised.

  13. So I see John.

    I hereby withdraw my uncharacteristic outburst.

  14. I love the song though. Thanks.

  15. I do so love to be remembered by a song about a rat – it makes a man feel special 😀

    That said, I’m not Brian – I’m just a very naughty boy… and perhaps the Messiah, but that is still up in the air 😈

    @John:
    Actually, the cut & past you provided gives no information to a person not educated in the term “Credit Default Swap”. Alot of what you give us is either media hype devoid of information or was designed for people who already know that a CDO is and how they work. I’m after links, videos, news articles that do more than throw opaque terms at us non-financial types but outline each of the components of the crisis in simple terms.

    As a programmer, I’ve had to work in many different industries because (let’s face it) most of them require the IT nerds in some fashion. One thing I’ve found about all of them is that alot of what they do is hidden behind jargon designed for insider-speak to be beyond the rest of us. Once you understand the jargon, alot of the “mystery” (and hence “value” we place on their services) is banished. This goes for my job as code-monkey as much as anything else.

  16. The dead cat fall flat overnight in the US. Listen for the thud on the ASX today, again.

  17. Ben

    Just on acronyms, I had a programmer send me a techspec for a new file in our system – where the file name contained 4 acronyms – which I thought was a world record. hehe

  18. Ben

    CDS’s are certainly a miracle of financial innovation and I doubt the originators know real function they serve other than to encourage insanely risky financial transactions.

    http://money.cnn.com/2008/09/30/magazines/fortune/varchaver_derivatives_short.fortune/index.htm
    AT FIRST GLANCE, credit default swaps don’t look all that scary. A CDS is just a contract: The “buyer” plunks down something that resembles a premium, and the “seller” agrees to make a specific payment if a particular event, such as a bond default, occurs. Used soberly, CDS offer concrete benefits: If you’re holding bonds and you’re worried that the issuer won’t be able to pay, buying CDS should cover your loss. “CDS serve a very useful function of allowing financial markets to efficiently transfer credit risk,” argues Sunil Hirani, the CEO of Creditex, one of a handful of marketplaces that trade the contracts.

    Because they’re contracts rather than securities or insurance, CDS are easy to create: Often deals are done in a one-minute phone conversation or an instant message. Many technical aspects of CDS, such as the typical five-year term, have been standardized by the International Swaps and Derivatives Association (ISDA). That only accelerates the process. You strike your deal, fill out some forms, and you’ve got yourself a $5 million – or a $100 million – contract.

    And as long as someone is willing to take the other side of the proposition, a CDS can cover just about anything, making it the Wall Street equivalent of those notorious Lloyds of London policies covering Liberace’s hands and other esoterica. It has even become possible to purchase a CDS that would pay out if the U.S. government defaults. (Trust us when we say that if the government goes under, trying to collect will be the least of your worries.)

    You can guess how Wall Street cowboys responded to the opportunity to make deals that (1) can be struck in a minute, (2) require little or no cash upfront, and (3) can cover anything. Yee-haw! You can almost picture Slim Pickens in Dr. Strangelove climbing onto the H-bomb before it’s released from the B-52. And indeed, the volume of CDS has exploded with nuclear force, nearly doubling every year since 2001 to reach a recent peak of $62 trillion at the end of 2007, before receding to $54.6 trillion as of June 30, according to ISDA.

    Take that gargantuan number with a grain of salt. It refers to the face value of all outstanding contracts. But many players in the market hold offsetting positions. So if, in theory, every entity that owns CDS had to settle its contracts tomorrow and “netted” all its positions against each other, a much smaller amount of money would change hands. But even a tiny fraction of that $54.6 trillion would still be a daunting sum.

    The credit freeze and then the Bear disaster explain the drop in outstanding CDS contracts during the first half of the year – and the market has only worsened since. CDS contracts on widely held debt, such as General Motors’ (GM, Fortune 500), continue to be actively bought and sold. But traders say almost no new contracts are being written on any but the most liquid debt issues right now, in part because nobody wants to put money at risk and because nobody knows what Washington will do and how that will affect the market. (“There’s nothing to do but watch Bernanke on TV,” one trader told Fortune during the week when the Fed chairman was going before Congress to push the mortgage bailout.) So, after nearly a decade of exponential growth, the CDS market is poised for its first sustained contraction.

  19. John

    The all ords closed on 1 March at 3203. It closed yesterday at 3554. So unless it drops 351 points today it will close the month up. Not a dead cat bounce to me, just yet.

  20. Not a dead cat bounce to me, just yet.

    Said with a lot of conviction Shane. It seems like yesterday when the papers were trying to will it up to 7,000 just before the crash. It show how low expectations have dropped.

    The upside, of course, if you’re cashed up is all the potential bargains if you can spot them and have enough faith that they are bargains. You strike me as being shrewd enough to take advantage.

  21. John

    The all ords is currently down 18 points, at this stage, not a thud in anyones interpretation, but the day is young.

  22. With your knowledge of housing Shane a company you might find worthwhile studying is REECE. Very strong history and are sure to do well in the future – sure, there will be a few earning hurdle but they’re practically debt free and have a wide reach. Well managed as well.

    Do not consider this as financial advice, I just thought it may be a company who would appeal to you and be easy for you to understand from a potential future investment viewpoint.

    Disclaimer: I don’t hold shares in REECE, however, that doesn’t mean I’ll be ignoring them either.

  23. “Can someone put up a “Ben” youtube song by the artist who was formerly black? Maybe that will help Johanne McPhilbin hehe.”

    Don’t forget, Ben will do anything for Willard:

    Why do I get the feeling that all those greedy rats in the Wall street attic are gonna turn on their governing class, eat up all the funds handed over and head straight to the basement & dig themselves a tunnel all the way to China & Dubai? Or a hacienda in the Americas somewhere…or a chalet way off in the mountains somewhere as the whole rotten financial edifice collapses on the busy serfs and buries their public services and dreams of real affordable education & health systems in a massive pile of shredded greenbacks.

    BTW, I don’t see you as a rat Ben Tolputt. But I will hand you a wooden spoon for that post that got 800 hits.
    N’

  24. @Nasking:
    Not sure which post you are talking about… so not sure whether I should laugh or be offended -*shrug*-

  25. I think Nasking is just inclined to have a crack at anyone; it seems to be entirely random.

  26. BT you should be congratulated.

    This is joni’s post from the G20 thread:

    joni, on March 30th, 2009 at 7:04 pm Said:

    I know John And that is why I say that it is more of a community than just a blog. It operates differently. reb and I work hard on the blog to keep it running and interesting. That is why we have recently been trying to steer away from being a single issue blog (GFC).

    Look at the thread on the “acknowledgement of country” that Ben put up. There was a very good discussion of the issues – some ribbing, some disagreements.

    And it got over 800 hits – one of the top posts ever.

  27. John

    I don’t consider anything on this site as financial advice it is purely a community discussing topics and offering personal opinions which should never be counted as financial advice.

  28. Shane

    Good attitude. I’ve been going over their financials and annual reports over the last decade and quite frankly I’m impressed, even without a view to investing in their shares. So few companies perform so well.

    Old habits die hard, it’s the analyst in me (wink)

  29. 800 hits is very good. Well done Ben.

  30. And likewise don’t take any notice of their footy tips…

  31. Ah, knew the thread was “active” – didn’t know it had more than a few hundred hits though. Kinda nice to see that I at least think of thought provoking subjects.

    Not that I mind the occasional GFC thread, just so long as it’s not all we got here 🙂

  32. “I think Nasking is just inclined to have a crack at anyone; it seems to be entirely random.”

    Tom M, I’ll ignore that considering you’re obviously going thru the grumpy old sad sack virus.
    N’

  33. John

    Can you hear the thud in the ASX ?

  34. John

    ASX up 340 points for the month. I call that a good result not a thud.

  35. Wave wave to the crew re ‘active thread’, John McP, Shane et al. Just to let you know that I do read but don’t much understand the stock exchange and investments and things akin to due to not having any money to invest.

  36. Shane wait for it , wait for it, can hear a thud coming. Earnings forecasts due out soon.

  37. John

    LOL you will have your ear to the ground hoping for the remotest thud. Your exact words were “Listen for the thud on the ASX today” Down 21 points or 0.59% not a thud in my eyes.

    The ever eternal pessimist “Wait for it, wait for it”, how long would you like me to wait because otherwise if it happens in 6 months time you will still claim it happened, sounds like all the other economists who have no idea. I act on actual happenings.

    I stomped on the floor, did you hear the thud 🙂

    Min

    Wave, wave back I don’t think too many of us have much money to invest at the moment.

  38. Shane

    Earnings expectations Shane, you won’t have to wait 6 months, April many of them are due out.

  39. …oh and I study performance based on fundamental indicators – and that’s what the market ultimately follow. Nothing to do with optimism or pessimism (wink)

  40. Hi Shane..I hope that Riley is doing well. Was thinking of him and his boots.

    John McPh..and likewise.

    I missed your input John re the mega investment in low cost rentals NSW. But isn’t this what we have been talking about, the lowest common denominator..low cost housing. It certainly isn’t going to appeal to the investor sector, but TUFF!

  41. I don’t know if anybody saw this a while back, but I love the style in which the economics guru is taken down a peg or two here. He actually handles himself pretty well I thought, for somebody who doesn’t have a leg to stand on.

    The Daily Show 12th March

  42. Tom R

    Jon Stewart deadly serious? Great Interview!

    Min

    John McPh..and likewise.

    I missed your input John re the mega investment in low cost rentals NSW. But isn’t this what we have been talking about, the lowest common denominator..low cost housing. It certainly isn’t going to appeal to the investor sector, but TUFF!

    Has to happen Min, and the roll out of low cost housing is a long term project which should hopefully bring the market back into alignment with reality – affordable to buy for those who can and affordable to rent for those that can’t.

  43. And John, all jokes aside, I’ve learnt heaps from your comments & posts. The political economy is sure a complex entity.

    Sometimes it’s good we agree to disagree. Don’t take offense if I play hardball sometimes…must be the Nth. American teachings eh? Bit too competitive…& suspicious of people sometimes. Something to do w/ my background.

    Yer an essential part of this blog
    Cheers
    N’

  44. Nasking – “Tom M, I’ll ignore that considering you’re obviously going thru the grumpy old sad sack virus.”

    Neither grumpy nor old, just a reasonable level of intolerance of BS artists.

  45. “Neither grumpy nor old, just a reasonable level of intolerance of BS artists.”

    That’s the second time you’ve thrown that accusation at me Tom M. You better start providing evidence.

    N’

  46. John McPhilbin, on March 31st, 2009 at 5:57 pm

    I do believe that’s the distinction that Keynes (and others) liked to draw between ‘enterprise’ and ‘speculation’. Not much is written these days about the importance of ‘enterprise’; and I’m not sure that ‘fundamentals’ captures the idea exactly when the activity-as-process is parsed by remote owner-investors in a managerial mindset. ‘It’s capital, Jim, but not as we know it. Set phasers to stun.’

  47. And I’ll continue to do so Nasking until you retract the completely unfounded comments you made about me recently.

    It is typical of those have a simplistic BS approach to attribution of opinion, yours obviously runs as follows – “Tom is opposed to tight regulation of unions, therefore he must favour the war in Iraq, therefore he is opposed to aboriginal reconciliation, therefore he voted for Kennett…etc”.

    You attributed various opinions to me that I find quite repulsive.

  48. I mean …favours tight regulation…

  49. Me being me, I’d just take the wooden spoon as a gift, and turn it into a bull-roarer, deep-knowing that it was, among other things, a passport to understanding, for this world and others; up to others what they do with their wooden spoon, though.

  50. “You attributed various opinions to me that I find quite repulsive.”

    You’ve been doing that to commentors for a long time Tom M.
    N’

  51. I don’t think so, I back my comments up. How do you justify yours?

    You said – “You better start providing evidence.”

    It’s on you. Provide the evidence of the opinions you attributed.

    Own up.

  52. Oh, I see your diatribe was facetious was it? If that’s what you are suggesting, then say so.

    I’ve had humourous/sarcastic/facetious exchanges with many of the long term contributors. You’re not one I’ve had any exchange at all with, until you started a completely unfounded and personal attack.

    Then you suggest – “You better start providing evidence.”

    Bizarre, illogical, unfounded simplistic BS.

    Moderator: OK – let’s move on.

  53. I know the Howard Government liked fudging figures so can anyone really rely on previous and future unemployment statistics when they’re released. I think not. It’s all in the definition.

    More to joblessness than official estimate of unemployment
    http://www.cch.com.au/au/News/ShowNews.aspx?ID=30343&Type=F&TopicIDNews=9&CategoryIDNews=0&u_i=39595
    By Garry Shilson-Josling, AAP Economist

    SYDNEY, March 27 AAP – The number officially unemployed is heading toward 600,000, but there are many more than that who are without jobs and want to work.

    Every year the Australian Bureau of Statistics (ABS) publishes its estimates of people of working age not in the labour force, or NILFs as they are known within the bureau.

    To know how someone would end up being tagged an NILF, you first have to know how the labour force is defined.

    It consists of the employed and the unemployed.

    So it may be something of a surprise to find that, as at September last year, there were no fewer than 1.54 million people 15 years and older who were jobless and wanting to work but who were not counted as unemployed, ABS figures released on Friday show.

    This was more than triple the number, 483,000, fitting the official definition of unemployed in September.

    Since then the global credit crunch has caused the labour market to deteriorate markedly, lifting the number unemployed by around 100,000, but the total – 590,500 after seasonal adjustment in March – will still be dwarfed by the number of jobless NILFs.

    The key to this apparent puzzle is that the definition of unemployment, in line with international conventions, is fairly narrow although, contrary to popular belief, it has nothing whatsoever to do with eligibility for social welfare benefits.

    To be counted by the ABS as unemployed, someone must be 15 years or older and must not have worked during the reference week of the monthly ABS survey, not even for an hour, and not even as an unpaid helper in a family farm or business.

    As well, they must have sought work in the preceding four weeks, or have a new job lined up to begin within four weeks.

    In either case, they must have been ready to start work during the reference week if the opportunity presented itself.

    One quirk of this definition is that the majority of unemployed youth are in fact full-time secondary or tertiary students.

    Whatever else they do with their time is irrelevant – the definition revolves solely around whether they were employed, whether they looked for work, and whether they were ready to start.

    There are obviously plenty of ways for someone to fall outside this definition and to be jobless but not officially unemployed.

    In September, for example, there were 47,600 jobseekers fitting all the criteria of unemployment expect that they were ready to start within four weeks, rather than in the survey reference week.

    A further 22,600, also actively hunting for a job, would not be ready until after four weeks.

    A further 1.11 million had not actively looked for work in the previous four weeks, even though they wanted to work.

    Of those, 750,000 were ready to clock on within four weeks.

    And of those, 73,900 were so-called discouraged jobseekers, those who had given up working because they had come to the conclusion there were no jobs available for them, almost half because they were considered too old.

    Of the other 676,100, nearly half – 323,500 – cited personal reasons for not looking for a job.

    That included 160,000 saying they were attending an educational institution.

    Others totalling 226,700 said they had not looked for a job, even though they wanted one, for family reasons.

    Caring for children was the most common family reason, with 143,400 in this group.

    These figures do not cover another form of hidden unemployment known as underemployment, where workers are employed but want more hours of work.

    In a publication released last month, the ABS said there were 687,700 part-time workers who would have preferred more hours, including 349,200 wanting to work full-time.

    That adds up to well over two million falling outside the official definition of unemployed, but wanting more work than they are currently undertaking.

  54. Ben

    The slightly hysterical example using the Pope’s meth binge might not be all that hysterical if auto – makers go bust. The chain reaction could bring the house down on the $55 trillion dollar market.

    A default would expose not only bank lenders but also investors who dealt in insurance policies against the risk of default by the car giants, known as credit default swaps

    Toxic debts could bring the house down
    http://business.smh.com.au/business/toxic-debts-could-bring-the-house-down-20090401-9jqe.html

    THEY were once potent symbols of a superpower’s economic might, but now the US car makers threaten to unleash a fresh bout of turmoil through their massive debt liabilities, and the fall-out will surely spread to Australia.

    Amid growing doubts over the future of General Motors, Ford and Chrysler, financial markets are fretting over $US250 billion ($360 billion) in total debt owed by the companies.

    The debt – scattered throughout the world financial system – dwarfs their combined market value of about $US17 billion. About $US80 billion of the debt is held in bonds sliced up and repackaged in complex financial products.

    Renewed fears for GM and Chrysler surfaced after President Barack Obama refused this week to extend a credit lifeline and said the companies must reinvent themselves or face bankruptcy. Ford has so far resisted government loans, but has been forced to cut wages and benefits, and said the collapse of either of its rivals would hit its transformation plans.

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