Sunday, April 18, 2021

History Rhymes, The First Stanza

 Students of history know that it may not repeat per se but it very definitely rhymes. As Ecclesiastes said 2500 years ago, there is nothing new under the Sun. Let’s take a look back..

The Great Debt Crisis of 2007-09 was precipitated by a wanton disregard for credit risk, particularly in the real estate sector.  Trashy, subprime mortgages were packaged into tranched CMOs sporting ratings as high as AAA and sold to investors.  Mortgage and other loan originators were paid to lend as much money as possible, not to assess the borrowers risk.  They had every incentive to do so, since investment banks were hungry for fee-producing “product”.  Ditto for rating agencies, who charged mightily to provide algorithm-generated ratings, instead of doing solid credit analysis. Furthermore, an enormous side business in credit derivatives such as CDS and CDOs generated even more fees and profits.

The enabling mechanism was that those most responsible for the bubble - originators, mortgage and real estate brokers, loan packagers, investment banks, credit insurers and traders - did not keep any of the credit and market  risk themselves, since they were just fee-creator middlemen who passed the risk on to investors.  In other words, a kind of pyramid scheme.

When the pyramid collapsed, some where caught with too much “raw product” in their “warehouses” (eg Countrywide), others with too much “finished product” for sale on their “shelves” (eg Bear Sterns, Lehman, Merrill) and a few others had taken on too much insurance exposure (eg AIG).  They all failed, merged, or were bailed out using taxpayer money.

At the buyers’ end, banks, mutual/money market funds and pension funds were stuck with paper that was for all purposes worthless and they, too, mostly had to be bailed out by governments. Again, taxpayer money.

As always, there were those few “wise guys” who profited mightily from the bubble’s demise. I don’t need to tell you who they were, they even made movies about them. And, pointedly, they are still around and many are bigger than ever. 

The cost of the mess is still with us in the form of zero/negative interest rates, a very weak banking system  and a global economy beholden to cheap Asian imports purchased using vendor finance (eg Chinese and Japanese government bond purchases).

So much for the past then, or, in poetic terms, the first stanza. The rhyme will come in my next post, the second stanza...

Stay tuned.


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  2. Woe to you who add house to house
    and join field to field
    until no place is left
    and you live alone in the land.

    Woe to those who call evil good
    and good evil,
    who turn darkness to light
    and light to darkness,
    who replace bitter with sweet
    and sweet with bitter.

    He lifts a banner for the distant nations
    and whistles for those at the ends of the earth.
    Behold—how speedily and swiftly they come!

    1. Very Biblical , but apt ­čśâ

    2. aye... hell... I think I know what went wrong.

      remember we were looking for historical parallels?

      This thing happened before, 4000 years ago... as you say, there is nothing new under the sun.

  3. Think I will never find the time to write it properly, so I will just finish my stuff here....

    China holds down its currency to boost exports... I don't see it this way...

    Firstly, that is at best a short term trick. Over the long term, (in a free market), the wages/ prices would rise to compensate for the currency being held down. However, both wages and prices and currency have been low for some time.

    Yes, wages and prices are too low for a free market... absolutely.... so it is not a free market... the power lies in the American corporations... they hold the prices down... can you imagine an apple supplier negotiating to triple prices because U.S. has printed 3 times the amount of currency...

    Thirdly, it also explains why America is so interested in keeping alive this current batch of monopolistic companies. Fed interest rate low, etc, etc... It is these companies that now form the heart of the American empire. When they die, the US empire dies with them.

    It was not always so... in the old days, America knew that innovation was on their side. The company might change but it would still be American... in that world, the U.S. is more tolerant of bubbles bursting... now.... this is not so... the fear is that when the current set are gone, the new set of companies will no longer be American...

    Now... stuff ain't as bleak for the U.S. as the media makes it out to be... America's current hand is still miles better than China's... just need some intelligence to play from a (somewhat) underdog position instead.

  4. Btw, hell... sorry I have been blubbering on... waiting for the next stanza...

    Don't worry about that damn chicken... he will just disagree with everything all the time... but secretly, he is very interested in your opinion.