Thank you for all of the
Cartoons — This was one of the best ones:
Financial Innovation
August 15, 2008 4:15pm by Barry Ritholtz
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Barry,
As Buffett quoted John Stumpf, CEO of Wells Fargo, in his 2007 letter, “It is interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine.”
BTW, in your headline, “Financial” is missing an N.
A great innovation that hurt the middle class and gave to corporations was to kill the dollar to pump corporate earnings. Paulsen presided over that. Last 4Q, biggest qtr of the year for most firms, dollar was 10% lower than the year before. So when you report earnings in dollars, you got 10% more dollars for the same foreign earnings y/y. But this sudden dollar rally, if it holds, will wipe out that benefit in the important 4th quarter. By first qtr 09, it may have a negative impact. I will keep you posted.
The poster boy for the dollar hurting 4Q is Google…very little cost of goods that will benefit from lower prices of commodities…yet 50% of revenue overseas. Imagine this in reverse soon.
Dr. Doom
On September 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.
The audience seemed skeptical, even dismissive. As Roubini stepped down from the lectern after his talk, the moderator of the event quipped, “I think perhaps we will need a stiff drink after that.” People laughed — and not without reason. At the time, unemployment and inflation remained low, and the economy, while weak, was still growing, despite rising oil prices and a softening housing market. And then there was the espouser of doom himself: Roubini was known to be a perpetual pessimist, what economists call a “permabear.” When the economist Anirvan Banerji delivered his response to Roubini’s talk, he noted that Roubini’s predictions did not make use of mathematical models and dismissed his hunches as those of a career naysayer.
But Roubini was soon vindicated. In the year that followed, subprime lenders began entering bankruptcy, hedge funds began going under and the stock market plunged. There was declining employment, a deteriorating dollar, ever-increasing evidence of a huge housing bust and a growing air of panic in financial markets as the credit crisis deepened. By late summer, the Federal Reserve was rushing to the rescue, making the first of many unorthodox interventions in the economy, including cutting the lending rate by 50 basis points and buying up tens of billions of dollars in mortgage-backed securities. When Roubini returned to the IMF last September, he delivered a second talk, predicting a growing crisis of solvency that would infect every sector of the financial system. This time, no one laughed. “He sounded like a madman in 2006,” recalls the IMF economist Prakash Loungani, who invited Roubini on both occasions. “He was a prophet when he returned in 2007.”
Strange as it sounds, it will become public policy in the new Obama Admin. to encourage property lending to those without the ability or intention to repay in order to get the system moving again.
It will be considered the least bad choice.
(Like a Rice/Putin meeting.)
I am repeating calls for a summit of true thought leaders…here’s my panel to come up with a way to lessen the impact of the coming disaster and recommend policy going forward:
Roubini, Shiller, Bogle, Stiglitz, Volcker, Ritholtz (Moderator).
Barry, you could make it happen I think…why sit back and watch the country go to hell?
Hilarious, but, reminds me of the parenting skills of some people we know.
Steve Barry — I like your crisis management dream team (CMDT), but isn’t this an impossible task?
You mention the “coming disaster”, but isn’t that the very same disaster that has waltzed through our open door and is devouring the children even as we speak?
Kind of like convening a panel of expert oncologists to advise a person with multiple stage 5 carcinomas on how to die, isn’t it?
Constantnormal,
Your analogy is a bit too harsh…the current economy is going to be very sick…but why die a horrible death and punish possibly innocent people more than they should? The panel should have three goals:
1) As much as possible, make sure the parties that benefited the most and caused most of the problems suffer in proportion to their actions. I don’t trust current policy makers are doing this.
2) Develop policies that can lessen the blow to the country. The wrong policy decisions now will make things worse than they have to be and screw up our future as well.
3) Develop policies that ensure that this won’t happen again soon. Of course some future generation will surely repeal all the good policies and screw up again…but that is their problem. The policies have to also address the 80 Trillion Medicare and Soc. Sec. liabilities.
BTW, Greenspan is not welcome in anyway shape or form.
Intelligent policies can be specified. Implementation is another matter.
At the same time,Roubini was also running around screaming that we were entering a terrible recession, even depression. Almost two years later, the US still is not in even a mild recession based on any official definition. He was way wrong on this.
~~~
BR: That’s not quite accurate, as we do not officially learn its a recession until after the fact.
But by the traditional metrics — Industrial Production, Employment, Income and Consumption — it very likely already is a recession.
I think some the innovations are outright silly.Consider the daily launches of many new flavors of ETFs.
The ETFs are awesome in my opinion, there’s nothing complex or nefarious about them. They’re like well customized shotguns.
I was shocked to hear the term “financial engineering” because it struck a chord in me. If these things are being engineered then I suspect they are being engineered by young people and being approved by older ones hastily in an effort to appear “hip”, or “with it.”
Personally (I’m 39) having the daily displeasure of working with young engineers (from top schools) in the manufacturing field, I’ve noticed the a few consistent qualities to their work:
1) shoddiness, lacking in fundamental soundness
2) over complicated
3) not rigorously tested
4) helplessly dependent on the input of experienced people / rework
5) input of experienced people ignored when the deadline is coming due.
The cartoon summarizes it, especially the generational aspect of this.
“Roubini, Shiller, Bogle, Stiglitz, Volcker, Ritholtz (Moderator).”
Sounds like a great Obama-led cabinet