Political Quips

On Oct.14 Bush might have said, "We had to destroy the banks in order to save them".

Litmus test: Don't pay too much attention to anyone who professes, "No one could have foreseen this crisis", or "We were all taken by surprise". Anyone in a position to know who says this is either lying or was seriously deluded.

The good news is, the lower the markets fall, the smaller a 7% drop becomes in dollars.

Ex-Weatherman Bill Ayers showed poor judgement in letting Barack Obama into his life. Here he was, living in relative obscurity, apparently rehabilitated, when suddenly he's at the center of a major political controversy.
(But how about his recently published defense (April 6, 2008)- it looks like his rehabilitation process has a long way to go.)

If Hank Paulsen can be Treasury Secretary, why not John Gotti for Attorney General?
(alright, apart from the fact that he's dead?)

Theme of the Republican leadership convention: "Our country first - God second."

Hoarding and Hedging

Like hoarding, cutting in line, and cheating at cards, hedging belongs to that class of activities which give advantage to those who practice it, but only if they get in early enough. After a certain optimum proportion of the involved population is reached, the game tips over into disadvantage for all. If you are worried that food prices are going to rise steeply in the near future, it is to your own advantage to quietly begin hoarding the types of food which can be stored for future use. However, if everyone is being advised to hoard, food prices will shoot up immediately as demand rapidly outstrips supply - and we all end up with a food shortage on top of the increased prices. If all the athletes use steroids, there is no particular advantage to any one athlete - and they all suffer the debilitating side effects. The stock markets supply many illustrations of the same principle; they are almost an embodiment of it, as anyone who bought Nortel at $125 a share is painfully aware.

The same principle works with hedging. The idea that risk - on holding mortgages, for example - can be shared and diluted, spread far and wide so that it becomes statistically insignificant, must have appeared to be brilliant a few decades ago when securitization of such "debt assets" was introduced. It obviously richly rewarded those firms which could take advantage of the practice. But as the practice spread to become almost universal, it increasingly resembled a pyramid scheme. Secondary and tertiary layers of hedging were created and sold as if they were assets of real value. Putting it another way, bets are made on bets: you bet that you can negate the risk you take in holding mortgages and I am betting that your bet will pay off. All of this activity was supposedly creating wealth, and many players and commentators once again believed that the basic principles of economics had been transcended (as they did during the heady days of the dot-com bubble). But, as the little boy pointd out, the emperor has no clothes: there is still real risk in the original transactions. And, as we have seen, if those original transactions are unsound, as in the subprime mortgage fiasco, we have a huge and complicated structure built on a rotten foundation.

Financial Godzilla

The Godzilla on the block is the derivatives bubble, perhaps over a quadrillion dollars (!). Perhaps the American taxpayers will pony up $700 trillion to make us all confident about those debts?

2008: the new 1929