Friday, Sep 28, 2007
An economist confesses
BBC "News": Greenspan: 'We saw credit risks'
In years to come, economists will claim that during the boom years, the economic, social and political consequences of unsustainably low interest rates could never have been foreseen, and the subsequent credit crunch (after all every single credit expansion-led boom in history has ended in financial catastrophe) could never have been predicted. This of course, will be a lie ...
Posted by paul @ 11:28 AM (482 views) Add Comment
7 Comments
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1. whiteknight said...
Hmm.. i wonder when people will stop talking about a bit of subprime action and start talking about the fact that across the spectrum of lending bank bosses pursued short term income (which benefits both them in terms of annual bonuses and salary and short term shareholder returns) over safe capital return.
More suprisingly they possibly continue to do so.
I will return again to the executive who was dismissed from an institution recently for what looked like losing a bit of share in the mortgage market in the UK.
Does it not follow entirely logically that if most market players are mispricing risk on a massive scale that if you reign back a bit then you will lose a bit of short term profit and market share? Wouldn't this also be considered "prudent"?
Why have some of these institutions that needed to borrow scaled back some of their "profitable" operations? (or are they doing so?) I have seen no evidence.
They don't seem to have learnt a damn thing at the moment. The surefire side effect of a bail out. No change in behaviour. Tell me otherwise if I am wrong.
They seem to be almost not cutting anything back in the anticipation that its business as usual tomorrow and they will lose ground on their competitors as things charge forward.
Totally delusional.
The stock price of the UK (or pounds sterling) is the next , far more important thing at stake. That will make a run on a more minor UK institution (which was in any event was a well ordered run of mostly older and more experienced people who remember what hard times can really be) look like a nice, controllable situation.
There is also still the amusing hint from a lot of press writing that this is somehow an affair that has occurred and is to be judged in the past tense; "do you remember the brief financial crisis of 2007?"
Oh.. i think not. I really think not. Nevermind.
2. whiteknight said...
Oh.. and the Chancellor/former chancellor (Prime Minister) looked "good" for 5 minutes, stepping in and "saving the day" whereas swervin' Mervyn was playing the Moral Hazard argument.
Watch for this perception to change dramatically as it becomes clear they day ain't saved by a long way.
Skate to where the puck is going to be. Especially if its going to be there only a few weeks later.
3. dbnazz1 said...
Whitenight...
Interesting points. i think the city pretty much works on short term. Long term strategic thinking doesn't really exist. it's the longer term strategic thinking that would avoid a lot of
economic problems that the UK seems to counter.
4. whiteknight said...
dbnazz1...
For sure. Here is something worth considering.
Banks have things called prop. desks or proprietary trading desks.
Compared to market making operations which are supposedly flat and making money on "spread" (or commission per trade) these desks take positions.
A cynical person might observe that the very best prop. traders over a period of 10 years might be "flat". ie. have made no average profit or loss for the bank. These are the best. The worst may have lost.
For themselves however, they will make big bonuses if they "make big" in the mean time. The downside: they lose their job (and maybe only for a while).
This looks like a free call option to me.
With their massive recent bonuses , a lot of bank executives would appear to have similar positions.
Is this what governs the banks behaviour and why punishment of shareholders doesnt necessarily rectify the problems that exist? Maybe there should be a lag to any larger payments? Maybe given the regular boom and bust cycles - this is a fairly easy time period to predict? Maybe some managers should be reminded that there is a tomorrow one way or another?
Maybe they should have to take onboard an instrument based on the default rate of loans made on their watch?
Hard to implement? Any thoughts?
5. shipbuilder said...
It's incredible the amount of short-sightedness in the public. I was thinking the other day that I am 31 and hence for all of my working life there has been an economic boom, or bubble. Nobody around my age will have known anything different and hence are letting the good times roll, with designer furniture, plasma TVs, BMWs etc. - everyone 'seems' richer when in fact they are just consuming more. In these times it can be very easy to forget that it was ever any different, especially when every idiot self-proclaimed expert is telling you that things are different this time and the dark days are something your parents worried about, but not you. This I think is the big danger in all of this - hence historically low interest rates look normal, house prices at 5 times salary look normal. I've started to realise as well that my memory of low/mormal house prices is now starting to fade - £150K for a 3 bedroom semi in Belfast now looks like a giveaway - it's incredible how quickly perceptions change.
I've no doubt that the young workers in the City are affected in the same way - many simply will have no memory of anything else but boom and hence could be prone to both underestimating risk and overreacting to changes in risk.
In terms of predicting the credit crunch, this site will be testament to the fact that a bunch of ordinary people were predicting these very events months and years ago.
6. crash bandicoot said...
Shipbuilder you are right. My wife has a couple of friends in their late twenties who have bought larger houses in the past couple of months. They had £85-90k mortgages already and must have borrowed close to another £100k looking at the asking prices around here. As I have posted before I tend to keep my mouth shut around these types because they know my opinion and think that I am totally barking mad. They on the hand have an almost religious faith in the fact that house prices only go up. One only completed two weeks ago and that was on a second house. The first fell through because the house that they wanted was repossesed before they could exchange! There really are none so blind as those who don't want to see.
7. Ticktock said...
Have any of you read Fred Harrison's 'Boom bust' (In which he makes a case for 18 yr. business cycles caused by land speculation and predicts depression in 2010) ?
If not, I would recommend it, and if so, what did you think of his theory?