Eliot Spitzer reemerges to claim vindication. Shameless does not begin to describe…
“Information is not free”
Longtime news and media executive Gordon Crovitz has for the last half-year been writing a terrific column on the “Information Age” — this week on the new copyright agreement between Google and book publishers.
The Panic of ’08: Or, How a Jamaican Nanny Ended Up With Five Homes
Whether the topic is football or finance, Michael Lewis is maybe the best non-fiction story teller of our times. Now this author of Liar’s Poker, the smart-ass inside tale of Eighties Wall Street excess, finds the man who helped expose today’s housing charade and learns about real excess — the ’80s, how quaint — as he chronicles the 2008 crash.
More generally, the subprime market tapped a tranche of the American public that did not typically have anything to do with Wall Street. Lenders were making loans to people who, based on their credit ratings, were less creditworthy than 71 percent of the population. Eisman knew some of these people. One day, his housekeeper, a South American woman, told him that she was planning to buy a townhouse in Queens. “The price was absurd, and they were giving her a low-down-payment option-ARM,” says Eisman, who talked her into taking out a conventional fixed-rate mortgage. Next, the baby nurse he’d hired back in 1997 to take care of his newborn twin daughters phoned him. “She was this lovely woman from Jamaica,” he says. “One day she calls me and says she and her sister own five townhouses in Queens. I said, ‘How did that happen?’ ” It happened because after they bought the first one and its value rose, the lenders came and suggested they refinance and take out $250,000, which they used to buy another one. Then the price of that one rose too, and they repeated the experiment. “By the time they were done,” Eisman says, “they owned five of them, the market was falling, and they couldn’t make any of the payments.”
But the sub-prime detective Eisman still had not fully grasped the enormity and breadth of the problem.
That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower.
Finally, Lewis lunches with his long-ago boss John Gutfreund, the Salomon Brothers CEO who he skewered almost 30 years ago.
[Gutfreund] thought the cause of the financial crisis was “simple. Greed on both sides—greed of investors and the greed of the bankers.” I thought it was more complicated. Greed on Wall Street was a given—almost an obligation. The problem was the system of incentives that channeled the greed.
Indeed, greed is ever-present. And not just on Wall Street. It is the incentives and discipline — the structure — of the market that keeps greed from pushing us over the cliff. It is this discipline of the market that makes service to others, in the words of George Gilder, more valuable than self-centered avarice. Had he taken it one step further, Lewis might have said that the ultimate disciplinarian — the taskmaster that demands real value instead of greed, froth, and fraud — is a rock-solid dollar.
Quote of the Day
“Hyperbole is not harmless; careless language bewitches the speaker’s intelligence. And falsely shouting ‘socialism!’ in a crowded theater such as Washington causes an epidemic of yawning.”
— George Will, November 15, 2008, wondering what to call existing bail-outs galore and almost $4 trillion of annual Federal spending.
State Your Question
After much speculation, Google launched its mobile “talk search” using speech recognition over cell phones. Just speak your question and get an answer back in a few seconds on your phone.
“It’s important to understand that machine recognition will never be perfect,” Mr. Reddy added. “The question is, How close can they come to human performance?” For Google the technology is critical to its next assault on the world of advertising. Google executives said location-based queries would make it possible to charge higher rates for advertisements from nearby businesses, for example, although it is not selling such ads now.
ChaCha, just down the road from me in Carmel, Indiana, has been at this mobile search game for a while now and says it’s tied with Yahoo! for No. 2. My wife and kids are big users of the ChaCha service while driving in the car.
Bubbleology
The prolific Niall Ferguson with a long narrative of the financial crash in Vanity Fair:
The key point is that without easy credit creation a true bubble cannot occur. That is why so many bubbles have their origins in the sins of omission and commission of central banks.
A Modest Proposal: Sell Nevada
Alex Tabarrok wonders whether the U.S. should sell some of its massive land holdings to help pay for its latest binge, with more surely to come. Conceptually, it’s interesting. I and others like John Rutledge have long argued that we need to look at total U.S. assets when doing any macroeconomic analysis. This would include potential trillions worth of federal lands. But it’s not clear the government would actually have to sell the land to reap the gain. Merely owning it is useful collateral for issuing more debt. On the other hand, getting more land into private hands might be a good thing in and of itself.
As I Was Just Saying…
On the eve of the G20 global financial summit, Judy Shelton weighs in with yet another brilliant exposition on stable money:
At the bottom of the world financial crisis is international monetary disorder. Ever since the post-World War II Bretton Woods system — anchored by a gold-convertible dollar — ended in August 1971, the cause of free trade has been compromised by sovereign monetary-policy indulgence.
Today, a soupy mix of currencies sloshes investment capital around the world, channeling it into stagnant pools while productive endeavor is left high and dry. Entrepreneurs in countries with overvalued currencies are unable to attract the foreign investment that should logically flow in their direction, while scam artists in countries with undervalued currencies lure global financial resources into brackish puddles.
Pearls of Unwisdom
Steve Pearlstein of the Washington Post is on Charlie Rose right now saying the U.S. trade deficit was a chief cause of the present financial crisis. He’s got it just backwards. It was our overreaction to the innocuous trade deficit — namely, inflationary weak-dollar easy credit, designed in part to close the trade gap — that brought us here. The weak-dollar Fed juiced oil and home prices. High oil prices boosted the trade deficit — just the opposite of the weak-dollar advocates‘ intent. Skyrocketing home prices required, and were fueled by, hyper-aggressive and unsustainable mortgage lending.
Pearlstein then said we needed an international regulator to stop this from happening. This entity should have stopped the U.S. from buying so much from China. Wrong again. We needed the Fed and Treasury to maintain a stable dollar. A stable currency is the ultimate financial regulator and disciplinarian. If we had ignored the trade deficit and focused on stable money, there would be no financial crisis.
The Man Who Killed IU Basketball…
…in a Wall Street Journal interview.
As usual, when he’s not making poor decisions, this guy, this NCAA president who doesn’t even like sports, is wishy washy —
“I go through my song and dance: We have no role to play.”
“It’s more complicated than people think.”
“we have no role to play”
Brilliant, Miles, great stuff.
“Palinonics”
Here at Maximum Entropy we focus on delivering “more signal, less noise,” and so this analysis of Sarah Palin’s unusual and incomprehensible speech really hits the mark:
What we have to do instead is decrypt her message by filtering out all of the confusing chatter that keeps her statements encoded and difficult to follow. . . .
If you just cut out about 60% of what she says, it hangs together. . .
Dr. Doom Persists
Chief panic prophet Nouriel Roubini sees long-term decline:
The U.S. will experience its most severe recession since World War II, much worse and longer and deeper than even the 1974-1975 and 1980-1982 recessions.
There’s no hope of a V-shaped recovery:
a U-shaped 18- to 24-month recession is now a certainty, and the probability of a worse, multi-year L-shaped recession (as in Japan in the 1990s) is still small but rising.
And there’s a real
risk that we will end in a deflationary liquidity trap as the Fed is fast approaching the zero-bound constraint for the Fed funds rate
leading to global
stag-deflation
When a permabear like Roubini has been right so often for the past year (lo for the wrong reasons) it may seem a tall order to refute him. But John Tamny does an admirable job:
just as housing was the hot asset class in the early and late ‘70s, so was it this decade not due to economic growth per se, but thanks to currency debasement that always leads to a flight to the real. In short, the subsequent moderation of home prices has not been an economic retardant so much as it’s been the result of economic sluggishness that always reveals itself when currencies are allowed to weaken.
Roubini holds the reputation of soothsayer at present, but the very analysis that has made him all-seeing was faulty on its face. Lower home prices are an undeniable good for less capital going into the ground, as opposed to the entrepreneurial economy. What led to housing’s moderation of late was paradoxically what caused its boom. When currencies decline, hard assets do well, and investment in real economic activity withers. . . .
In short, Roubini made the correct call a few years ago about looming economic difficulty, but the call ignored the real cause which decidedly was the weak dollar. Happily for Washington’s political class, Roubini’s suggestions for “stimulating” the economy absolve it of its own mistakes, all the while allowing it to do what it does best: spend the money of others.
Crunnnnch!
So I’m in a meeting with two distinguished gentlemen this morning, and I open my black leather portfolio to take out some notes, and what do I reveal to the world? A half-crumbled oyster cracker. Hmmm. How could that have gotten in there?
Tommmmmy!
End of an Airport
Tomorrow I’ll fly out of the brand new Indianapolis Int’l Airport on its opening day, November 12. For those who have visited the old airport here, it looks like a massive improvement, both practically and aesthetically.
Update: The airport was even more visually spectacular than I’d expected. But security was still slow. And our plane left late because their weren’t enough gates, which really confused the pilot: “A new $1.1 billion airport, and there aren’t enough gates in the first hour of operation?”
“The Age of Entanglement”
My friend Louisa Gilder’s brand new book The Age of Entanglement: When Quantum Physics Was Reborn arrived in the mail from Amazon today.
Matt Ridley, author of Genome, says:
Louisa Gilder disentangles the story of entanglement with such narrative panache, such poetic verve, and such metaphysical precision that for a moment I almost thought I understood quantum mechanics.
The cover art alone is spectacular. Can’t wait to crack it open tonight.
2012?
Is Paul Ryan the future?
After two straight electoral defeats, it is time for a substantial party shake-up. We don’t need a feather duster; we need a fire hose.
We need to be honest about the root causes of our current financial crisis: loose money, crony capitalism and a lack of market transparency and information.
Malcolm Gladwell phones it in…
…just in time for the holiday shopping season, at least according to Michael Maiello of Forbes.com:
Oh, and one of the Lakeside parents had a computer company called C-Cubed and [Bill] Gates got a job there and so on and so forth. Gladwell’s not surprising conclusion is that if Gates had been an eighth grader in Cambodia rather than Seattle in 1968, things might have turned out differently for him. Thank you, Mr. Gladwell! Now why does my cat’s breath smell like cat food?
The Hoped-for Collapse of China
Gordon Chang wonders whether a President Obama will “restrict trade with China.”
Absent from recent trade debates in the U.S. is the fact that last year all but $5.9 billion of China’s overall trade surplus of $262.2 billion related to sales to America. The temptation is that Obama will try to use this leverage over Beijing to restructure trade relations in the coming years. In President Bush’s second term, a fundamental realignment of ties with China was unthinkable. In view of the powerful forces at work in these volatile times, however, many of the assumptions we now make about trading with the Chinese may no longer be valid.
Lots of people mistakenly get charged up over trade deficits. But Chang, who has been predicting — or more accurately, hoping for — The Coming Collapse of China for a decade, should really know better than to take a bilateral trade imbalance seriously. Think about it: Japanese and Korean firms send goods into China for final assembly and shipment to the U.S. The U.S. trade deficit with China jumps but falls vis-a-vis Japan and Korea. Problem? No.
Anyway, Chang may not need an explicit Obama trade blockage to get his China crash wish. Washington’s more indirect but just as ill-conceived effort to cut the U.S. trade deficit via an inflationary weak-dollar has already worked its wicked protectionist magic — see, global panic and recession — and the question now is whether China’s juggernaut will merely slow, or succumb.
Dying Tombstones
The credit crisis almost deep-sixes the company that makes the commemorative M&A toys for Wall Street execs.
This spring came what Kern called “the tiny-globe craze.” Sokoler rolled his eyes. “Oh, don’t start with that,” he said. “You know those things you see in Sharper Image, where there’s a base and a little globe just floats over it?” (They work by means of magnets.) Somebody at Merrill decided to order a hundred of them to celebrate an M. & A. deal, and all of a sudden everybody had to have one. “It was a real pain in the ass,” Sokoler said. “People were calling my cell phone in the middle of the night, saying, ‘It’s not floating!’ And you’d have to, like, walk them through it. You’d say, ‘Yes, it is floating—you just have to hold it in the right place.’”
