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Climbing The Wall

By | May 13th, 2010|

What do the gloom crew most get wrong? You know them when you hear them. “The latest European bail-out isn’t enough. Or it doesn’t deal with structural problems. The US is just like Greece: we’re in hock up to our ears. And what about moral hazard: aren’t you just rewarding budget indiscipline? I love questions like these. They serve mainly to illustrate the biases of [...]

The Other Bailout

By | May 11th, 2010|

In the US, we usually have some discussion before lending billions to a money-losing bank. Unless it’s Freddie or Fannie. Amid all the hoopla over Greece and the European debt crisis, Freddie Mac announced that they lost money in the first quarter and they’ll need another $10 billion in senior preferred stock from the government. Fannie Mae noted that they’ll need another $8 billion. As [...]

Surprise Party

By | May 10th, 2010|

Shock and awe. That’s what the European central bankers hoped to produce with their trillion dollar plan. On the face of it, they did just that. Global markets recovered about 5%, or half of the $3.7 trillion decline they’ve seen since the debt crisis hit the markets late last month. Some say the bailout doesn’t have enough teeth to force fiscal restructuring; some say they’ve [...]

“Not In Our Stars”

By | May 8th, 2010|

“The fault lies not in our stars, but in ourselves.” Shakespeare wrote this some 400 years ago, where one of his characters proposes taking responsibility for his place in the world. That’s not bad advice today. It’s easy to blame others. Some say the world economy is unbalanced because China exports too much. But China exports so much because the US doesn’t save enough. We [...]

Anatomy of a Crash

By | May 7th, 2010|

A funny thing happened on the way to the market. Around 2:45, Boring old Proctor and Gamble--maker of toothpaste and shampoo--fell off a cliff. The stock suddenly dropped 25%, from $60 to $45/share. Since the Dow is an average, that triggered a 100-point drop in the index, and programs all over the world started buying the Dow and selling other indices. Chaos followed. Excelon, the [...]

A More Perfect Euro-Union

By | May 5th, 2010|

At first the Euro seemed so logical. The southern European countries got sound money and low interest rates. The northern European countries got expanded markets and cheap labor. What could go wrong? The low interest rates encouraged a housing bubble in Spain and overconsumption in Greece and Portugal. Expanded markets fed a Teutonic sense of destiny, and German shipments to the rest of Europe grew [...]

Quis Custodiet ipsos Custodes?

By | May 4th, 2010|

Who will rate the raters? Of all the actors in the financial crisis, the ratings agencies have seen little pain from their abysmal miscalculations. While they collected hundreds of millions in fees rating thousands of deals, 92% of the AAA-rated sub-prime bonds from ’06 and ’07 have been downgraded to junk status. Who pays for these kinds of errors? We all do, really. The overconfidence [...]

Repetition is NOT Flattery

By | May 3rd, 2010|

History has a nasty way of repeating itself, just when it’s least convenient. Corporate profits have been strong. So strong, in fact, that they’ve attracted a lot of interest. Marginally profitable companies have been expanding, borrowing money and building out their businesses to capture these margins. With unemployment high, labor costs have been low. And with interest rates down, lots of companies have been able [...]

Banking on Change (Part 3)

By | April 30th, 2010|

I’ll break banking reform down into two parts: what should be, and what will be. What should happen in finance is a massive simplification that deals with “too important to fail” and provides funds for all kinds of companies that need cash through their product cycle. This should be coordinated internationally, because the cross-border issues are often what makes finance so complex. As the banks [...]