Friday, January 02, 2009

Let's Bury Greenspan, Not Praise Him...

BigPic's Ritholtz is on a rant today.

One of the biggest outright lies of this housing, economic and financial collapse is that “No one saw it coming.”

This is a patently absurd comment. Anyone who makes it — and there have been lots and lots of people saying as much – reveal themselves as either clueless or liars or both.

BigPic then mentions the August 2005 (Yup. THREE and one-half years ago) speech given at a party feting "Easy Al."

Mr. Rajan, a professor at the University of Chicago’s Booth Graduate School of Business, chose that moment to deliver a paper called “Has Financial Development Made the World Riskier?”

His answer: Yes

The proverbial fart at the dinner table...

Summary of Rajan's points:

1) Incentives were horribly skewed in the financial sector;

2) Credit-default swaps generated big returns, but failed to consider the risk if defaults occurred;

3) Banks were holding a portion of the credit securities they created, putting the banking system itself at risk.

4) Banks might lose confidence in one another;

5) If that occurred, the interbank market could freeze up. This would cause a full-blown financial crisis.

If it sounds vaguely familiar, congrats! You've been paying attention!!

Mind you, this speech was delivered at a highly-visible event, in front of "all the right people." You know, the Best and Brightest, Ivy League MBAs, Econ Ph.D.'s, Movers and Shakers...

The overcompensated idiots.

1 comment:

Shalom P. Hamou said...

Sorry! Quantitative Easing Won't Work

In a Liquidity Trap although Saving (S) is abnormally high investment (I) is next to 0.

Hence, the Keynesian paradigm I = S is not verified.

The purpose of Quantitative Easing being to lower the yield on long-term savings it doesn't create $1 of investment.

It does diminish the yield on long-term US Treasury debt but lowers marginally, if at all, the asked yield on savings.

This and other issues are explored in my tract:

A Specific Application of Employment, Interest and Money
Plea for a New World Economic Order


This tract makes a critical analysis of credit based, free market economy, Capitalism, and proves that its dysfunctions are the result of the existence of credit.

It shows that income / wealth disparity, cause and consequence of credit and of the level of long-term interest-rates, is the first order hidden variable, possibly the only one, of economic development.

It solves most of the puzzles of macro economy: among which Business Cycles, Stagflation, Greenspan Conundrum, Deflation and Keynes' Liquidity Trap...

It shows that no fiscal or monetary policy, including the barbaric Quantitative Easing will get us out of depression.

A Credit Free, Free Market Economy will correct all of those dysfunctions.

The alternative would be, on the long run, to wait for the physical destruction (through war or rust) of most of our productive assets. It will be at a cost none of us can afford to pay.

A Specific Application of Employment, Interest and Money