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.

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