The Big Mistakes They Still Don’t See
29 December 2008Imagine this: SNS members now know that the real causes of the current economic crash, on a global dimension, came from the Japanese carry trade and huge petrodollar increases inflating the global liquidity bubble until it was unstable.
Amazing that Fortune magazine would put a cover up claiming that a) the sub-prime mess was the whole story (it was a minor subplot), and then feature an unknown woman banker who saw the sub-prime mess coming.
If Fortune is that embarrassingly blind, no surprise that no one else is seeing causes and effects very clearly. And Fortune is in good company: Portfolio put Michael Lewis’ story on calling the subprime mess on their cover, too. Oops. Myopic at best.
So, what are the key causes that seem still uncovered, or poorly understood, and what was their role? Without going through them in detail, here are the major bones in the corpse:
1. Free money. Japan knowingly blew up the global economy. Why, is another matter.
2. The Trigger Theory. Using OPEC to get supply and demand close, oil industry players gamed oil pricing, driving it from market rates ($50-80) to $147. The first investigation of these players was announced this week; it looks like the SNS Trigger Theory is in the process of being confirmed. I just hope you read about it in the media, outside SNS.
3. Greenspan. This has been covered, but often completely wrongly: Greenspan is guilty of trying to manipulate equities markets, and using rates to do it. He and others have tried, quite successfully, to put out a smoke screen stating the opposite: that he didn’t manage the Nasdaq bubble quickly enough, etc. He personally created the local refi bubble in the U.S., leading to the sub-prime mess. But don’t forget that many nations experienced real estate bubbles, since the real cause was a global liquidity bubble.
4. Musical Chairs. Banks were playing fast and loose for years before the sub-prime debacle, but when it put a spotlight on their problems, they froze up. The main reason the TARP bailout has been so ineffective, the reason they are not using these funds for loans, is that they were already breaking reserve requirements, running debt off their balance sheets, and participating in contracts that put them way out of compliance with the few regulations left. The real story, not yet told, is how sick the banks were before the sub-prime mess.
5. The fear of inflation. Since the real problem, at the beginning, was too much liquidity in the global system, it makes sense that, even though we are temporarily facing credit restrictions, the long term problem has neither gone away, nor been attacked or resolved. In other words, as soon as the short-term credit problems are eased, the world will be facing a huge inflationary bubble again. And no one seems to be talking about, working on, or writing about, that either.
Finally, I’ll share a little frustration. Everyone, literally including the Pope, who has ever said the sky is going to fall, is now promoting themselves as having foreseen the current crisis, with its proper causes. The pope said it was lack of ethics, back in 1985. Well-known bears like Rubini, complaining for sometimes a decade or more without making specific predictions, are permanent bears, and we have a lot of permanent bears on a planet driven by rich shorts from Connecticut, most of whose houses are now for sale.
Maybe someone else saw this catastrophe for what it really was, as cause and effect, and said so publicly; if so, hats off to them, we need their insight. The rest of you amateurs ought to admit that you didn’t see the forest for the trees, and stop all of your unwarranted claims. Get off the TV and the covers of Fortune etc., and leave the FT alone. We need less stupid chatter, and more intelligent help from those who legitimately got it right.
8 Responses to “The Big Mistakes They Still Don’t See”
December 30th, 2008 at 12:01 pm
To think that the basic cause is anything other than the worldwide use of fiat money is shear folly. Political appointees allowed to act without restraint will always pander to the masses and choose the least painful short term alternatives. All, repeat all historical precedents have ultimately resulted in the same end that we are now just beginning. In brief, there is no free lunch. To force your neighbors who have behaved rationally, honestly and fairly to provide free “lunches”repeatedly will but further the depth and rapidity of the demise of what has been the greatest and most successful experiment in human political history. You do ultimately reap what you sow.
December 30th, 2008 at 12:46 pm
Mark,
You forgot the Investment Banks (and Commercial banks) running everything off balance sheet in SIVs (hello Enron!) and the fake insurance scam – still to unwind – through Credit Default Swaps. The Japanese didnt intend to blow up the world economy it was just an unfortunate(!) side effect of an attempt to solve their domestic problems without admitting the scale of the real estate bust in Japan.
Neil
December 30th, 2008 at 1:36 pm
Well said!!!
To a better year.
Cheers
December 31st, 2008 at 12:30 pm
Let’s start a like-minded community. Let’s fight them back with what really hurts them: brains.
January 1st, 2009 at 8:59 pm
The problem is not a lack of brains or education but a lack of integrity and plain old guts. Of course, greed is also a given.
January 3rd, 2009 at 8:39 am
Entirely too much shifting of capital from the naive to the unprincipled.
January 3rd, 2009 at 11:32 am
As usual, Tim has hit this problem exactly at the center. The real root cause began with shifting of assets from stable positions to hot money, on a global scale. Generally, this meant from savers in Japan to debt equity companies, from individual home owners to wall st. sharks, etc.
The interesting question here, perhaps not yet addressed by the economics crowd, is: if one person owns a stock, whose habit is buy and hold, vs. another holding stock, whose habit is day trading, their assets look the same in today’s metrics. But one is stable, and the other hot money.
January 15th, 2009 at 1:49 pm
“they planted wind, we are going to harvest the storm”