Monday, October 06, 2008

What the Numbers Mean

Listening to French Bloomberg in Lyon, seeing the shocked face of the newscaster as she looks at a world of red ink, seeing the CAC 40 fall over 9 percent in one day, Germany's DAX down 8 and the Dow back under 10,000, I think that this will destroy the blind faith in markets for a generation.
As you watch the sheep heading over the cliff, you naturally wonder why you followed them in the first place.

There's lots of anger everywhere about giving $700-800 billion to the same people who created the need for it in the first place. Here's the sound of an angry economist. Here's an apologetic columnist, misusing the kind of argument I made yesterday about peer pressure in markets to say new regulation might stifle innovation. He's right to say that "The returns on what turned out to be toxic assets were just too good to miss. Any banking chief who had dared pull out of the market for, say, leveraged loans or mortgage-backed securities in 2005 and 2006 would have been lynched by investors for destroying shareholder value."

It went way beyond that. Covering today's Congressional hearings on the Lehman Brothers' collapse, the New York Times noted that "Another document showed that executives were warned in a January 2008 meeting that the company was facing liquidity problems. Yet the firm moved forward with capital outlays, including $5 billion in bonuses, $4 billion in shares and $750,000 in dividend payments between 2007 and the firm’s bankruptcy filing on Sept. 15." Massive debt, leverage, invented investment vehicles, obscured risk, deception, wishful thinking, free credit sponsored by the US government - all maxed out to max out gains.

Meanwhile, in France, Le Figaro, the conservative newspaper, published a poll (Friday October 3, p 21) in which they asked with which of 2 views on the current crisis their readers agreed the most. One was that the current crisis was like the others capitalist systems have, and that the system will soon get back on its feet. One-third agreed with this. The other was "the financial crisis is a crisis that shows that it is necessary to change fundamentally the capitalist system." 59% chose this.

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