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Hullabaloo


Tuesday, August 30, 2011

 
It's not a conspiracy
by David Atkins ("thereisnospoon")

Digby did a tremendous job earlier today of taking on the notion that the entire financial crisis was dreamed up, foreseen, expertly planned and exploited by a cabal of wealthy conspiracists straight out of a James Bond novel.

Anyone who has read Roubini's Crisis Economics or Michael Lewis' The Big Short will be dispossessed of the illusion of a vastly intelligent criminal cabal fairly quickly. There were a number of people who saw the end coming, but they were mostly ignored and vituperated against as all the "Very Serious People" just "knew" that the good times would keep on rolling. There are so many examples of this in Michael Lewis' book alone it's hard to count them all. A good one follows below:

The credit default swap would solve the single biggest problem with Mike Burry’s big idea: timing. The subprime mortgage loans being made in early 2005 were, he felt, almost certain to go bad. But as their interest rates were set artificially low, and didn’t reset for two years, it would be two years before that happened. Subprime mortgages almost always bore floating interest rates, but most of them came with a fixed, two-year “teaser” rate. A mortgage created in early 2005 might have a two-year “fixed” rate of 6 percent that, in 2007, would jump to 11 percent and provoke a wave of defaults. The faint ticking sound of these loans would grow louder with time, until eventually a lot of people would suspect, as he suspected, that they were bombs. Once that happened, no one would be willing to sell insurance on subprime mortgage bonds. He needed to lay his chips on the table now and wait for the casino to wake up and change the odds of the game. A credit default swap on a thirty-year subprime mortgage bond was a bet designed to last for thirty years, in theory. He figured that it would take only three to pay it off.

The only problem was that there was no such thing as a credit default swap on a subprime mortgage bond, not that he could see. He’d need to prod the big Wall Street firms to create them. But which firms? If he was right and the housing market crashed, these firms in the middle of the market were sure to lose a lot of money. There was no point buying insurance from a bank that went out of business the minute the insurance became valuable. He didn’t even bother calling Bear Stearns and Lehman Brothers, as they were more exposed to the mortgage bond market than the other firms. Goldman Sachs, Morgan Stanley, Deutsche Bank, Bank of America, UBS, Merrill Lynch, and Citigroup were, to his mind, the most likely to survive a crash. He called them all. Five of them had no idea what he was talking about; two came back and said that, while the market didn’t exist, it might one day. Inside of three years, credit default swaps on subprime mortgage bonds would become a trillion-dollar market and precipitate hundreds of billions of dollars’ worth of losses inside big Wall Street firms. Yet, when Michael Burry pestered the firms in the beginning of 2005, only Deutsche Bank and Goldman Sachs had any real interest in continuing the conversation. No one on Wall Street, as far as he could tell, saw what he was seeing.

No one could see what he was seeing. This is in 2005--fairly late in the bubble game. And still no one could see what he was seeing. Later on in the book Michael Lewis tells of the crucial moments when Wall St. first started to really realize that credit default swaps were going to bring the whole system down and stopped selling them. It was a like a spooked herd of cattle stampeding for the exits all at once. And as the book chronicles, most of Michael Burry's wealthiest clients were furious with his market-shorting investment strategy for years, often pulling their money out of his firm in protest because they all wanted in on the big money mortgage derivative game all the rest of the big boys were playing.

One of the biggest lessons one can learn in life is that no matter how far up one rises or doesn't rise, the world is still populated by the same sort of morons we met in high school. It never gets better. The people at the top of the economic are just as greedy, impulsive, reckless, shortsighted and petty as everyone who annoys us in our everyday lives.

This is part of what being a progressive means: understanding that reality, and understanding that most of our circumstances in life have little to do with our work ethic or skill, but rather a lot more to do with the circumstances of our birth and education, our parents, our social environment, whom we happen to meet and impress, which companies are hiring when we come on the job market, the bosses and clients we get and even just a lot of dumb luck. The financial Masters of the Universe aren't much smarter than the rest of us, and they didn't see the subprime mortgage CDO collapse coming any more than the average schlub who bought bought a subprime mortgage did. The only difference is that the former used the threat of total global economic collapse as leverage to get bailed out, while the latter had no such power.

It's idiots, all the way up the chain. Idiots like Thomas Friedman and Alan Greenspan, neither of whom can prognosticate two feet in front of their noses, but whose words are taken as gospel by all the rest of collective fools who think they're the smartest guys in the room. Which makes it all the more important that the idiots at the highest levels of government, whether they sport a fancy meaningless Ivy League degree or not, start listening to the actual smart people who did see it coming. Accurate prognostication is how policy makers can actually tell the smart people from the idiots.

Thomas Friedman and his ilk are not evil geniuses playing out the next move on a grand conspiratorial chessboard. They're just as dumb as the collective content of their words make them out to be, no matter how erudite or carefully constructed those words may be.

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