2008/10/14

The problem this time may not be “too big to fail” but, more accurately, “too big to save”. Only time will tell. But, seriously, do you REALLY THINK that Paulson's $700 billion (yeah, it's really larger than that…) bailout plan will do anything considering the size of the problem?

In conclusion, I think you can see that we've been living in a world that is standing on its head; a topsy turvy world turned upside down. The forces of gravity pull equally hard on all Earthly structures and economic structures are no different. In the domain of today's digitized wealth, it's become all too easy to forget that the basis for all monetary and financial systems is TRUST , not financial ingenuity and computer programming skill. As in any relationship, trust - once lost - is not easily regained. David Haas in The Crushing Potential of Financial Derivatives

Reputable business leaders and economists had been warning for years that our financial institutions were excessively leveraged. In mid-August of this year the New York Times Magazine published an article foolishly entitled "Dr. Doom" about a perfectly reputable academic economist, a professor at New York University named Nouriel Roubini, who for years had been predicting with uncanny accuracy what has happened. In September of 2006--two years ago--he had "announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac." By August of this year, when the Times article was published, Roubini's predictions had come true, yet he continued to be ignored. Until mid-September, the magnitude of the crisis was greatly underestimated by government, the business community, and the economics profession, including specialists in financial economics. Bernanke had repeatedly stated that it was unlikely that the mortgage defaults that accelerated after the housing bubble burst in mid-2006 would spill over to the financial system or the broader, nonfinancial economy. In May of 2007, for example, he said: "Importantly, we see no serious broader spillover to banks or thrift institutions from the problems in the subprime market." It has been more than two years since the housing bubble burst. One might have thought that that was enough time to enable the experts to discover that our financial system was in serious trouble. Richard Posner