Monday, January 28, 2008

A Financial Mini-Rant

It's been a while since I've posted a financial rant on this blog, but we seem to be cursed with "interesting times"....a few random thoughts on the economy:
  • Compared to 2001 the upcoming financial pain has to be worse. If there's any industry I'd want to be at the focus of a bubble-collapse-recession it'd be the computer industry; we're an industry with high growth and usually low unemployment; we bounced back. I think this time around, with housing hit hard it's going to be worse for more people with fewer options.
  • I think the hopes of "decoupling" (the idea that the rest of the global economy will march on, allowing the US to quickly turn around via exports to strong foreign economies) will prove to be a fantasy. Over and over when finance gets ugly, everything moves together. Perhaps it is because there are so many positive feedback cycles. Read the downfall of LTCM - the experts are always surprised by "perfect storms".
  • The stimulus package strikes me as a poor idea. We're in a jam because we've collectively borrowed and spent a lot of money we didn't have - the heart of this financial mess is about insolvency. So borrowing another $150 billion seems like a supremely poor idea. It's like our solution to maxing out our credit cards and getting a pink slip is to go apply for another credit card and immediately max that one out too. I don't know how the US will get over its debt addiction, but buying an eight-ball isn't the right approach.
  • The financial system is parallelized by fear of counter-party risk, but I don't buy that we got anything useful out of the heavily engineered products that got us here. You could make some kind of argument about greater financial efficiency, but it looks to me like Wall Street invented a series of instruments whose primary feature was to make Wall Street rich. If we can't understand how to value these things, are they really helping us manage capital more efficiently?
  • The recent bond-insurance melt-down shows a conflict of purpose to me. On one hand, insurance involves taking money now for services to be rendered later, so there's a lot to be said for your insurance company not going broke. On the other hand, if we don't let financial companies fall flat on their face when they do really stupid things, we introduce a moral hazard. The way to mediate this would have been more regulation - not letting any insurance company play with fire. (And frankly if we didn't have municipal bond insurance, the world would continue to turn. If Louisiana doesn't need bond insurance, no one does.)
Okay that's enough of that for now. I have to go hide my money under the mattress.

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