Larry Summers, Paul Volcker and Rolf Englund, June 2007

Moral hazard

The optimists will be right until they are wrong
Wolfgang Munchau


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En ettåring som ingen firar

Ett år har gått sedan den globala kreditkrisen blossade upp, snabbt och häftigt. Och krismolnen hänger fortfarande tunga över finansmarknad och världsekonomi.
SvD Ekonomi 2008-08-03

How the world changed one day last summer.
Jeffrey Cane, Aug 8 2008

It can be tricky trying to pin down the beginning or end of world events. When asked about the impact of the French Revolution nearly two centuries later, Zhou Enlai replied: "It is too soon to tell."

Still, the birth of the credit crunch—the child of a burst bubble in housing—can be traced to a Thursday last summer, a day when many Wall Street executives, bankers, and government officials were enjoying their vacations.

On August 9, 2007, it became clear that fear had paralyzed the world's credit markets.

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In 1989, Mrs. Thatcher went to Paris for the G-7 conference. President Francois Mitterrand had decided to use the summit to showcase the bicentenaire of the French Revolution.
Reporters flocked to Mrs. Thatcher to get her impressions of the event. What did she think of the French Revolution, they probed.
"It resulted in a lot of headless corpses and a tyrant," the Iron Lady replied.
But surely Madame would agree that the French Revolution began the long march toward human rights, non?
"Certainly not! That began with Magna Carta,"
Mrs. Thatcher replied firmly.

A year since the credit crunch burst upon an unsuspecting world, the big questions remain unanswered.
Where are we now? Is it nearly over? And has understanding finally caught up with reality?
Roger Bootle, Daily Telegraph 10/8 2008

The central banks' measures to return the money markets to normality by injecting massive amounts of liquidity have been at least partially successful.
The spread of three-month interbank interest rates over the official policy rate - a useful indication of the willingness of banks to lend to each other - has narrowed from a peak of 1.2 percentage points to 0.8 percentage points now.
Before the credit crunch struck, however, this spread was regularly in the region of 0.2 percentage points.
So although the worst may now be behind us, things are far from normal

Moreover, even if the liquidity crisis may be past its worst, the housing crisis has only just begun.
At the start of the credit crunch, house prices in the US had already fallen by 4pc.
But over the past year they have fallen more rapidly, taking the total drop from the peak seen in 2006 to 16pc.

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We are all Keynesians again
As the crunch grinds past its first anniversary, central banks’ credibility is still at risk
The Economist print Aug 7th 2008

ON AUGUST 9th 2007, after an alarming leap in interbank interest rates, the European Central Bank signalled its readiness to provide the banking system with the liquidity it suddenly lacked.

The financial system was not as robust as most regulators thought.
Banks had not shed risk altogether; it was hidden off their balance-sheets.
The British tripartite system of oversight was ineffectual in the Northern Rock crisis.

The reason for saving a big financial institution that gets into trouble is the economic havoc its failure can cause. The historically minded need no reminding of the Great Depression—least of all Ben Bernanke, the Fed’s chairman, an expert on the subject. It seems plausible that, even if the risk of catastrophe is slight, no chances should be taken.
To borrow the title of a popular book: shoot black swans on sight.

The idea of giving central banks independence was that they would take decisions from which politicians would shrink. The central banks’ credibility depends on being prepared to do two unpopular things:

raising interest rates, despite the economic pain,
and letting financial institutions fail.

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Full text 2 Mission creep at the Fed

Full text 3 Greenspan

Full text 4 Phase II

Full text 5 Derivatives

Full text 6: Housing slump

Keynes - Black Swan

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It is almost exactly a year since the European Central Bank was forced to inject €95bn into the eurozone banking system, bringing home what many had suspected – that the fallout from the US subprime mortgage crisis in the US was causing serious pain to global financial markets.
Financial Times

Cramer Day is upon us.
This weekend marks the anniversary of former hedge fund manager Jim Cramer’s outburst on CNBC
John Authers, Investment Editor, Financial Times August 1 2008

The Federal Reserve was “asleep” and that there was “Armageddon” in the fixed income markets. It was possibly the most entertaining five minutes of financial television ever broadcast.

Those who do not work in a Wall Street trading room and have not watched the excerpt repeatedly over the past year, can watch it on YouTube (search for Cramer, Bernanke and Burnett) where it is a popular view.

He implicitly took a strong stance on the issue of “moral hazard” – the theory that insurance, particularly when offered for free by governments, will encourage excessive risk-taking, and so bailouts should be avoided.

He was angered by the way “my people” – friends in Wall Street – were hurting, that the Fed had “no idea” how bad things were, and that Ben Bernanke was “behaving like an academic”.
Moral hazard, in other words, should be put aside as the crisis was so severe.

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Bloomberg is reporting Banks' Subprime Losses Top $500 Billion on Writedowns.
Bloomberg (and others) keep referring to this as if it was a "subprime" problem.
The reality is this was an unsustainable worldwide credit boom of epic proportion.
Mish August 12 2008 with nice table

it is going to be increasingly difficult for banks and brokers to raise the capital required to support the expected losses.
Massive shareholder dilution is coming.

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Credit crunch a year on: The losers
However you look at them, the figures remain startling.
BBC 3 August 2008

Bank losses
The Economist print edition Aug 7th 2008

8 who saw the crisis coming... and 8 who didn't
One year after the credit crunch began, Fortune looks back at who saw trouble ahead, and who just ended up in trouble.
CNN/Fortune August 2008

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