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Wall Street Crisis (2)
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(For new reader and those who request 好友请求, please read my 公告栏 first)
(Notes added 9/28/08. For readers interested, today's Sunday NY Times has a long, detailed, and fascinating account of the events that led to the 85 billion dollars bailout of The American International Group, the world's largest insurance company. the article offers a glimpse of the inner workings of the financial networks of the world. I repeat here my two sentences summary in my first article:
"The elements of Financial Engineering are actually relatively simple. It is human greed that knows no end, delusional, and never learns.")
In my previous blog article, I wrote, as an interested non-expert observer, about the root cause of the Wall Street financial crisis. We just completed two most tumultuous weeks in the US financial history since the 1929 market crash and the ensuing Great Depression of the 1930s. While things may temporarily appear to be on the mend, this week’s TIME magazine cover story details in very clear language “how” and “why” we got to where we are. The story is well worth reading http://www.time.com/time/business/article/0,8599,1842123,00.html .
Among the interesting tidbits:
- The bankrupted Lehman Brothers firm had leveraged 35 times more than their own net worth (Thus, a 1% decrease in the market value of their holding caused a 35% decrease of their net worth. Shear madness by hindsight)
- The whole systems is leveraged more than once with the fancy Collateralized Debt Obligations (CDOs) built upon very risky housing mortgages and Credit Default Swap (CDSs) insurances built on top of the CDOs giving the appearance of safety. In simply language, you built a fancy house on a foundation of loose sand, and then added another floor on top of that to give the appearance of grandeur.
- Warren Buffet actually warned in 2003 that these fancy instruments are “weapons of financial mass destruction”. But while everyone want to be rich like Buffet, no one listens to his sage advice.
- Many of these financial instruments were bought by foreign countries, e.g., China. If these become worthless, the future ability for the US to continue to borrow money to finance our lavish living standard will be endangered. Thus, the federal government has no choice but to come to the rescue.
Now I add my own two cents worth:
- This rescue plan by the federal government estimated to be about one trillion dollars will be borne by the tax-paying public and the succeeding generations (there is no free lunch). Government can print money and usually pay for it by the ensuing inflation and cheapened money. Inflation is the easiest and favorite form of (invisible) taxation by politicians. The American public and our children are in for a period of painful adjustments. As the sick jokes go: “we have privatized our profits and socialized our debts” or “The US is more socialistic than China, and China is more capitalistic than the US”.
- In 1914, the British Empire was at her zenith (日不落大英帝国), yet 30+ years later after two wars, she is reduced to food rationing and devalued Pounds. The US was the only superpower at the turn of this century, where will she be by 2040?
I worry for my children and grand children.
(Notes added 9/22/08: For another shorter, simpler, clear, but still somewhat incomplete, explanation on HOW DID WE GET INTO THIS MESS? see http://www.aier.org/research/commentaries/554-how-did-we-get-into-this-mess-the-origins-of-the-housing-crisis)
https://blog.sciencenet.cn/blog-1565-39766.html
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