Which of the following phrases sound innocuous?
a) Moral hazard
b) Externalities
c) Opaque
d) NINAs
(continued below)
d) Exotic derivatives
e) Illiquid
f) Gated hedge funds and/or gated auction-rate securities
g) Privatization
If you answered, "all of them", you win the brass ring (the cost of gold is skyrocketing!). You have officially entered the World of Financial Euphemism.
Why is everything hitting the fan at the same time and what can the ordinary citizen do about it?
Let me airily define some of the above terms off the top of my head. A "moral hazard" is not when your young 'un plays a video game like Grand Theft Auto. It's when the masters of the universe are bailed out from their hugely stupid highly risky highly profitable bets (that is, highly profitable on the upswing, until everything turns into the pile of garbage that it actually was in the first place) by the U.S. Government which is the taxpayer. Bailing out stupidity encourages more stupidity in the future because of the real certainty that the Fed Gov will continue to bail out these corporate thieves.
Stupidity is also an innocuous term. What I mean is blatant theft on a very wide scale. All these dudes who thought up "opaque exotic derivatives" get paid off the top. They don't stand around and wait for the chips to fall where they may. They grab the money up front and split. Getting fired, pshaw! Pretty sweet when you walk off with a couple hundred million. And you don't even have to show up at the office anymore.
"Opaque exotic derivatives"...ah, does that phrase trip off the tongue like drops from a waterfall. I close my eyes and picture long-limbed beauties emerging from a superstretch limousine with tinted windows.
"Illiquid"--what does that mean, you can't find a bathroom? No, it means different things. One is that a debt instrument was never traded on the open market so that it couldn't be valued the usual way and instead was valued by hypothetical models, and/or that what was bought cannot be converted into cash because no one wants to buy it. That fact of illiquidity didn't stop any financial institution from putting a value on debt instruments like "opaque exotic derivatives" and credit rating agencies from blessing their evaluations with a triple-A seal of approval.
Unfortunately, now there is a "credit crunch". Not a breakfast cereal (unless you eat shredded mortgage-back securities in the morning). Even formerly, truly good debt has no buyers. Which makes it bad debt. That is where the "gated" part comes in. People who put their money into hedge funds and auction-rate securities (which help fund municipalities and student loans) cannot get it out. Okay, hedge fund investors were told upfront that their money could be locked up as part of the sweet deal they were getting (and paying management fees and percentage of profits for). But people who bought auction-rate securities were told that their investments were as good as cash, in other words, that they were "liquid". Better even than a personal check from your neighbor that smells like potatoes, or the expectation of getting a loan paid back from a relative. They can't get their money, either.
That brings us to "externalities." But that's for another diary.