Skip to main content

With a big nod to Helen

One of the most annoying things these days is to watch our political leaders, business stars and pundits tell us that the current crisis is unprecedented, and that "nobody could have precicted" what's been going on  - and go on to use the opportunity to ask for more powers to themselves in order to enact the solutions they see to the crisis.

The fact is: that crisis WAS PREDICTED - and not just by lefty bloggers. The people that now tell us they could never have conceived such a thing just dismissed the warnings, and those bearing them, with something approaching contempt back then. And ofcourse, they are now telling us that their solutions are the only one that will work today, and that we must urgently give them more powers, and again ignore the shrill warnings of the "extremists" that were right then. Why are they taken seriously, again?

Oh - of course. Because being SeriousTM is more about fitting into the mainstream than about being correct.

Anyway, here are a few examples of warnings from early 2005. I blogged each of these articles on DailyKos back then, but I won't link to these just to underline the point: these warnings did not come from shrill lefties, they were printed in the Financial Times, the main business paper in Europe (and the main competitor to the Wll Street Journal globally), and they were expressed by senior bankers or politicians.

the 'crack cocaine of global finance'

Has a newly resilient international banking system acquired near-immunity to crises? Or could a financial bolt from the blue still expose global finance to a devastating systemic shock?


Note, in passing, the astonishing fact that most of the assets of US financial institutions are not subject to the risk-based capital regime and supervisory constraints that apply to US banks. This is because a high proportion of US financial activity now takes place outside the banking system, in institutions ranging from non-banks such as GE Capital to giant hedge funds.

An overly generous financial safety net has potentially been extended by default as a result of the growing concentration of financial assets and liabilities.


The positive feature of credit derivatives is that they can give banks an opportunity to transfer risk to those institutions that are best equipped to bear it. But the market can be illiquid, while trading strategies depend on highly complex pricing models. And credit derivatives have never been tested in times of acute market stress. With so much of the market concentrated in a handful of complex giants, there is a risk that any attempt to reduce their exposure in the face of a shock could magnify rather than diminish the shock. he banks' first line of defence, in the event of trouble, is their capital cushion. Yet it is hard to know what constitutes an adequate cushion when so much financial activity that could pose a systemic threat is outside the banking system, and when the degree of leverage in finance is so hard to gauge.

That article also points out the increase risk taking of the financial world as cheap liquidity brings returns down, and flags that the behavior of new, untested, financial products in times of stress is generally hard to predict. It furthermore notes that current regulations are largely pro-cyclical (ie they reinforce market movements, by allowing booms to go higher, and making busts more painful)

So we have it all - the shadow banking system, the abuse and concentration of derivatives, the risk of illiquidity, the lack of regulation and supervisions, and the insane pro-cyclicity or what little there is.

Clouds sighted off CDO asset pool

many bankers argue that the world already has reason to be grateful to credit derivatives. Without them, the arguments goes, financial markets could have crashed after the Enron scandal or, more recently, after General Motors had its debt ratings downgraded. "It's fair to say that in the past [the GM shock] would have caused the market to seize up entirely," says Sean Park, global head of credit trading at Dresdner Kleinwort Wasserstein.

Yet the very same traits of CDOs that can be so benign also carry potential risks. The sector has expanded so dramatically in recent years that it has, in itself, helped boost demand for credit products. In turn, that has helped keep bond prices high - and may have lulled investors into a false sense of security. Meanwhile, the fact that CDOs disperse credit among multiple investors means that, if a nasty accident did ever occur with CDOs, it could richochet through the financial system in unexpected ways. Many insurance companies, banks, hedge funds and pension groups have piled into the sector.


"I have been to dealer-sponsor events [selling CDOs] and the way they simply things scares me," says Charles Pardue, of Prytania, a hedge fund. "I fear there are people being lulled into the idea they understand [these instruments] - when they may not."


One of the most crucial questions in this fast-growing market is whether investors correctly understand “correlation” risk - that is, the danger that if one asset turns bad it could affect other assets in a snowball effect.

That article discusses the extraordinary growth of derivatives and structure products like CDOs (dollateralized debt obligations) and CDSs (credit default swaps), amidst a quasi-desperate quest for higher returns in markets where returns are squeezed down because asset prices are inflated by cheap liquidity. It underlines, yet again, that things are okay because conditions are extraordinarily mild and that the instruments are untested in times of crisis. Some of the risks we saw explode in the past year are even noted already - correlation risk, while some are implied (the era back then is permanently described as one of cheap, pervasise, liquidity)

Property could fall like a house of cards

Nout Wellink, president of the Dutch central bank, last month warned that a hangover from the property boom could well exacerbate the next downturn.


The end of housing bubbles in other countries has been associated with periods of prolonged economic weakness, increasing financial fragility, rising government deficits and the appearance of monetary instability.


But it is not just borrowers who are hurt by a housing market collapse. Rising levels of bad debt inflict damage on lenders' balance sheets. This often leads to a credit crunch and sometimes to a full-blown banking crisis.


The head of the Dutch central bank now regrets what he calls the "artificial stimulus" provided to the economy by the housing boom.

So - not just a warning printed in the Financial Times, but coming from the head of the Central Bank of a major European country, and warning of how the same circumstances had brought about the same consequences time and over again. He was ignored, but he was, of course, correct.

So - just 3 articles from early 2005, before there were any hints of any weakness in the ongoing bubbles, coming from uninmpeachable sources in one of the most SeriousTM publications around...

No, nobody could have predicted how this would end...

One of the striking things about business newspapers, in fact, is that they are great sources of information if you don't read the headlines, the front page or just the leading paragraph of articles, but focus on the full content of the paper. All the information is there, available to be analysed. But the analytical skills of their main pundits and editorialists, and the common wisdom on context that gets distilled into other articles, rarely absorbs that content - in fact, it is often amazing how often it appears that those people in such papers that are in charge of analysing the news and providing an interpretation that will be distributed far and wide (for these pundits are influential) do not read their own paper...

And thus, as mainstream news organisations, politicians and TV anchors get their cues from the Serious People in the business press, the hard information gets lost as analysis turns into mush or propaganda (your choice), and people believe it was never there in the first place.

"Nobody could have predicted" really means "I'm too stupid to know what I'm talking about."

Dean Baker's latest note needs to be read in full, but here's the money quote:

Imagine that the bailout had gone down a second time. Suppose that the financial markets and credit markets had panicked in the same way that they actually have panicked since the bailout's passage.

The newspapers would be filled with news stories, columns, and editorials condemning the ignorant hordes who just can't understand economics, and who forced their leaders in Congress to vote against the bill. However, when bad things happen after Congress follows the advice of the elite (who, by the way brought us to this crisis in the first place), no one is supposed to say anything.

Well, the real story here is that the elites brought us this mess. They were too dumb to see an $8 trillion housing bubble and to recognize the damage it would cause when it burst. They didn't know what they were doing then and they still don't know what they are doing now.

We have to take their microphones away from them. Urgently.

Originally posted to Jerome a Paris on Sun Oct 12, 2008 at 12:49 PM PDT.

Your Email has been sent.
You must add at least one tag to this diary before publishing it.

Add keywords that describe this diary. Separate multiple keywords with commas.
Tagging tips - Search For Tags - Browse For Tags


More Tagging tips:

A tag is a way to search for this diary. If someone is searching for "Barack Obama," is this a diary they'd be trying to find?

Use a person's full name, without any title. Senator Obama may become President Obama, and Michelle Obama might run for office.

If your diary covers an election or elected official, use election tags, which are generally the state abbreviation followed by the office. CA-01 is the first district House seat. CA-Sen covers both senate races. NY-GOV covers the New York governor's race.

Tags do not compound: that is, "education reform" is a completely different tag from "education". A tag like "reform" alone is probably not meaningful.

Consider if one or more of these tags fits your diary: Civil Rights, Community, Congress, Culture, Economy, Education, Elections, Energy, Environment, Health Care, International, Labor, Law, Media, Meta, National Security, Science, Transportation, or White House. If your diary is specific to a state, consider adding the state (California, Texas, etc). Keep in mind, though, that there are many wonderful and important diaries that don't fit in any of these tags. Don't worry if yours doesn't.

You can add a private note to this diary when hotlisting it:
Are you sure you want to remove this diary from your hotlist?
Are you sure you want to remove your recommendation? You can only recommend a diary once, so you will not be able to re-recommend it afterwards.
Rescue this diary, and add a note:
Are you sure you want to remove this diary from Rescue?
Choose where to republish this diary. The diary will be added to the queue for that group. Publish it from the queue to make it appear.

You must be a member of a group to use this feature.

Add a quick update to your diary without changing the diary itself:
Are you sure you want to remove this diary?
(The diary will be removed from the site and returned to your drafts for further editing.)
(The diary will be removed.)
Are you sure you want to save these changes to the published diary?

Comment Preferences

skybluewater, N in Seattle, Kimberley, clyde, Frederick, ElitistJohn, PeWi, ClaudeB, fly, wozzle, elishastephens, Sharon, Lupin, clb, Alumbrados, myriad, Superskepticalman, Ed in Montana, Angie in WA State, ljb, easong, boydog, vicki, KeithH, Terri, dwellscho, Aeolus, PrahaPartizan, hazey, oofer, catdevotee, Phoenix Woman, jotter, nu, baked potato, Sally in SF, grollen, ogre, alyosha, teacherken, Sparhawk, laurak, XOVER, Trendar, ctkeith, AaronInSanDiego, insaneliberal, Detlef, El Payo, Geenius at Wrok, abarefootboy, lrhoke, Mountain Don, demnomore, TKinVT, Gooserock, Rolfyboy6, flatiron, pHunbalanced, TrueBlueMajority, Danno11, nicolemm, HarlanNY, whataboutbob, mem from somerville, ScientistMom in NY, SeltzerDuke, BigOkie, mattman, janinsanfran, RunawayRose, Bob Love, lazbumm, DebtorsPrison, SteinL, tnichlsn, sphealey, dengre, tommurphy, Shockwave, Schmuck, wu ming, donna in evanston, Wintermute, goatchowder, cotterperson, byoungbl, meg, democat, Jim W, ericy, Arlyn, bellatrys, eeff, Mnemosyne, Nashville Bill, xynz, gecko, LeftHandedMan, devtob, bcb, TarheelDem, frisco, lawnorder, dash888, ZAPatty, marjo, theran, sobermom, RFK Lives, BenGoshi, object16, twistandshout, MarkInSanFran, zeroooo, mataliandy, exNYinTX, givmeliberty, technopolitical, gilacliff, RubDMC, bigforkgirl, eyeswideopen, rasbobbo, rwsab, Hatu, bronte17, 88kathy, conchita, TracieLynn, afox, sponson, robertdfeinman, cskendrick, BlackGriffen, wonkydonkey, Shadan7, Cassandra77, Zwackus, understandinglife, whenwego, ask, Time Waits for no Woman, Kevvboy, Morague, KMc, wanderindiana, ksh01, gayntom, mkfarkus, pattisigh, buckhorn okie, Aquarius40, farmerhunt, roses, khloemi, pedrito, JuliaAnn, javelina, murphsurf, sgilman, Larry Bailey, oceanspray, itsmitch, nargel, CodeTalker, bws, ceebs, Spud1, thingamabob, marysz, Jesterfox, enough already, Cedwyn, antirove, Alna Dem, wvhillrunner, dksbook, aitchdee, Melanchthon, Redfire, JimDev, tidalwave1, nicta, psnyder, danthrax, sockpuppet, SadTexan, Dallasdoc, MadLibrarian, DeadB0y, 2laneIA, superscalar, KevinEarlLynch, BmoreMD, Febble, gmb, alivingston, johanus, exiledfromTN, Hawksana, Kidspeak, astronautagogo, laughingriver, wdrath, GN1927, Chirons apprentice, On The Bus, defluxion10, betson08, snakelass, jmknapp, rlharry, lecsmith, lcrp, faithnomore, Democratic Hawk, inclusiveheart, walkshills, Bendra, KateCrashes, djtyg, side pocket, mungley, Redbug, JayDean, CanYouBeAngryAndStillDream, Deward Hastings, fran1, jcrit, poemworld, TexasLefty, haileysnana, kcurie, kd texan, ganymeade, AaronBa, thereisnospoon, BDA in VA, donailin, oortdust, sawgrass727, Jersey Joe, sxwarren, Julie Gulden, luvmovies2000, nailbender, greenskeeper, leolabeth, madaprn, joanneleon, G2geek, Massman, Recovering Southern Baptist, chumley, ExStr8, bloomer 101, historys mysteries, Bluesee, radarlady, 3goldens, Kewalo, pattyp, j sundman, NoMoreLies, TexasTom, Jeffersonian Democrat, bellevie, Ckntfld, el dorado gal, Othniel, baccaruda, JanetT in MD, CTPatriot, unclejohn, revbludge, subtropolis, relentless, ek hornbeck, OpherGopher, PBen, nyc175, sap, offred, Flint, JohnB47, elkhunter, Far left coast, truong son traveler, ajsuited, Robin7459, eightlivesleft, Valtin, dogemperor, TN yellow dog, Clem Yeobright, kaye, juliesie, david78209, baahl, YucatanMan, trinityfly, Laurence Lewis, afew, boofdah, eru, Mz Kleen, howardfromUSA, lennysfo, owlbear1, Annalize5, mojo workin, LNK, Pam from Calif, jorndorff, jimstaro, pandawoman, Buffalo Girl, thered1, aaraujo, GreyHawk, Burned, QuickSilver, topshelf, govib, bmaples, lasky57, antiapollon, jane123, paxpdx, Daneel, RickE, Marcus Junius Brutus, Big Nit Attack, Ginny in CO, Aint Supposed to Die a Natural Death, wiscmass, FindingMyVoice, sodalis, coolbreeze, Lisa Lockwood, Reepicheep, loggersbrat, dsteffen, Rogneid, bookwoman, Margouillat, Ekaterin, ZinZen, EKO, empathy, gazingoffsouthward, JanF, mightymouse, Dania Audax, Land of Enchantment, melvin, fhcec, xaxnar, CJnyc, Over the Edge, Jim P, maryru, CCSDem, axman, Born in NOLA, Doug Goodenough, martini, Paul Ferguson, dus7, redcedar, Nance, trashablanca, BachFan, danmac, Metatone, LeighAnn, Compound F, tarheelblue, Patriot Daily News Clearinghouse, Keone Michaels, PatsBard, highfive, Weishaupts Dismay, myboo, sherlyle, RustyBrown, 417els, njr, Malachite, CDNNTX, ActivistGuy, fat old man, Gorette, cookseytalbott, borkitekt, victoria2dc, abe57, ccmask, The Wizard, deha, Shakludanto, carolita, greenearth, sullynyc, Brudaimonia, NBBooks, sravaka, global citizen, StrayCat, Tanya, A Siegel, Marshall Collins, Ashaman, Libby Shaw, VegasLiberalStevo, imabluemerkin, Iranaqamuk, real world chick, Pager, NearlyNormal, bleeding heart, el cid, MarciaJ720, sceptical observer, ER Doc, feduphoosier, Unitary Moonbat, Dinclusin, BarbaraB, bonesy, quantumspin, Pilgrim X, Turbonerd, SingerInTheChoir, ChapiNation386, dirkster42, sully18, vox humana, profh, rsie, Dianna, va dare, means are the ends, RantNRaven, Statusquomustgo, crystal eyes, FrankieB, kurious, KenM30, Lurtz, Friend of the court, Hedwig, Temmoku, AltruisticSkeptic, Nulwee, One Pissed Off Liberal, old wobbly, RagingGurrl, Boreal Ecologist, marykk, timewarp, out of left field, DorothyT, ibonewits, asilomar, donnamarie, willie horton, Cronesense, Fredly, hockeyrules, wa ma, Wanda517, Loudoun County Dem, Mr K, blue armadillo, california keefer, moodyinsavannah, godislove, momoaizo, vets74, BruceMcF, Izzzy, moosely2006, drbloodaxe, Outrider, Allogenes, edsbrooklyn, FishOutofWater, vista2020, tbirchard, david mizner, Jimdotz, ezdidit, Calvin Jones and the 13th Apostle, Unbozo, Democrat, Strabo, bnasley, RosyFinch, mouser68, 99 Percent Pure, Drowning Wave, Orange County Liberal, dconrad, Canyon Lefty, dolphin777, rivamer, Singing Lizard, SeaTurtle, bobswern, jnhobbs, Moderation, jhop7, rogereaton, theorem, Wreck Smurfy, Joffan, Rumarhazzit, uciguy30, Poom, madgranny, JML9999, Captain Nimrod, keikekaze, sable, Assaf, Hens Teeth, Terra Mystica, mcyrhul, JDWolverton, FishBiscuit, adrianrf, seriously70, Justus, condorcet, Spoonfulofsugar, TX Freethinker, DW Dawg, RickMassimo, OleHippieChick, mamamedusa, lamzdotes, ghettoMuppet, Involuntary Exile, angel65, Wes Opinion, nlight, afx114, CDH in Brooklyn, Akonitum, steff, Its any one guess, nanne, Lujane, tofumagoo, hwmnbn, happymisanthropy, Wek, pickandshovel, vernonbc, Jeff Y, WoodlandsPerson, gildareed, mnguy66, mofembot, a lien on everything, WisCheez, banger, Gemina13, dmnyct, kyril, KimD, shigeru, numen, luckylizard, aigeanta, DixieDishrag, Uncle Bob, nklein, CatfishBlues, allie123, psilocynic, Anr, caps lock on, magicsister, In her own Voice, watercarrier4diogenes, shortgirl, CIndyCasella, forgore, ggwoman55, 207wickedgood, maggiejean, ithinkitsjones, Bule Betawi, multilee, OHeyeO, Neon Vincent, Rick Aucoin, emboyo, snackdoodle, hummingbird4015, Discipline28, Shhs, jaf49, Michael James, banjolele, CanyonWren, Frank Schnittger, be the change you seek, red states blues, Rabbithead, ColoradoWantsWolves, i know, Partisan Progressive, SciVo, Patch Adam, zackamac, Daily Activist, Robert Sandy, babajimbob, Shep001, zbbrox, mama hearts obama, MKSinSA, TheOpinionGuy, Buck Power, ZilV, SteveP, Knight Rider, jemjo, jazzence, sanglug, allep10, IngeniousGirl, synductive99, Mom in Maine, IreGyre, SnowItch, moviemeister76, audiored, 57andFemale, Houston Gardener, orangedem, sumo, PoliticalJunkessa, Katie71, ArthurPoet, A Voice, Nonconformist, reesespcs, FundaMental Transformation, ohmyheck, Pr0crast, orangeuglad, Wings Like Eagles, Randtntx, Cleopatra, Words In Action, Big Apple, Just Bob, phoebe1st, ZAP210, BigVegan, ladygreenslippers, dalys, ppl can fly, TruthandTrust, YellerDog, Carmen Cameron, BrighidG, Midwesterner in NYC, danbury6112, awcomeon, winkster, T Maysle, miss SPED, budr, Pebbles, LaughingPlanet, NJpeach, robertacker13, eXtina, cloud9ine, Hamsun, seishin, whisperinghope, fleisch, El Ochito, Big Danny, Mrs Olbermann, cgirard, msmo1918, Nestmaster, Ronald Singleterry, Lost and Found, legalchic, ATFILLINOIS, Eddie L, Peyton on the Plateau, OldLady in BC, NY brit expat, ItsSimpleSimon, HartfordTycoon, Kristina40, DrFitz, ThirtyFiveUp, Jaimas, Earth Ling, WattleBreakfast, Publius2008, Urtica dioica gracilis, MsGrin, Fulcrum21, sapientgrape, The Holy Smoker, Freddy Bear, Floande, USHomeopath, bottles, AMfromATL, Jim Oleske, alexa100, Freelance Historian, Berliner2, Actbriniel, jeanma, slice, indubitably, virtual me, mieprowan, heart of a quince, Jurassic Game Warden, atheistben, etbnc, implicate order, croyal, Olon, vahana, soaquarian, OregonMon, Cintimcmomma, Susipsych, Freeman Bevan

Subscribe or Donate to support Daily Kos.

Click here for the mobile view of the site