On 2010-02-28, at 3:50 AM, SA wrote:
> Jordan Hayes wrote:
>
>>> The crisis happened because the fundamentals of the securities
>>> (the mortgage-backed securities) were defective.
>>
>> Of all the issues involved in this highly complex subject, I think I can state categorically that this one is incorrect. Mortgage-backed securities are not to blame in this, even in the slightest. MBS (and more generally CDO) I think are uncontroversially a net win for banks and consumers alike.
>
> Whether or not that's true, it's beside the point. I didn't say the existence of MBS caused the crisis. I said the crisis was caused by the use of faulty MBS (faulty due to bad loans and a bubble) as the main transaction medium for the wholesale banking system. When (some) MBS unexpectedly lost value, the transaction medium was suddenly no longer accepted. Consequently, interbank lending evaporated and there was a forced fire-sale of assets. It was a bank run. That is what explains....
>
>> what happened in the 3rd and 4th quarters of 2008 to the credit markets, banks -- especially central banks -- and investment banking generally.
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I suspect the subject is so complex because this has simutaneously been a) a classic crisis of overproduction, this time in housing, in which assets linked to the underlying product in the real economy have depreciated in tandem with it, rendering weaker creditors insolvent and b) a financial crisis unlike any other in that these impossibly structured assets, mostly traded over the counter and held off balance sheet, have been so extraordinarily difficult to trace and value that they have not allowed the market to clear as did, say, depressed 19th century railway bonds. This would explain the dearth of prospective bargain hunters, the failure of schemes to entice them like the super-SIV and PPIP, and the retreat from mark to market accounting - there was, in effect, no private market to clear. The financial system went into cardiac arrest in the immediate aftermath of Lehman because the banks and other big institutional investors in the overnight and short term money markets had no way of assessing how much they or their counterparties were exposed, and it was only the unprecedented massive intervention by the Fed and other central banks which resuscitated them.
Does the derivatives explosion then represent a "net win" and "new stage" of capitalism, as has been argued here, or are they "financial weapons of mass destruction", as Buffett put it, symptomatic of a system in terminal decline, a foretaste of bigger and more severe crises to come? This has become an difficult question not only for us, but an agonizing one for global capitalist policymakers, torn on the nature and degree of regulation of this massive new shadow banking system and, indeed, whether such is even possible.