The Experts Don't Know What's Going to Happen...

...but they kind of agree about what did happen. A panel put together by the New York Review of Books was held on April 30, 2009 @ The Metropolitan Museum of Art. The discussion was transcribed in its latest issue (6/11/09), How To Deal With the Crisis. The panel included such luminaries as Bill Bradley (U.S. Senator-NJ (D) 1979-1997; managing director at merchant bank Allen & Co.), Niall Ferguson (Professor of History @ Harvard, Senior Fellow @ Hoover Institute), Paul Krugman (but of course, just awarded the Nobel last year), Nouriel ("Dr. Doom") Roubini, doomsayer extraordinaire (Distinguished Professor of Economics @ NYU Stern School of Biznez and Chairman of RGE Monitor, George Soros (Chairman of Soros Fund Management LLC, well-known macroeconomic trend cruncher and legacy builder, who is distinctly unhappy with the "free market paradigm"--I think if he met John Galt, he'd spit in his eye) and Robin Wells (who co-authored the book Economics with Paul Krugman and made some very astute comments herself.

Ferguson joisted with Krugman, especially about the potential hyperinflationary effects of the government's printing money, not specifically regarding backing up all the bad debt in the financial system but decrying the fiscal stimulus. On the other hand, Paul (who believes that all this talk about hyperinflation is a way to wage war against further stimulus) despaired for the near future of ordinary Americans, which is 99.9% of all of us who are being laid off to the tune of 600,000+ per month.

I thrilled to Paul's thundering words:

The other thing not to miss is the importance of a strong social safety net. By most accounts, most projections say that the European Union is going to have a somewhat deeper recession this year than the United States. So in terms of macromanagement, they're actually doing a poor job, and there are various reasons for that: the European Central Bank is too conservative, Europeans have been too slow to do fiscal stimulus. But the human suffering is going to be much greater on this side of the Atlantic because Europeans don't lose their health care when they lose their jobs. They don't find themselves with essentially no support once their trivial unemployment check has fallen off. We have nothing underneath. When Americans lose their jobs, they fall into the abyss. That does not happen in other advanced countries, it does not happen, I want to say, in civilized countries.

In all the millions of words (along with the trillions of dollars) printed about this re/de/pression started December 2007, the pundits often overlook human suffering.

Niall became sarcastic, invoking the "lessons" of the 1970s:

The lesson of economic history is very clear. Economic growth does not come from state-led infrastructure investment. It comes from technological innovation, and gains in productivity, and these things come from the private sector, not from the state.

What could be more technologically innovative than synthetic CDOs (collateralized debt obligations) built according to mathematical models based on highly fallible projections? Or credit default swaps? Or securitization? And everyone agrees they are at the heart of this horrible economic disintegration.

As far as productivity goes, well, when you fire 4 out of 5 people in a company, that one person has to pick up the slack and eureka! productivity soars. So don't worry, Niall. Unemployment will continue to grow.

My brother called me two days ago to say hi and to let me know he was still at Citigroup. I had been predicting Citigroup's demise for 1-1/2 years already. The following is our email exchange (redolent of the times):

Good to hear from you, bro.
>>
>> I'm happy that you're still plugged into Citigroup (the new joke is that
>> =
>> its share price is lower than its ATM fees). I got laid off from =
>> Alzheimer's on Feb 10 (even tho 2 weeks before the prez/CEO said she was
>> =
>> sharing my ideas for maximizing income at no cost with the senior staff;
hope she doesn't use these ideas or I'll be miffed).
>>
>> Jeff also just got laid off (Fri). I've been doing some career coaching
>> =
>> here and there and just started sending out feelers re: different =
>> consulting ideas. At least I don't have any debt and I have savings. =
>> Man oh man this is some global situation. I blame it all on the =
>> internet (as do Roubini and Taleb). Everything was done at once and is =
>> now crashing at the same time. Trading in unison, de-leveraging in =
>> unison, foreclosing in unison and firing in unison is NG. (:.
Love,
>> Kathi

From: "Wayne Berke"
To: "Kathi Berke"
Sent: Tuesday, February 24, 2009 8:16 PM
Subject: Re: Victim of Catastrophic Economic Meltdown (ha!)

>
> Kathi,
>
> Good one (about the ATM fees). Bummer about you and Jeff getting laid
> off.
> Do either of you qualify for unemployment insurance? Who are Roubini and
> Taleb? Even Wikipedia hasn't heard of them.
Blame it on capitalism with its inherent cycles of boom and bust. It's
> pretty
> similar to a bipolar disorder I think. The higher the highs, the lower
> the
> lows kind of thing. Unfortunately, we're coming off a very extreme high
> (fueled by the Internet among other things). What we should learn going
> forward, if we're smart which we're not, is that regulation is very, very
> important in the financial world. And anyone who starts talking about
> how great it is to rely solely on the invisible hand of the marketplace
> should be summarily shot.
BTW, here's a really cool, artistic depiction of how we got into this
> mess:
>
> Disaster Capitalism
>
> Love,


Nouriel Roubini is a professor at the graduate school of business at NYU.
He is also known as Dr. Doom. He predicted the collapse of the housing and
credit market back at some conference (Davos? The IMF Happy Hour?) in 2006
and they laughed at him. Now they don't laugh so much. He is omnipresent.
A rockstar.

Nassim Nicholas Talebis the writer of
"The Black Swan: The Impact of the Highly Improbable" (April 2007). He is
also a rockstar. At Davos, people like Michael Dell and others lined up to
kiss these guys' rings. Taleb's theory basically is that the financial
system pretended that it was eliminating risk by seeking to disregard the 1%
possibility that the house of cards the system was built on could fall over.
He called his book "The Black Swan" to say in essence that just because
every swan you see is white, that does not mean there are no black swans.
And by ignoring that possibility you build in the greatest risk of all,
especially if the scale is massive.

There is an equation known as the Gaussian copula function. It was
formulated by a mathematician named David Li who was trying to reduce
correlative risk to one factor. He did that by measuring credit default
swap costs (the cost of insuring against default), instead of doing the
messy job of considering all the variables involved in, say, one mortgage
pool making up a mortgage-backed security (gauging the probability of
default on the part of each of thousands of mortgage holders, all with
different situations that could all work out very differently in the
future). He merely looked back historically as far as credit default swaps.
CDSs have only really been in existence for about 10-15 years. During that
time housing prices went up, up, up. Li's equation, based on the theory
that housing prices would alway go up, delivered a single number considered
the risk factor. Everyone in the financial sector used this number to
determine the risk in their trades. And guess what, they didn't think there
was any risk!

The managers didn't understand the mathematicians, but they liked the risk
reduction represented by that single factor. The mathematicians loved the
beauty of the equation, but they couldn't see the NINAs (no income, no
assets) borrowers or the cheap crooks selling the loans making thousands on
fees. There was no overlap. No Venn diagram.

But what's going on is no longer a "subprime" crisis. It is a credit
crisis. Companies are divebombing because they can't get credit. Even very good companies. Their debt is coming due (everything runs on credit; did
you ever see anyone walk into an auto dealership with $20,000 stuffed in
their pockets?) and they can't roll it over. Even investment grade
companies (like Southwest Airlines) have to pay 10% interest to raise money
now. I only pay 12% on my credit card line. The cost of debt service alone
can kill companies. So they're selling all their assets at fire sale
prices. Or they're going into bankruptcy because the banks are calling in
their loans. Banks that are getting billions in taxpayer money.

But the real problem that hasn't been solved by any statistical equation or
the financial wizards in Washington is that of credit default swaps. The
notional value of credit default swaps is something in the range of $50
trillion (for/against default)
my dailykos
diary. That's why AIG is hemorrhaging money: they owe so much on the
"insurance" contracts (credit default swaps) they made with counterparties
that things wouldn't default. AIG didn't hedge against the CDSs they wrote
(no capital cushion-credit default swaps aren't regulated at all, in fact no
one knows how many there are); it just kept collecting premiums. Now the
entities it wrote contracts on are defaulting and the gov't is pouring money
into it to keep it (futilely) from defaulting itself.

Fun, huh?

Love,
Kathi