Economic Reckoning

Lately, I’ve been doing lots of reading about the economy, and learning some new things. Some very, very interesting new things.

Things like … how some investors like Steve Eisman figured out that the accepted process for rolling a big pile of crappy high-risk mortgages into bonds, and then re-rolling the lowest tranche (BBB) of those bonds into still more bonds — but with the amazing new bond rating of AAA instead of the crappy BBB they had before — was a sucker’s bet. And so Steve Eisman shorted everybody he could think of who held these risky positions. Which sounds pretty sensible, now.

What does not sound sensible is the process of re-grading high-risk “BBB” bonds into “AAA” lowest-risk bonds, which are considered safe for pension funds. Um, question … what is Moody’s for, if not to do this kind of investigation and assign a rating that reflects the true risk of the investment? This is their line of work, no?

The article linked above, “The End of Wall Street’s Boom” by Michael Lewis (author of Liar’s Poker), is excellent, if a bit long. It is the single most essential piece of information I’ve yet seen on understanding what really happened underneath the covers in the mortgage world, and is well worth reading. Twice.

And the second thing I learned was that some analysts, like Ed Morse, were predicting a fall in oil prices back in June, only to face large doses of ridicule, followed shortly thereafter by, yes, a collpase in oil prices that had been pushed up to artificial highs by speculators and huge Chinese pre-Olympics demand. Mr. Morse predicted a drop to only about $93, and today oil traded at about $43, so he was still too pessimistic by $50 a barrel. Maybe more, give it a few days.

And the third thing I learned was that a man named Peter Schiff warned us about an economy too dependent on consumer spending and financed by debt. Back in 2006. And people are making fun of him on the video. I’m sure we can expect their admission of being 100% wrong, oh, just about never.

And that’s just what I’ve read in the last few days.

So who’s laughing now? Some people got rich with falling market values. Because they realized things other people did not: they looked at financial reality, and insisted that you can only ignore it for so long before bad stuff happens. Markets, as it turns out, don’t really subscribe to post-modern concepts like narratives.

It would be wise to keep this in mind the next time you read “experts” in the paper, all saying the same thing, and all placing blame everywhere but where it is deserved.


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