I wrote about the destruction of Fannie Mae and Freddie Mac and the meaning of moral hazard. Right on cue came this statement from Jason Furman, the economic policy director for Obama campaign, in an interview with The Financial Times: Mr. Furman indicated that Mr Obama could back further intervention to support Fannie and Freddie, …
The Future of Fannie and Freddie (in a nutshell) Read More »
Reporting from Jackson Hole, Wyoming, where the “leading banking policymakers” were concluding their annual meeting, The Financial Times wrote: More than a year into the credit crisis, the world’s top central bankers admit that they are still in the dark as to what its ultimate impact on the global economy will be. The governor of …
The dictionary definition of moral hazard is “the possibility of loss to an insurance company arising from the character, habits or circumstances of the insured”. In the parlance of modern risk management, that is called reputation risk. But being vacated by a modern equivalent has not meant the demise of moral hazard. On the contrary, …
The destruction of Fannie Mae and Freddie Mac is an example of the self-destructive tendency of speculative capital materialized in the actions of its blind agents. The agents are blind in the sense of being concerned only with facilitating the movement of speculative capital to and from arbitrage relations, no matter what the consequences. If …
Mission Accomplished: The Destruction of Fannie Mae and Freddie Mac (Epilogue) Read More »
The lucrative business of Fannie Mae and Freddie Mac had attracted the attention of the private financial firms. They had created Structured Investment Vehicles (SIVs) that approximately mimicked the business model of the GSEs. The SIVs borrowed at the lower rates in the commercial paper market and purchased higher yielding assets, mostly mortgage-based CDOs. Between …
Mission Accomplished: The Destruction of Fannie Mae and Freddie Mac (Part 2 of 2) Read More »
A friend asked what I thought of the U.S. housing market, whether an end to the crisis was in sight. Returning from the hunt, the Iranian king runs into a peasant. ‘Where from, peasant?’ the king inquires. ‘From the bazaar, Your Majesty. Had a house, sold it for a goat.’ ‘You damn fool,’ the kind …
Speculative capital is inherently self destructive; it eliminates the opportunities that give rise to it. What is the real life manifestation of this characteristic? In other words, how does the self-destructive tendency manifest itself in practice? On example I used in Speculative Capital and the Credit Woes series was the shrinkage of spreads. Speculative capital …
Mission Accomplished: The Destruction of Fannie Mae and Freddie Mac (Part 1 of 2) Read More »
This past Sunday (July 20, ’08) The New York Times had another front page story about the ravages of indebtedness. The heading, “Given the Shovel, Digging Deeper Into Debt” signaled the usual way the story was to be framed: irresponsible borrowers, greedy and unscrupulous lenders. The story’s “human face” was a perfect setup: a slightly …
In more than one occasion in this blog I have written about the consequences of the genuflection of theorists to businessmen. The root of the problem is an improbably philosophical one, pertaining to the validation of theory. As a theory is a conceptual explanation of the working of the real world, it must coherently and …
I don’t know what finance textbooks say about arbitrage these days; I haven’t read one in years. But in the 1980s and well into the 1990s, they had only one example of arbitrage: buying IBM at New York Stock Exchange for, say, $120 and simultaneously selling it in the Pacific Stock Exchange for $120.5 and …
Revisiting Continuous-time Finance (Part 2 of 2) Read More »