Where are we in the crisis? Where are we going? What is to be done?



Originally published at the IGM Forum and reproduced here with the author’s permission.

7 Responses to "Where are we in the crisis? Where are we going? What is to be done?"

  1. JAlex   November 20, 2008 at 9:57 am

    Excellent synopsis. Kudos

  2. interested reader   November 20, 2008 at 10:30 am

    I guess this is why Paulson scrapped the plan to buy troubled assets directly – the problem is not artificially low prices, the problem is that these things are really rather worthless.

    • ex VRWC   November 20, 2008 at 3:22 pm

      Worthless or do not even exist. Consider – I buy an insurance policy on your mortgage for $10. There is a 20% chance you will default, so my ‘asset’ is worth $2. I loan money based on my ‘asset’ and leverage it 20 to 1, loaning $40. Now, 9 other people do the same, also buying policies on your mortgage. So we have $400 worth of leveraged loans based on a $2 asset (or $10 if you default). All well and good as long as things keep looking up. But once they come down, deleveraging collapses everything. This is my simple view of the derivatives market. There are not $400 of bad assets, just the one. But there are $400 worth of derivative liabilities. So how do you buy up the bad asset to fix it. You don’t, you just pour money in to try and cover up the insolvency that the deleveraging will reveal.

  3. nyu grad student   November 20, 2008 at 11:18 am

    what if assets worth $50?,as seems most likelythen what?

    • Neil   November 20, 2008 at 4:19 pm

      Well…. if I follow the math above… they would have to put in 50 instead of 5 to make the banks solvent… or ten times the capital of the “5” cash infusion based on loans being worth 95. That would be quite a bit more than TARP planned…. For example, if TARP planned for $500 billion to go to banks vs other bailout destinations…. maybe $5 trillion dollars? If they planned on $125 billion, then it’s $1.25 trillion. Dr. Roubini said losses will be in excess of $3 trillion. Maybe more. It’s not over by a long shot. Small businesses that can’t get credit since August can put off suppliers for 90-120 days or so and then that strategy runs out and they have to start laying off people big time. If the auto guys get turned down December 2-8 or before…. the you know what hits the fan right around the time the small business equations starts unravelling.

  4. Anonymous   November 20, 2008 at 7:22 pm

    unwind all the CDS contracts and forbid them in the future

    • Guest   November 20, 2008 at 8:04 pm

      yesterday wouldn’t be soon enough.At the minimum, restrict CDS’s to participating parties and eliminate all the “side bets”.Those “bucket shop” laws seemed sooooo restricting.