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Waiting for the tsunami

December 19th, 2007

The sudden collapse of shares in the Centro group following the announcement that they were having trouble refinancing their debt (there’s been a partial recovery today) reminds us that no-one really knows what is going on in global credit markets. Bad debts have been buried under layers of collateralised debt obligations, and seemingly sound companies may (or may not) have all kinds of off-balance sheet obligations, liable to be called in at short notice.

Given that we are collectively among the most indebted people on earth, we probably ought to be more worried than we are. But, as Costello and Howard found during the election campaign, it’s hard to stir up concern about a possible crash when we’re still worrying about whether strong growth will overheat the economy.

Individually, the only real preparation for a possible jam in credit markets is to make sure that we are not relying on the availability of credit on easy terms in the near future. For example, if you are planning on refinancing a home loan and locking in a fixed rate, you might think about doing so sooner rather than later (note: I’m not a financial adviser, and this isn’t financial advice – if you’re actually in this, or a similar, situation, consult a professional).

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  1. December 19th, 2007 at 14:25 | #1

    Jeebus, John – it took you long enough!

    I have long been wondering why respected economists like yourself have not been sounding the alarm bells. But then again, I am one of those free-thinking Conspiracy Theory nut-cases who frequent blogs like ICH and read people like Mike Whitney, who saw this whole mess coming a very long time ago.

    In fact, I locked my mortgage into a fixed rate a few years ago mostly because of Mike’s highly informed and reasonable analysis. Sure, it may sound weird and panicky to some, but so did the idea (back in 2003) that we might be invading Iraq just to get their oil, or the idea (back in 2000) that George W. Bush might be just a compliant Big Oil stooge. We live and learn, eh?

    So now we look up from the beach and see the big tsunami on the horizon. It’s not like we should all be so surprised, is it? Is it?

    Mind you, I have sacrificed hours and hours and hours of my life, including time with my kids and time I could have devoted to a money-making career, just to inform myself about what is going on. And I realise that most people cannot (or will not) make such time sacrifices, even though our taxpayer-funded troops are criminally complicit in the murder of a million Iraqis, etc etc.

    And I guess I am lucky enough to be in a personal situation where I can devote the necessary hours to accumulating such information, without watching my kids go hungry at dinner time.So I don’t want to appear overly judgemental.

    But what about yourself, Prof Q? Did you not see this tsunami coming? Have you not locked in your own mortgage, if you have one? If you saw it coming, why were you silent? Because vocalising this hugely important issue might have damaged Rudd’s chances of defeating Howard?

    I think the problems we face now go back to the days when GW Bush was first elected, when Enron and Arthur Andersen were making headlines. Our governments found some useful scapegoats and the media did not pursue the broader problems.

    So now, as you say, “no-one really knows what is going on in global credit markets”. That’s really not good enough, is it? Not when the very existence of this planet may be depending on the answer.

  2. December 19th, 2007 at 14:33 | #2

    Mmmnn… Enron, Kenneth Lay, Houston, George W. Bush… WHO COULD HAVE GUESSED???!!!

  3. December 19th, 2007 at 14:37 | #3

    Jeebus, John – it took you long enough!

    I have long been wondering why respected economists like yourself have not been sounding the alarm bells. But then again, I am one of those free-thinking Conspiracy Theory nut-cases who frequent blogs like ICH and read people like Mike Whitney, who saw this whole mess coming a very long time ago.

    In fact, I locked my mortgage into a fixed rate a few years ago mostly because of Mike’s highly informed and reasonable analysis. Sure, it may sound weird and panicky to some, but so did the idea (back in 2003) that we might be invading Iraq just to get their oil, or the idea (back in 2000) that George W. Bush might be just a compliant Big Oil stooge. We live and learn, eh?

    So now we look up from the beach and see the big tsunami on the horizon. It’s not like we should all be so surprised, is it? Is it?

    Mind you, I have sacrificed hours and hours and hours of my life, including time with my kids and time I could have devoted to a money-making career, just to inform myself about what is going on. And I realise that most people cannot (or will not) make such time sacrifices, even though our taxpayer-funded troops are criminally complicit in the murder of a million Iraqis, etc etc.

    And I guess I am lucky enough to be in a personal situation where I can devote the necessary hours to accumulating such information, without watching my kids go hungry at dinner time.So I don’t want to appear overly judgemental.

    But what about yourself, Prof Q? Did you not see this tsunami coming? Have you not locked in your own mortgage, if you have one? If you saw it coming, why were you silent? Because vocalising this hugely important issue might have damaged Rudd’s chances of defeating Howard?

    I think the problems we face now go back to the days when GW Bush was first elected, when Enron and Arthur Andersen were making headlines. Our governments found some useful scapegoats and the media did not pursue the broader problems.

    So now, as you say, “no-one really knows what is going on in global credit markets”. That’s really not good enough, is it? Not when the very existence of this planet may be depending on the answer.

  4. December 19th, 2007 at 14:38 | #4

    URL Links for the above comment here (sorry, but my first effort at posting the comment failed).

  5. John Bignucolo
    December 19th, 2007 at 14:45 | #5

    Dr Nouriel Roubini (in Prof. Quiggin’s Economist Blog) has written extensively about the U.S. subprime meltdown and the effects this has been having on the U.S. housing market, the U.S. (and now global) credit market and wider economy. He writes from a macroeconomic perspective and events have proven him to be much more right than wrong. He’s had a very pessimistic view for quite some time on the likely outcomes from the meltdown.

  6. rog
    December 19th, 2007 at 14:50 | #6

    Greenspan looks back

  7. rog
    December 19th, 2007 at 14:53 | #7

    When you consider that 95% of subprime are not defaulting it seems that the US subprime is not the primary reason money has become scarce.

  8. rog
    December 19th, 2007 at 14:57 | #8

    I saw a tsunami coming a long time ago, its called scepticism, and I worked hard and got rid of the mortgage.

  9. Chui Tey
    December 19th, 2007 at 15:12 | #9

    1. Isn’t the seizure of financial markets due to the loss of trust in S&P’s ratings?

    2. If the Government is going to be the ultimate guarantor of failing banks, shouldn’t they run ratings independent of the rating agencies?

    3. If everyone saw the tsunami coming, but the early warning system said that “everything was fine”, then why wasn’t the government moved into action? Is this a case of free markets gone too far?

  10. David
    December 19th, 2007 at 15:44 | #10

    I just hope my super fund isn’t exposed to this.

  11. David
    December 19th, 2007 at 15:58 | #11

    This bloke (http://jameshowardkunstler.typepad.com/) has been warning about the tsunami (among other things) for quite a while.

  12. Peter Pan
    December 19th, 2007 at 16:04 | #12

    To Rog:
    You are right about the direct numbers but it’s the down stream effects that do the damage.

    From The Australian, David Nason, New York correspondent | July 28, 2007

    “Moody’s Economy.com chief economist Mark Zandi said Moody’s Economy.com had calculated that $US2.5 trillion of sub-prime mortgage debt — about 25 per cent of total US mortgage debt — was outstanding as of February 1 this year. Some $US1.37 trillion of that total was in loans at serious risk of default, while $US460 billion was expected to actually end up in default. The ultimate loss to investors over two to three years would be roughly $US113 billion.â€?

    But far only about $US25 billion or so has popped out of the system as loses. So the fear is about where the rest is going to surface. You have to remember that banks are fundamentally unstable institutions. One could call them houses of cards. (They borrow short and lend long!) So just a hint of a problem is enough to frighten the market that the houses are about to come crashing down. That is why the Central Banks have to put much more than the $US113 estimated in loses back into the money system already to prop thing up.

    A worrying thing is that the financial sector comprises somewhere between 40% to 60% of the Australian stock market depending on the criteria used to classify stocks. I suspect most of the Australian Superfunds are going to cop in the neck while this thing plays out.

  13. jquiggin
    December 19th, 2007 at 16:29 | #13

    Umm, Gandhi I did actually warn about this quite a while ago

    The bulk of the [derivatives] exposure is in interest rate swaps, which are fairly well understood and seem to pose only modest risks in themselves. But there’s still around $1 trillion in more recent derivatives involving securitisation of various kinds of debts. This securitisation is sound only if the credit rating agencies have got their risk assessments right, which in turn requires that the accounts on which those assessments are based should be valid. A few years ago, when the market in debt derivatives was starting up, this assumption seemed safe enough, but now it looks a lot more dubious. The big danger is that defaults in the debt derivatives market could spread to the much larger interest rate derivatives markets.

    I haven’t posted on this for a while now because I didn’t have anything new to say. I still don’t have much new, but I thought it was about time I repeated myself.

  14. Ernestine Gross
    December 19th, 2007 at 17:30 | #14

    JQ writes a disclaimer: “I’m not a financial adviser, and this isn’t financial advice – if you’re actually in this, or a similar, situation, consult a professional.”

    Credentialism has grown to such an extent that those who have actually relevant knowledge, but no ‘certificate’ to satisfy the accounting-law club, feel obliged to write disclaimers.

    Why haven’t the corporate lawyers and accountants of Centro advised the public? Is it because they haven’t got a certificate either?

    (Yes, I probably qualify for membership of the club of crumpy old women.)

  15. MH
    December 19th, 2007 at 17:38 | #15

    The Tsunami is the death rattle for the free market buccaneers of the shadow banking system. The knock on effects will probably be multiplied by the same multiples of deposit creation, simple math. Given we have abandoned regulatory oversight and let non banks securitise in virtually any possible way you can think off and get away with, trying to re-secure the money against an assett not a paper(electronic) deposit entry is going to be the first mammoth task the second will be getting the political and institutional will to re-regulate the financial system. The lessons of the 1930′s was not that systems fail but that it takes a very long time to find systems and rules to make it all work again. Lord Keynes solutions will not work this time because the disaggregation of wealth will be spread far and wide, to you and me and everyone next door as well. The debt levels we all have will be an enormous drag on any sort of demand creation. Just in time for the world to fall off the back of the petroleum bell curve and for the reality of a carbon based economy that failed to account properly for externalities to emerge. We are in for a long and rough ride. Pity all those who were looking to retire in the next decade, including myself, we are all going to be a lot less wealthy. My view the final crunch will come when those who insured the debt are discovered never to have been in a position to pay all those so called insured obligations. As Roubini has to my mind quite correctly assessed it is not a single fault issue but a gravely serious problem with multiple layers of fiduciary and systemic issues overlapping. Great christmas present.

  16. observa
    December 19th, 2007 at 20:03 | #16

    “I am truly sick and tired of having to point out to our brilliant commentators some basic monetary facts. The most important of which is that money matters. From March 1996 to July 2007 currency grew by 101.6 per cent, bank deposits by 177.7 per cent and M1 by 169 per cent. Ponder these figures for a moment and then ask yourself this simple question: How can any economic commentator worthy of the name pretend that these money supply figures have had absolutely no influence on the economy?”

    http://www.brookesnews.com/071712auscad.html
    And we are not alone. Neither will we be alone in having to unwind all these malinvestments caused by virtually rolling the printing presses for years. Our central bankers can only do it for so long before we wake up to the fact that this funny money has been used to finance ever more dubious borrowing. After all, as JQ told us all recently, when you get money for free you usually squander it and when we all do that together in great numbers, we have a big squander. Central bankers are now staring at the abyss of their own making. Do they roll the printing presses some more in an attempt keep their pyramid scheme rolling, or have the players mostly cottoned on and it would be an exercise in futility now. I think it’s the latter and they know it, in which case we are about to test the theory that the new Workchoice regime can maintain employment and real wages as its supporters have wanted you to believe. Expect them to quickly turn it into Accord MkII, with the usual smoke and mirrors, when their fallacious views are put to the sword.

  17. gandhi
    December 19th, 2007 at 20:19 | #17

    Prof Q,

    I haven’t posted on this for a while now because I didn’t have anything new to say. I still don’t have much new, but I thought it was about time I repeated myself.

    That link was over five years old! You’ve had little or nothing to say for OVER FIVE YEARS?

    Listen, all regular readers here will know I am very supportive of this blog and your own commentaries, Prof. So this is not personal. But I find it quite outrageous that so very few “respected” economists were willing to put their reputations on the line and call this tsunami what it was (pretty obvious to anyone watching US politics and economics, even a layman like myself).

    I’m just hoping you might agree that the media, politicians, and your colleagues in tertiary economics, should all have had more to say about these things quite some time ago. Isn’t that the responsible role all three sectors should have played?

  18. December 19th, 2007 at 20:20 | #18

    dare i ask, if various asian countries have been taking yankee dollars for various goods for a long time, and have electronic lumps of it beyond counting, don’t they either own the usa, but can’t think what part they want, or the numbers are meaningless?

    if the usd isn’t worth a dollar, or even close, isn’t the credit squeeze just a pimple, symptom of gathering chickens?

  19. Tony G
    December 19th, 2007 at 20:35 | #19

    Brookesnews has some interesting articles observa.

    Like this one;

    Dishonest political tampering with the science on global warming.

    http://www.brookesnews.com/071712gw.html

    “My fellow-participants, there is no climate crisis. The correct policy response to a non-problem is to have the courage to do nothing. Take courage! Do nothing, and save the world’s poor from yet another careless, UN-driven slaughter.”

    Please introduce a new carbon tax as we don’t have enough taxes.

  20. gandhi
    December 19th, 2007 at 20:51 | #20

    Of course, I realise that if you had stuck out your neck, the rightwing cultural warriors would have been all over you like a rash. But still…

    Put yourself in the shoes of Joe Shmuck, who is suddenly saying “What the – ???” If guys lke you couldn’t call this one for them, who was ever going to?

  21. SJ
    December 19th, 2007 at 21:11 | #21

    gandhi Says:

    But I find it quite outrageous that so very few “respected� economists were willing to put their reputations on the line and call this tsunami what it was (pretty obvious to anyone watching US politics and economics, even a layman like myself).

    That’s not true. Economists like Nouriel Roubini (as mentioned above), Brad Setser, Paul Krugman, Duncan Black, financial writers like Barry Ritholz and plenty of others have been talking about this for ages.

  22. jquiggin
    December 19th, 2007 at 21:46 | #22

    Gandhi, I’m fully aware of the issues, and the possible bad outcomes. I posted this in August for example.

    But I honestly don’t know how this one is going to turn out.

  23. SJ
    December 19th, 2007 at 21:54 | #23

    gandhi, I should also have mentioned Brad DeLong in the list of prominent economists.

  24. Socrates
    December 19th, 2007 at 22:40 | #24

    Why is anyone surprised when “financial engineering” turns out to be just another fraud. All they do is invent new language/jargon for it.

    When I first studied economics “junk bonds” were the fashion, but I couldn’t work out where the money came from? I guess I wasn’t a good student. But gosh, it turns out they were worthless after all. Later I couldn’t understand “Futures markets” and then “derivatives”. Again, they turned out to be nothing to understand either.

    The scam seems to always be the same: the new investment “vehicle” (another jargon term) is just either a way to hide debt (unsecured borrowing) and/or speculative investment, banking on aset prices going up beyond what any underlying revenue stream would justify.

    Its hard to know whether interest rates are about to go through the roof, or collapse with the US economy. Fortunately our own mortgage is small. Lets hope some of the clowns responsible for this mess end up in jail.

  25. observa
    December 19th, 2007 at 23:14 | #25

    “Please introduce a new carbon tax as we don’t have enough taxes.”
    TonyG, We’re going to get a new carbon tax anyway. It’s just a question of who taxes us and why. Here’s a pretty good explanation of why it should be our Govt, bearing in mind the obvious that they’d be under pressure to cut income tax accordingly-
    http://www.iht.com/articles/ap/2007/12/13/asia/AS-GEN-Bali-NY-Mayor.php
    With cap and trade and handing out the permits to big carbon, (bearing in mind if you auction them they have to pass the costs on immediately and give away the game), there is no such luxury. You basically hand the right to tax to big biz and naturally big union. As well there is the distinct possibility of a blue sky carbon price over time. That is totally out of our control thereafter, assuming the system isn’t gamed atrociously.

    Back to the tsunami. Don’t pick on John or any other economists or pundits for not picking the exceptionally long run for this pyramid scheme, this time round. IMO two additional and unquantifiable factors came into play. The first was demographics in the baby boomers. Normally rolling the printing presses would quickly turn into evertday price inflation, as it did with the inflation of the 70s, as a youth boom spent every extra dollar it could lay its hands on. Fast forward to 96 on and that same demographic wanted to use the extra dollars to add to its wealth for retirement. They began to bid up assets, to the point where their kids couldn’t afford housing, but no matter mum and dad would help invest in their houses too. Big difference and then came the clincher. Hard working Asian savers (well often their command economy overlords) jumped on board to fund the pyramid game as well. Alan Kohler produced a time series graph of Oz indebtness as a proportion of GDP on his tele spot and there it was- 3 peaks getting larger and larger, the first before the late 1800s depression and the second before the great depression and then motzah of them all where we’re at right now at the end of the series.

  26. Ian Gould
    December 20th, 2007 at 01:13 | #26

    So we’ve gone from “everything’s dandy” to “it’s 1932 all over again.”

    A quick prediction: the US will fall into recession next year but probably not a particularly steep or prolonged one. The world economy as a whole will experience a slow down but continue growing.

    Having been disappointed by the failure of global economic catastrophe to arrive, the doomsayers will turn to pronouncing the United States finished as a world power.

    In 2009 or 2010, the US will start growing again and at some point will be growing faster than the other major developed countries at which point popular opinion will switch to proclaiming the innate superiority of the American economic system and predicting an endless US boom.

    Then some time around 2011 or 2012 the US will stumble and the cycle will start over.

  27. Tony G
    December 20th, 2007 at 02:53 | #27

    Sorry this is of topic.

    observa

    If there is empirical evidence of carbon causing global warming (ie poisoning us) -that evidence should give a clear level of sustainable and therefore acceptable carbon emissions.

    A taxing regime whether public or private is not going to restrict the emissions -as people who can afford it, will emit as much as they want.

    At this point in time agreement can not be reached on what are acceptable carbon emissions. This is because there is no conclusive empirical evidence stating that (x amount of emissions = y amount of GW)

    Once the nexus is proved and acceptable emissions based on conclusive evidence is agreed, then any emissions above that level should be banned.

    The remainder, the acceptable emissions (If any,) should be divided and allocated equally to each person. i.e. each person emits their allocation how they want to.

    “it should be our Govt, bearing in mind the obvious that they’d be under pressure to cut income tax accordingly”

    I fail to see how our government, a self regulating monopoly, one that has legislated itself a pay rise every year since federation, can be under any pressure to cut any tax.

  28. MH
    December 20th, 2007 at 06:23 | #28

    I have to agree with JQ there are no immediate answers. We are in unchartered territory financialy, globally and morally. The answers will come in time – maybe.

  29. December 20th, 2007 at 08:22 | #29

    There are some who posit the theory that the universe is sustained upon the back of an elephant, and that the elephant is sustained upon the back of a giant turtle. Others claim it is turtles all the way down.

    Modern economics seems to rest upon similar foundations.

    “no-one really knows what is going on in global credit markets�

    Again, that’s just not good enough, is it? If it is only the assumption of rectitude that supports public confidence in the system, then it can all come crashing down with the merest whiff of scandal.

    So the elite investor class tune in eagerly to hear the “soothing” words of wise men like Greenspan and Bernacke. The markets shudder, but “confidence” is maintained. How long can this go on?

    Sure, a tiny handful of voices have cried out. And if this is just another “shudder” then their words, like their names, will be quickly forgotten. But is is just a “shudder”?

    “No one really knows.”

    Not. Good. Enough.

  30. Katz
    December 20th, 2007 at 08:47 | #30

    It’s not really turtles all the way down.

    The elephant in the room (ifyou’ll pardon the mixed anamial metaphor) is that the long-suffering taxpayer will eventually be soaked to salvage some of the politically powerful interests damaged in the coming financial crunch.

    These politically powerful folks will be saved regardless of whether they were culprits or victims of this prolonged spate of financial madness.

    So at the bottom isn’t a turtle. It is a taxpayers.

  31. December 20th, 2007 at 10:07 | #31

    Yeah Katz, good luck to Joe Schmuck trying to get the RBA to bail him out of his mortgage woes. Mind you, he might have better luck asking the Chinese for help. And get this:

    “A lot of people feel maybe the worst is behind us, and there is going to be tremendous value to obtain in this sector. I think a lot of that feeling is misguided. No one truly knows how much risk they have left,” said Matt McCormick, portfolio manager at Bahl & Gaynor Investment Counsel.

  32. jquiggin
    December 20th, 2007 at 10:25 | #32

    There’s a big range of uncertainty here, but my best guess is pretty close to Ian Gould’s at #26. Katz at #30, and Gandhi’s first sentence at #31 can be taken for granted – thus it always has been, and thus it ever will be, I fear.

  33. December 20th, 2007 at 11:10 | #33

    thus it always has been, and thus it ever will be, I fear.

    So I assume that is NOT a call for increased transparency in global economic markets, Prof Q?

    We should all just sit back, grab a cold one, and “wait for the tsunami” (if it comes)…?

    But given this lack of transparency, why on earth should Joe Shmuck support the system? What’s in it for him, even assuming the tsunami doesn’t blow him and his family and their mortage off the beach?

    Why should be even be paying his taxes in such a climate of irresponsibility and unaccountability? Why should HE have to underwrite the criminal greed driving this corporate globalization agenda?

  34. MH
    December 20th, 2007 at 11:56 | #34

    I think the American tax payers global credit card is near its limit. The exodus from US$ is carefully underway and the Fed will end up with rates near zero to stem the internal bleeding. I think they and possibly we have now caught the Japanese disease (assett bubbles, demographics, external competition and low interest rates) thus I remain a bearish contrarian for all the reasons stated previously at 15. It will be all held together until well after the Wall Street crowd collect their end of year bonuses and then hand the bill to the schmucks on the street. The record of the 43rd President of the US gives me no confidence it could end up otherwise.

  35. jquiggin
    December 20th, 2007 at 12:06 | #35

    Obviously, we should be pushing for transparency, a new global financial architecture and all those things. And more fundamentally, Joe S (particularly if he or she lives in the US) should be taking a pretty hard look at the system, the way the cake is divided up, and what, if anything, the candidates for the Presidency plan to do about it (hint: the best option is probably Edwards).

    But the system has been unfair ever since it has existed, gains have been hard-won and subject to frequent reversals (eg Bush and Howard). We have to keep on pushing, but I’m not anticipating the end of the existing order any time soon.

    So, yes, grab a cold one, and come back in the New Year with a bit more energy to try and improve things as much as we can. There are certainly plenty of positive possibilities in the wings.

  36. December 20th, 2007 at 12:17 | #36

    gandhi,
    What is good enough? Managing your own risks well, not relying on the future to be the same as today, learning from the past and working hard.
    The only way to know what the future will hold is either to be dead or living (if it can be called that) in North Korea.
    Sure, the global system has its problems and contamination from the US will cause this from time to time, but no-one has really been complaining about the 16+ years of growth in Australia that has resulted in large part, from the opening up of our economy.
    Even if a mild recession comes out of this, something I do not see happening in WA at least, it will be a small price to pay for the improvements of that period – a very small price.

  37. December 20th, 2007 at 12:19 | #37

    I should add that if you blame the governmetn for what has gone wrong, then trusting the government to fix it shows the triumph of hope over experience.

  38. Katz
    December 20th, 2007 at 12:20 | #38

    I agree with AR.

    So long as the right crooks end up financially ruined and in jail.

  39. al loomis
    December 20th, 2007 at 13:34 | #39

    As I’ve said before, Al, your views on democracy can be taken as read. Please comment on the topic at hand or not at all.

  40. O6
    December 20th, 2007 at 13:35 | #40

    What about our huge overseas debt? Mr Costello (remember him?) used to say it doesn’t matter because it’s private debt, not government borrowing, but will the people who lend us money to buy consumer goods be happy to do this for ever?

  41. December 20th, 2007 at 14:14 | #41

    Prof Q,

    There are certainly plenty of positive possibilities in the wings. Amen to that, ‘bro!

    I have long thought that the Corporatocracy ultimately did itself a major dis-service by squeezing GWB into the White House because:

    (a) He wasn’t up to it, even with Cheney at his back, and
    (b) It was far too bloody obvious.

    So now their agenda is exposed to all who care to see it, and it’s not a pretty sight. The positive is that we, the people of this planet, now know who our real enemies are.

  42. December 20th, 2007 at 14:18 | #42

    !

  43. swio
    December 20th, 2007 at 15:25 | #43

    Centro’s position makes me think about that of the US government. Centro’s problem is that they can’t roll over debet. I wonder how many people are aware that the US government has to constantly roll over its debt, just like Centro.

  44. jquiggin
    December 20th, 2007 at 17:02 | #44

    Not quite true, swio. Uncle Sam can repay his debt any time he wants, just by cranking up the printing press.

  45. December 20th, 2007 at 17:33 | #45

    It is probably just me that thinks it is kinda funny that all of a sudden ‘the nationalisation of a bank option’ has just jumped back on the table.

    Surely no good capitalist would agree to that kind of defeatism. Northern Rock

    http://www.economist.com/world/britain/displaystory.cfm?story_id=10333265

  46. MH
    December 20th, 2007 at 18:04 | #46

    The retail money market has become separated from the wholesale market which had become separated from the bankers market. This disengagement has invoked the long dormant moral issue of moral hazard and suddenly has awoken the ultimate lenders of capital to the issue of collateral and the ability to repay debt. When you look at where the contagion started so called sub-prime loans, was it really inability to repay that triggered the fallout or was it the contracts which offered initially cheap money followed by a rate hike that caused the damage,in other words the greed of the lenders? I am not so convinced with the view that blames the borrowers, which is the current spin, it is the same specious argument of the poor are responsible for being poor. The rate increase was a bet that while money was cheap you could do the deal and the return would increase over time but the gambled failed when the money became dearer before the repayments could be met. Why did the money become dearer? because real disposable income has been gradually falling with credit card charge increases, food prices rising, fuel prices rising and incomes relatively stationary. With large credit borrowings there comes a point where borrowers fall into a debt trap. The assets are actually still good, the US banking system via the shadow banking system and globalisation screwed the golden calf.

  47. philip travers
    December 20th, 2007 at 20:25 | #47

    Some of us,meaning me,have been in the realm of the poor for a very long time.[Seeing even the Henderson poverty line became an Aussie Dodo].And now we have even sweller relationships with the U.S.A.,I wonder why it is that economists and accountants are not like politicians ,the populace having access to their registered assets.Include journalists,maybe forensic psychologists,or anyone that can take advantage of a downturn all the way to Depression,to buy up big.Because surely as a matter of common sense,including the estimates of unaccounted for $trillions of stuff missing from Defence in the U.S.A.,some may well have planned for the complete failures of others,including citizens plural of the world with Aussie connections.War bonds for the U.S.A. were got from Aussies,and yet looking at the history of war bonds now suggest how many Australian suckers were cajoled by a sense of emergency and care for the U.S.A.Will they not try all these things again,with different external formats.Perhaps they have poked some away somewhere for the honestly accounted for.

  48. Katz
    December 20th, 2007 at 21:40 | #48

    Yes Joe2.

    The case of Northern Rock is an example of what I was referring to above in relation to the burden being placed on the taxpayer.

    In the case of Northern Rock, notice that your Ecomomist article refers to mum and dad depositors having already got out of the bank.

    The money that is stuck in the bank is money owed to major lenders:

    On December 18th the government moved closer towards what is, in effect, the nationalisation of Northern Rock when it extended its guarantee to cover almost all the bank’s wholesale debts. What this means is that the Treasury is now directly guaranteeing about a third of the mortgage lender’s liabilities, which are a bit over £100 billion. That is on top of the £25 billion loan from the Bank of England. In all, the government’s commitment to the bank has now reached the stomach-churning figure of over £55 billion.

    That is huge, huge money.

  49. Brian Bahnisch
    December 21st, 2007 at 00:34 | #49

    A lot of people are being wise after the event but according to the Chanticlear column in the AFR not a single one of the major broking houses had a ‘sell’ on Centro before the shares were suspended last week. So all those highly paid analysts didn’t see the tsunami coming.

    The CEO of Centro was said to be buying shares in the company in November, so he didn’t see it coming. (BTW I understand the reward system in the company is share price dependent and some of the executives may actually owe the company money right now.)

    Centro was about 60% leveraged, which is in the upper range of what’s normal for companies, but high for property trusts until a few years ago. But then Centro isn’t precisely a property trust in the way we had come to expect.

    One mob who did warn about Centro was The Intelligent Investor who have been saying “AVOID” for months.

    My impression is that they were and are good operators. It’s just that they had an oops! in rolling over some short-term debt in their the last buy, after four major banks told them it would be fine. Now they have lost control of their own destiny and it’s going to take a lot to get the trust back. Which is a bit ironic, because their main fault was to trust too much that bankers knew their own business.

    I’d say that many perhaps most super funds would have had Centro shares but there exposure would not be anywhere near as large as the Joe Schmucks of the world.

  50. observa
    December 21st, 2007 at 00:49 | #50

    Tony G,
    “Once the nexus is proved and acceptable emissions based on conclusive evidence is agreed, then any emissions above that level should be banned.”
    The conventional wisdom is the world needs to reduce its fossil fuel use by 60%. The easiest way would be to cap that at the well or mine when it’s extracted. Tell that to the world at Copenhagen, or even Ross Garnaut now.

    “The remainder, the acceptable emissions (If any,) should be divided and allocated equally to each person. i.e. each person emits their allocation how they want to.”
    And what if I want to sell some of mine? Assuming you can measure my allocation and determine how much of it I’ve used in the specified time period, particularly when I have lumpy demand (eg a fly or drive holiday) Giving me a carbon credit card and deducting my carbon consumption every time I buy some good or service is an administrative pipedream.

    “I fail to see how our government, a self regulating monopoly, one that has legislated itself a pay rise every year since federation, can be under any pressure to cut any tax.”
    It may well be if it raises a new carbon tax after seriously banging on about the price of everything in the runup to an election and bagging the private sector for ‘unfair’ price rises. Sauce for the goose is sauce for the gander under the circumstances.

    Back to tsunamis, or more precisely booms and busts. One view (guess who)says it’s the nature of capitalism. Animal spirits, exuberance and hubris before the fall stuff. That’s what hangovers are for, to remind you not to party hard drink too much stoopids. The other view says that’s all rubbish(remember we’re talking macro here, not individuals)and what do you expect when you kick off with cheap drinks and happyy hours. It’s the money creation stoopids.

    Think about it like this. Suppose the dollars in your hand (actually real savings or IOUs from your command of real output you have contributed to)were slowly appreciating over time say by 2% pa(yeah I know it’s hard) So you can stick your $100 under the mattress for a year and it will then buy you $102 worth of today’s goods and services. Then the usual with 2% inflation when it only buys $98 worth in 12 months time. Now ask yourself this question. Under which regime are lenders more circumspect about the financial credentials of the borrowers and also the borrowers more keen to borrow rather than save), at any given interest rate. (which we might really think of as the price of time here?) Then you can think about zero inflation cf that 2% reduction in purchasing power. Basically the Austrian economists say one causes malinvestments because of the propensity to chase higher and hence riskier returns, while borrowers are increasinglyonly too happy to accommodate the. What suffers is savings and investment in real wealth creating pursuits.

    Oh and if the govt kickstarts the process and is happy to oversee its continuation for income tax receipts purposes, then it’s natural that it should pay the piper. After all it’s only funny money isn’t it?

  51. observa
    December 21st, 2007 at 00:52 | #51

    Or Monopoly money.

  52. gerard
    December 21st, 2007 at 01:06 | #52

    Katz at 48,

    you call that huge money?

    THIS is huge money:

    For the 11th year in a row, the U.S. Government Accountability Office (GAO) was prevented from expressing an opinion on the consolidated financial statements of the U.S. government–other than the Statement of Social Insurance–because of serious material weaknesses affecting financial systems, fundamental recordkeeping, and financial reporting.
    David M. Walker, the Comptroller General of the United States and head of GAO, did note some progress in this year’s audit. This year GAO expressed an unqualified opinion on the fiscal year 2007 Statement of Social Insurance, which includes the Social Security, Medicare, Railroad Retirement, and Black Lung programs. This is significant because the statement covers some of the largest numbers in the federal government–tens of trillions of present-value dollars associated with future social insurance expenditures.

    Overall, however, Walker was not satisfied. In a speech today at the National Press Club, he said, “If the federal government was a private corporation and the same report came out this morning, our stock would be dropping and there would be talk about whether the company’s management and directors needed a major shake-up.� Walker urged greater transparency and accountability over the federal government’s operations, financial condition, and fiscal outlook.

    Despite improvements in financial management since the U.S. government began preparing consolidated financial statements more than a decade ago, three major impediments prevent the U.S. government from obtaining a clean opinion: (1) serious financial management problems at the Department of Defense, (2) the federal government’s inability to adequately account for and reconcile intragovernmental activity and balances between federal agencies, and (3) the federal government’s ineffective process for preparing the consolidated financial statements.
    “Until the problems outlined in our audit report are adequately addressed, they will continue to have adverse implications for the federal government and American taxpayers,� Walker said in a letter to the President and Congress. “The federal government’s fiscal exposures totaled approximately $53 trillion as of September 30, 2007, up more than $2 trillion from September 30, 2006, and an increase of more than $32 trillion from about $20 trillion as of September 30, 2000,� Walker said. “This translates into a current burden of about $175,000 per American or approximately $455,000 per American household.�

    The GAO report is here.
    http://www.gao.gov/cghome/d061138cg.pdf

    I hope that Professor Quiggin does not mind me quoting this passage at length, because what the head of the GAO is sounds pretty important to me. US government debt has reached an immeasurable size. I’ll say from the outset that I don’t know anything about economics, but surely the fact that the government of the world’s largest economy is, seemingly intentionally, creating a monster fiscal crisis on a scale never before seen must have something to do with all this Tsunami talk. Explicit government liabilities rising by over 3 TRILLION in five years! Fiscal exposures increasing by 32 TRILLION since 2000? This increased debt is going directly to the top one percent of income earners in the States courtesy of the craziest tax cuts in history – and probably into the top one percent’s hedge funds. But I don’t see anybody mentioning the Bush Administration in any of this, so maybe it’s not as bad as it sounds. I’ll note though that at the recent OPEC meeting some producers were remarking on the dollar’s freefall and toying with the idea of moving oil exports to other currencies. The US government’s twin government and trade deficits could push the dollar down to the point that it’s abandoned as the global reserve currency. Foreign central banks aren’t, in theory, going to bother taking on more debt in a debased dollar. Dollar hegemony gives the US the ability to defy fiscal gravity, if this ability is lost then… well, I’m hoping somebody who knows their stuff can tell me what would happen.

    On the other hand, since countries like China know that dumping American debt could ruin the markets that they depend on, they might not be willing to risk it. To me it looks like a very mysterious game, a sort of international prisoners’ dilemma between bond issuers and debt holders.

  53. observa
    December 21st, 2007 at 01:25 | #53

    $455000 per household eh? Perhaps the Chinese could forclose and auction their McMansions and plasmas to get some of their sweat back?

  54. mugwump
    December 21st, 2007 at 05:37 | #54

    It seems the US subprime problem reaches further than it should because of the failure of the ratings agencies.

    Once upon a time if you held a mortgage with a certain rating you received an interest rate that reflected that rating. AA rated mortgages were less risky than B- mortgages so consequently B- paid a higher rate of interest than AA (I am making up the ratings – I am not an economist or finance guy).

    Then some bright spark realized that if you had a basket of mortgages you could slice them up to create securities (“Collateralized Debt Obligations” or CDOs) with different risk profiles (ratings) and hence different yields (interest rates) than the underlying mortgages.

    To make things concrete, suppose I have 100 subprime mortgages in my basket, with say a default risk of one per year (1%), yielding a long-term return of 10% (subprime borrowers are risky so they have to pay higher interest rates).

    Now, there are two big customers who would like to buy my mortgages off me but can’t because their risk/yield profile is wrong for their investment strategy. The first, “Big Swinging Dick Global Hedge Fund A”, or BSDa for short, needs a yield of at least 20% to keep their investors happy. The second, “Deutsche Pension”, are forbidden by their strategy from investing in less that AAA securities.

    So I get clever with my basket of mortgages. I create a new “derivative” security that makes the holder responsible for losses associated with the first 20 defaults in my basket. I create a second security that is essentially the complement of the first: it continues to pay interest at the same rate until 20 mortgages have defaulted.

    The second derivative is so much less risky than the original mortgages (what’s the chance of 20 mortgages defaulting when the underlying rate is one per year? Almost nothing), the ratings agency grant it a AAA rating, and Deutsche Pension buys it.

    Of course, the first derivative is now far more risky than the underlying mortgages, so it needs a higher yield. To pay for this, I reduce the interest payable on Deutsche Pension’s security (which after all is now AAA), and pay that money instead to the holder of first derivative, which now yields 20%, and is snapped up by BSDa.

    Presto! Everyone is happy.

    The problem with this scenario is that it assumes defaults are independent events. In normal times they are, since they are usually linked to personal circumstances (eg, I default because I fall ill and can’t work). But most subprime mortgages have an inbuilt correlation: they start out with lower introductory rates that reset in a year or two. When they reset, there are a fraction of borrowers who will be unable to meet their obligations, and hence will default.

    Furthermore, in the US where mortgages are “no-recourse” meaning the bank is left holding any difference between the value of the house and the value of the mortage (ie negative equity is the bank’s problem), the subprime borrowers that all reset and default at the same time will also all be underwater on their loans at the same time.

    Thus, the risk profiles of the two derivative securities I created are very different: the probably of 20 defaulting at the same time and being underwater on the loans is now significant, so that BSDa in fact has a high probability of losing all its money; and the probability that more than 20 will default and hence put Deutsche Pension underwater is also significant, making a mockery of the AAA rating for their security.

    This is why the first to fail were hedge funds (a few months ago), and now you are seeing Banks and big pension funds in trouble.

    The bailout announced by Bush is exactly the wrong thing for the mortgagees: it freezes the lower interest rate for subprime borrowers for another five years. But houses are continuing to fall in price, so if you are underwater today you’ll be underwater in 5 years time. Given the no-recourse nature of the loans, you’d be better off foreclosing today, moving into a cheaper house, and letting your bank (or Deutsche Pension, or BSDa) deal with the mess.

    But the bailout does help the investors, because it puts off the day of reckoning, which gives them a chance to unload their securities to a greater fool.

  55. Katz
    December 21st, 2007 at 07:04 | #55

    Yes Gerard, all very disturbing.

    But the truly gargantuan figures that the GAO quotes regarding indebtedness of the US government are the products of agreements between consenting parties.

    That is, the Fed on behalf of the US government issued paper signifying this debt and purchasers both domestic and foreign constented to buy this paper.

    On behalf of the US people the US government has decided that the benefits that they will receive from funding the operations of the US government in this way outweigh both funding these operations by taxation or not embarking on these operations at all.

    Now, this may be a crassly stupid decision, but these transactions are conducted quite transparently in the full gaze of media and political scrutiny. The roblem you outline arises when people perceive that the US government isn’t raising sufficient revenue to service these debts.

    On the other hand, the decision of the British government to assume the risk of private investors in Northern Rock represents a stealthy and panic-stricken commitment of public funds.

    BTW, the US government is doing something similar by underwriting the potential losses that may accrue to the Federa Reserve as a result of transactions conducted under the very rcently instituted emergency Term Auction Facility.

    http://www.federalreserve.gov/monetarypolicy/taf.htm

  56. Katz
    December 21st, 2007 at 07:30 | #56

    The problem with this scenario is that it assumes defaults are independent events. In normal times they are, since they are usually linked to personal circumstances (eg, I default because I fall ill and can’t work). But most subprime mortgages have an inbuilt correlation: they start out with lower introductory rates that reset in a year or two. When they reset, there are a fraction of borrowers who will be unable to meet their obligations, and hence will default.

    Yes. Nice explanation Mugwump.

    I’d only add that one of the reasons why these defaults aren’t independent events is the original motivation for inventing the CDOs you discuss.

    CDOs are a means of securitizing mortgages. In other words the bank originating these mortgages no longer has these mortgages as a liability on its books.

    By selling the risk, the bank has earned the originating fees and has made a profit on selling their mortgages.

    Cleaning out its liabilities in this way allows the bank to originate new mortgages. Eventually, however, banks scraped the bottom of the barrel of people who could afford to buy a house. At this point banks came up with these subprime mortgages as an instrument that provided the temporary illusion that a bellhop could afford a McMansion.

    If the originating bank had to carry such a mortgage on its books the bellhop would have been chucked out of the bank neck and crop. However, because the bank had already estabished the practice of securitization, it could sell the bellhop’s dodgy mortgage to an investor.

    Thus, the practice of securitization allowed for an erosion of the quality of borrowers who were granted finance.

    And as Mugwump says, the inattention of the rating agencies allowed this problem to become a contagion.

  57. December 21st, 2007 at 08:15 | #57

    Thanks for that link Gerard. I’m assuming this was a joke:

    I don’t see anybody mentioning the Bush Administration in any of this, so maybe it’s not as bad as it sounds.

    If it’s not a joke, it’s laughably wishful thinking. When Bush took office, the people of the USA handed the keys of power over to the Corporatocracy for good. The real movers and shakers in the money markets are no longer constrained by national boundaries, and the US economy is a big, fat, juicy Cash Cow which can be endlessly sliced and diced.

    I’m hoping somebody who knows their stuff can tell me what would happen.

    Exactly the problem, innit? Those who “know their stuff” are busy raking in money hand over fist, as secretively and stealthily as they can, leaving even the supposed “experts” in the dark.

    Prof Q and colleagues have “no idea” how bad things might be, but I’m guessing Dick Cheney, David Rubenstein, and King Abdullah have some idea.

    Of course, it depends how you define “bad”… We wouldn’t want to fall into the trap of making moral judgements, would we? That way lies madness.

  58. December 21st, 2007 at 09:00 | #58

    WordPress ate my comment again :-(

  59. frank luff
    December 21st, 2007 at 09:16 | #59

    The blame game is on!
    I now at least know what a derivitive is, even if I can’t spell it.
    The warnings have been there for as long as?
    To the average punter economic jargon is at fault, keeping the unwashed in the dark with jargon has become a profession.
    fluff4

  60. MH
    December 21st, 2007 at 09:29 | #60

    If you read some of Professor Schillers work on the pyschology of decision making and information assessment amongst the so-called financial luminaries you soon realise that the so-called informed investor is mostly myth. Any form of predicitive assessment is not much better than toss of the coin (probability) plus game theory mixed in for good measure. A little bit of informed intuitive assessment would probably do better if you care to do the research. Given the various ‘interests’ that produce the rubbish that is a lot of financial reporting these days who would not be surprised they never see anything coming.

  61. gerard
    December 21st, 2007 at 12:47 | #61

    Morgan Stanley to Sell Stake to China Amid Loss

    http://www.nytimes.com/2007/12/19/business/19cnd-morgan.html?ex=1355720400&en=367dfa3b6a13cc70&ei=5090&partner=rssuserland&emc=rss

    Morgan Stanley posted its first quarterly loss ever on Wednesday after taking an additional $5.7 billion write-down related to subprime mortgages. The investment bank said it would sell a $5 billion stake to the China Investment Corporation, that country’s sovereign wealth fund, to shore up its capital.

    The sale, which would give China about a 9.9 percent stake in one of Wall Street’s biggest investment banks, is the latest example of a foreign investor shoring up a Western financial firm in the wake of the housing meltdown…

  62. December 21st, 2007 at 13:08 | #62

    Gerard, see my link at #31.

  63. Katz
    December 21st, 2007 at 13:08 | #63

    Yes, Gerard, this has been happening quite a lot recently. Suddenly it’s ok for ragheads and commos to buy up large chunks of the world’s largest finance houses.

    Consider the irony. The world’s communist great power has a powreful voice on the board of the icon of private finance capitalism.

    Remember recently when the great and the good in US public life had a brain explosion when a Gulf state corporation had the temerity to attempt to purchase some US port facilities? What a difference a year makes!

    The interesting question is which party will change its behaviour and strategic goals more: the Communist Party that now pulls strings in one of the most powerful boardrooms in the world, or the US political elites who must now choose between geopolitics and financial stability.

  64. Ian Gould
    December 22nd, 2007 at 00:00 | #64

    It’s strange, for years I’ve been saying the US was borrowing too much from abroad and was probably going to experience a run on the dollar. I’ve also been arguing that asset markets in the US = particularly bonds and real estate were overvalued and showed all the classic traits of a bubble.

    A year of so back (maybe it was less) John reversed his previous position and started to ask if the US budget and current account deficits were really as bad as they appeared.

    Now I have enormous respect for John as an economist and this caused me quite a lot of headscratching but ultimately I concluded he was mistaken.

    Now, having been out of step with majority opinion in predicting economic trouble ahead for the US, I found myself still in the minority.

    Maybe I’m just a contrary bastard?

    People are speaking here as if they expect the world economy to melt down entirely.

    I think that’s vastly unlikely.

    Anyone remember the 87 crash; the Asian financial crisis; the recession of 91-92; the tech wreck?

    Some people will lose their jobs. Some will lose their houses. Taxpayers will end up financing bail-outs, some of them of firms which don’t deserve or don;t need public money.

    All that is regrettable. It’s also a valid reason for anger since much of the pain is unnecessary and a direct product of the policies of the Bush administration.

    But 10 years from now, most people won’t even remember any of it. (Meaning we’ll probably end up with another borrow-and-spend Republican administration ready to repeat Bush’s mistakes – joy!)

    Meanwhile Centro shares are up from 80.5 cents three days ago to $1.12. As usual people who keep their nerve and invest countercyclically are going to make a packet.

  65. Katz
    December 22nd, 2007 at 01:06 | #65

    But 10 years from now, most people won’t even remember any of it. (Meaning we’ll probably end up with another borrow-and-spend Republican administration ready to repeat Bush’s mistakes – joy!)

    IG, the inescapable fact about ownership is that people don’t have to remember the moment of transfer of ownership. Title proves that moment of transfer.

    He who pays the piper calls the tune.

  66. mugwump
    December 22nd, 2007 at 06:14 | #66

    Meanwhile Centro shares are up from 80.5 cents three days ago to $1.12. As usual people who keep their nerve and invest countercyclically are going to make a packet.

    Or it’s just the dead cat bouncing.

    I would want to know a lot more about the internal financial condition of Centro before buying those shares. I speak as one who lost money on One-Tel, Worldcom, Enron and Tyco, all of which looked like deals when they were beaten down, had their dead-cat moment, and then went to zero (well, Tyco didn’t go all the way, but I still lost money).

    I don’t invest in individual stocks anymore.

  67. gerard
    December 22nd, 2007 at 19:09 | #67

    There are a couple of interesting articles on the LRB website.

    http://www.lrb.co.uk/v30/n01/lanc01_.html on Northern Rock.

    http://www.lrb.co.uk/v22/n08/mack01_.html on LTCM and derivatives.

  68. Ernestine Gross
    December 22nd, 2007 at 22:04 | #68

    One of the responses to the physical tsunami in SEA was to improve monitoring instruments. Nothing of this kind has happened in the turbulent world of finance – notwithstanding the ever more elaborate regulatory measures by the BIS.

    Securitisation, including the construction of ‘synthetic securities’ (‘derivatives’) is seen as a problem. Yes, it is a problem if one adheres to the habit of trying to measure ‘money’ within the accounting framework (‘Assets’ and ‘Liabilities’) and persists with ranking agencies, which in turn rely on accounting data. The relevant information about the actual financial markets cannot be represented by accounting data because its framework allows only for two forms of finance: equity and risk free debt. Of course, everybody knows that the debt recorded is not risk free. But nobody can tell me why people are interested in balance sheets, other than for fiduciary reasons.

  69. observa
    December 22nd, 2007 at 22:35 | #69
  70. wbb
    December 22nd, 2007 at 23:29 | #70

    Thanks for that spiffy subprime tutorial, mugwump.

  71. MH
    December 23rd, 2007 at 14:05 | #71

    China interests buy into US banking – as Marx once said, ‘capitalists would sell the rope with which to hang themselves’. Arabic interests buy into US banking – so much for the war on terror. Now you know how really know what a desperate state the US banking system really is in. No loss to foreign interests they have to do something with those massive accumulations of US$ for oil and other trade goods, which continue to steadily fall in exchange value, might as well buy a worthless bank with it.

  72. Ian Gould
    December 23rd, 2007 at 16:16 | #72

    Anyone remember how the Japanese were buying up the US (and Australia)back in the 1980′s and it was the end of US power and the start of the inevitable rise of Japan?

    Current stories about China taking over are probably as exaggerated.

  73. Katz
    December 23rd, 2007 at 16:39 | #73

    IG,

    I, for one, didn’t suggest that China, or anyone else, would “take over”.

    Indeed, my question was very even handed, concerning which parties would be changed more by the experience of a new source of equity and control of finance houses of the West.

    Unless you wish to argue that there is some sort of identity between the traditional controllers of a bank like Morgan Stanley and “American power”, the suggestion that a change of voice on the board of Morgan Stanley influences “American power”, (i.e., the authority of the government on the United States) doesn’t make a lot of sense.

    Here are some likely changes:

    1. Chinese interests will repatriate profits to China, just like US interests did when US investment dominated the world.

    2. If the Chinese imput is more intelligent than the interests they replaced on the Board, then the US government may enjoy a greater tax flow from a more profitable company.

    However, we have already seen that nativist tendencies are sometimes not far below the surface in American public life. I’m fascinated by how little heart-burning there has been over the Chinese investment in Morgan Stanley compared with the above-mentioned furore over Arab ownership of some US ports.

  74. observa
    December 23rd, 2007 at 18:36 | #74

    The US ports issue was one of security, given 9/11 and the possibility of a nuke or dirty bomb rolling up in a shipping container. That said, it was probably safer to have Dubai Ports involved, since the UAE has clearly been off limits to AQ and Co, with those orders coming down from Arab oil street. It’s why the likes of Halliburton set up base in Dubai, because they understand the implicit safety of doing so.

  75. Katz
    December 24th, 2007 at 07:17 | #75

    A moment’s reflection would indicate that the owner of a port has no control over the surreptitious contents of shipping containers passing through its facility.

    That role falls to law enforcement authorities.

    No, the ports furore was driven by panic-stricken nativism and by opportunistic pandering to racism.

  76. Ian Gould
    December 24th, 2007 at 19:32 | #76

    You know we CAN’T be in a financial crisis yet – we haven’t found a single guy to represent the whole mess yet.

    I wonder who’ll be cast in the Michael Milken/Ken Lay role?

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