Here’s my piece from the Fin on Thursday
The global financial crisis that began early in 2008 has put many of the seemingly unstoppable processes of globalization into reverse. The volume of international trade has fallen sharply, and that of international financial transactions even more so. The banks and financial markets that seemed to define the global economy have retreated into the arms of national governments.
There is one striking exception to this pattern of retrenchment. According to the TeleGeography Global Internet Geography Research Service, international Internet traffic has grown at an annual rate of 74 percent in 2009, well above the 55 percent growth measured in 2008.
In part this is a matter of momentum. The huge growth in capacity that was already committed before the crisis ensured that growth could continue. Although new investment in fibre optic capacity has slowed as a result of the crisis, the system has proved capable of absorbing massively greater traffic.
But there are more fundamental forces at work here. Although the Internet and its main manifestation, the World Wide Web depend on physical communications networks and commercial service providers, they are not, in the end, about cables and modems.
The Web is a set of protocols and social institutions for the expression and exchange of ideas of all kinds, whether expressed as text, audiovisual material or software. Ideas are public goods. They can be shared without losing value, and they cannot easily be restricted. The Web is a prime example of a global good, one which benefits people everywhere in the world and depends for its value on contributions made all over the world.
The fact that the spectacular expansion of Internet activity has continued, and even accelerated through the financial crisis shows that the global exchange of information does not depend, in any important way, on the global financial sector. Most Internet innovations have been developed on a non-profit basis, and even for-profit companies like Google maintain strong independence from the short term demands of financial markets.
On the other hand, the productivity of the real economy, and therefore the financial sector depends hugely on innovations that have arisen from the growth of the Internet. The first-generation innovations of the Web in the 1990s universally adopted by business and governments. Now they are shifting to ‘Web 2.0’ technologies, including wikis, blogs and web-centric applications.
There has, then, been a huge shift in the location of innovation. Many of the innovations that have driven productivity growth over the past two decades depend on public goods mostly produced outside the market and government sectors.
When we compare the huge social and monetary cost of the global financial crisis with the huge and continuing benefits of the global exchange of information, almost all of it given away free of charge, a striking paradox emerges. With a handful of exceptions the innovators who gave us the Internet received little or nothing in the way of financial reward.
Leading figures like Tim Berners-Lee, the initiator of the World Wide Web have become famous, but not, at least by the standards of the global financial sector, wealthy as result. And the thousands of contributors whose efforts turned these innovative ideas into reality have received little more than a warm glow of satisfaction.
Meanwhile, the innovators who gave us such boons as the CDO-squared, the option-ARM mortgage and the stapled security have walked away, collectively, with billions in salaries, bonuses and share options, leaving the rest of us to clean up the mess they created when the whole edifice of collapsed so spectacularly a year ago. ??Even during the dotcom boom, when financial markets were eager to finance Internet-based innovation, their efforts were spectacularly misdirected. Billions were hurled at ludicrous ventures like the on-line sale of pet food. Meanwhile, the innovations that were to produce the Web 2.0 wave, such as the first blogs and wikis, were being developed without any significant input of credit or venture capital.
This contrast raises questions about the way we organise our economic system , the way we regulate financial markets, and the incomes derived from those markets. If monetary returns are weakly, or even negatively, correlated with the value of social production, there’s no reason to expect financial markets to do a good job in allocating resources to supporting innovation.
?As a result, it seems unlikely, that the massive incomes generated in the financial sector to reward financial innovation are beneficial to anyone except, of course, the recipients.
John Quiggin 
“The global financial crisis that began early in 2008 has put many of the seemingly unstoppable processes of globalization into reverse.”
Wrong. The credit crunch started in July 2007 when SocGen had to shut down two of their hedge funds. The money markets dried up as evidenced by the bailouts of Northern Rock, Fannie and Freddie and numerous other financial institutions. The first series of liquidity measures came in August and September of 2007 and then the first fiscal stimuli was applied from the beginning of 2008 onwards.
“There has, then, been a huge shift in the location of innovation. Many of the innovations that have driven productivity growth over the past two decades depend on public goods mostly produced outside the market and government sectors.”
What a load of twaddle. Do you think that banks utilise wikis? What is your view of financial innovation such as internet banking, using mobile phone technology to now act as a debit/credit card or to provide a resource for online share trading? Massive innovation has come from the financial sector. Have you ever been on a trading floor? Have you ever seen the sheer brainpower that goes into some of the technology used there which can then be applied elsewhere in both the economy and society? Productivity-boosting appliances such as… excel or word or any number of online applications have been developed by companies which make money from it. Yes, absolutely nothing to do with the marketplace.
“If monetary returns are weakly, or even negatively, correlated with the value of social production, there’s no reason to expect financial markets to do a good job in allocating resources to supporting innovation.”
If you are so brilliant at finding these inefficiencies; why don’t you put together a fund, make millions in the process and then prove that you are right?
I am sick to death of finance-bashing rhetoric from people with only a cursory knowledge of what has actually happens out there.
The fact that you have to start with a silly dating quibble is indicative of the weakness of your case. As for the rest, way to miss the point!
The article is not about minor process innovations in retail finance, but about the innovation elsewhere in the economy the finance sector is supposed to drive. But, if it were about retail finance, I’d ask you how long it takes to get a US cheque credited to an Australian account (Hint: the answer is in weeks, not days). And this at a time when an individual with modest tech skills like myself can manage something far more complex like this blog.
ProfQ,
The beginning is important because it is like starting any debate about WW2 ignoring the first stage. If you ignore 2007-2008 you ignore massive fiscal stimuli that did nothing to lift the US out of recession. You also ignore the huge government bailouts. And you ignore that during this time, we have an “inflation genie” problem. It links in with a lot of public policy issues and ignoring the Credit Crunch to focus on a hyper-crunch post-Lehman brothers restricts the field of vision about the causes, and responses to the crisis.
You talk about paying the US. There is a reason why – the US government is horrific when it comes to moving money between accounts. It has something to do with terrorist financing and because of it, it means that moving money between the US and anywhere else in the world is like pulling teeth.
The above paragraph is not meant to be an anti-gov’t diatribe BUT the US takes a huge interest in money being moved between accounts. I can explain it later on but it deserves a separate post.
Sorry about losing my temper with the first post.
One other thing…
When it comes to technological development, you will see over the next couple of years the developments in computer technology made in hedge funds being applied to a much wider context. A lot of quants and computer programmers have been laid off and they are now moving into the tech sector so I am very excited about that.
Perhaps the befuddlement of the financial sector will see a rationalisation and refocus with investment into more concrete concepts. Things like technological research, bricks and mortar development, energy systems, bulk transportation. Not much can go wrong there.
The movement has already begun. Firms are downsizing their trading floors and are now moving towards corporate finance which provide longer payoffs.
Quite agree with the article. Good stuff as usual. Not all innovation is desirable at you note. Also, it is exceedingly rarely that it is the CEO or other senior executives who do the innovating anyway, so the frequently heard claims that these overpaid parasites need to continue to be overpaid so the innovation continues is debatable. In financial markets, given the structure of the markets and excess volatility, the activities of commercial banks and others may not be efficiency promoting anyway. They may simply be earning their profits by, in effect, taxing investment flows. If the activity of those making profits by buying and selling in markets does not improve allocative efficiency, then to the extent that their trading activities extract profits, their activities could be interpreted to be a tax on those markets without any compensating benefit. As for ‘price discovery’ the questions are, is the price discovery quick enough to provide allocative benefits and does it discover the price or rather, just introduce more noise and excess volatility.
SeanG, you seem to forget that there are other service providers venturing into the traditional areas of banking and investment services ie social banking.
MoSH,
and you seem to be forgetting the reasons they have not been doing it for decades – but then you want still more of that reason – regulation.
Michael,
Social banking – what is that? Giving money away to people who cannot afford it?
It becomes increasingly obvious that neither the political nor the financial fraternity are fit for authority.
Whither now?
BB
I don’t get the point of the article. Having worked in telecommunications R&D for the over a decade, I can certainly say that a lot of the innovations have been paid by the private sector and consumers. Indeed the internet turns 40 this year and whilst it is true that the “big bang” concepts have been done by people that have not earned a conmesurate reward, this has always been the case: Alexander Graham Bell did not invent the telephone but he certainly got the money, RCA did not invent the TV but the poor sucker who did died in poverty.
Now as to what is the real cause of the increase of productivity in the economy, I would argue that the decrease in the cost of computing power and data storage has been the real driver. The internet and its related applications depend on these two factors. I have access to the drop in cost of broadband over copper (xDSL) and within two years the cost dropped from about $US75 to about $US15 per port (largely to the entry of China).
So what drives innovation? Well we don’t know. There is incremental innovation which is really a process based thing and then there is the “where did that come from” innovation. The former is what drives all established businesses – I give Apple as the only example of both, they were not the first to create a computer but were the best at it when they started, when they started drifting they brought in a guy from pepsi who tried to make more of the same in a better way, and it was not until Jobs came back and established the iPod product line as a second innovation (although once again not the first to do so but with the better business model).
The idea that anyone can predict what innovation will succeed is bollocks – this applies as much to the government as to the private sector. Sometimes little things that seem unimportant at the time acquire enormous significance (PCI bus anyone).
as an aside governments created both the OSI model for communications (never really came into existance as a single product) and TCP/IP which did. If you had to bet on which one would win it would have been OSI since that had more money, more people and wider support. Instead, today its ideas live on as a structure to understand communications but TCP/IP won because it was built with a small team that had a real product and a deadline.
Finally, financial sector innovation – well certainly the innovations introduced over the last decade or so have been proven to be dangerous, misguided and malignant. I am still undecided whether this was fraud on a massive scale (willingly or unwillingly).
Once I read a quote which from recollection had a judge asking an armed robber as to why he held up banks, to which the reply was because that is where the money was. So the finance sector attracts thieves, full stop.
Martin Wolf in the Financial Times explores the reason for the behaviour in a series of articles and his argument that this happened because the incentives and rewards are badly flawed has merit (at least to this untrained person). The real worry is Larry Summer who is on the record as saying he does not want to kill off innovation. However he has not explained why innovation in Finance is important, secondly he has not explained whether historically finance was not innovative or how innovative it should be (is there really such a demand for new products say compared to IT applications) and has has not considered why strict regulatory regime would reduce innovation. A comparative case would ne medicine, lots of heavy regulation (in some cases not heavy enough) but still innovation continues and we don’t have squillions of people dying or becoming crippled. Sadly larry Summers will dictate what kind of regulation we get.
SeanG, there are a lot of people struggling in this world trying to make ends meet and some rely on ‘social banks’ to get a small loan and better themselves. If they had the opportunity I’m sure many would opt to get a CISA or better.
Andrew Reynolds, wrong.
Financial sector innovation has been caused by the increasing use of sophisticated technology and was thought to have been extremely beneficial. Like original nuclear reactors – the outcomes can be toxic. This crisis will make the financial markets even more innovative because they learnt that for all the PhDs they can amass, the models and predictive behaviour they thought would occur, did not.
Creative destruction will take place and what will come out on the other side is something far more resiliant.
SeanG, who is ‘they’?
The financial sector.
People are saying things are Business As Usual. Only those in journalism have used that. No one that I know of in the financial sector have expressed that things are like they were.
The financial sector has been through a traumatic change. It is changing.
If finance is irrelevant then why does the government need so much of the damn stuff (borrowed and or stolen). Why can’t we be governed by good will and the warm inner glow that comes from personal contribution. Of course I’d argue that we can be, at least to a much larger extent to which we currently are. If government was smaller we would have more Internet style civil society solving problems and making advances. And of course we would also still have the private sector.
Would real businesses be so dependent on external finance if we taxed them less?
Funny thing – the government is borrowing from the exact same people who channelled their money to homes and businesses creating a bubble.
Now we have a bubble in government debt!
SeanG, juornalists were not responsible for the calamity. Try again.
TerjeP (say tay-a), welcome to reality & the democratic socialist forum.
I never said they were.
Re-read my comments and if you don’t understand then I will explain using smaller words.
SeanG, I am a bit thick and slow these days and you should really explain who are ‘they’?
Sean G – there is a model of social banking which is called seed funding where small amounts of money are loaned to people (often women) unable to access funds from traditional sources because of a lack of collateral. The programs are usually funded on very small sums initially and rely on money being repaid to pass loans to the next applicants. This model fits in well with Prof Q’s proposition that people who are motivated for reasons other than money will produce social change in a way that the mainstream economic and financial systems cannot and will not as it is based on aggregation of wealth to individuals.
MoSH,
Well argued. I can see exactly why I was wrong. Your exposition was both in depth and tightly argued.
I can see, from your argument, why regulation has in fact helped the smaller institutions and disadvantaged the bigger banks and how more regulation will, in fact, provide us with a vibrant and diverse financial sector, well able to withstand the shocks that exposure to the world provides on a regular basis.
Not.
Jill Rush – fellow blogger and libertarian John Humphreys has started something similar to this type of fund for educating students in Cambodia. It is non-profit. It is worth a look. They are in need of further seed capital so they can expand the student intake, so if you have any given them your consideration.
There main page is on WordPress:-
http://humancapitalproject.wordpress.com
For pictures of sponsored students and universities see the page on Facebook:-
http://tinyurl.com/yaqxchu
Sponsored students are required to contribute 10% of their income post graduation back into the fund for a period of 5 to 10 years.
Jill,
And the reason why that model will struggle in Australia is simple – the people that provide it (all client facing staff) would need to be PS 146 (that is from the FSRA) qualified, the institutions that provide it will need to be APRA certified (a process that takes at least 18 months and costs a fortune) if they want to take any deposits. Presuming they are an incorporated body (difficult otherwise) they will need to go through ASIC (could be quick) to incorporate and then get an AFSL (Australian Financial Services License – a long and expensive process for a small company), ensure that they have appropriate lawyers and auditors on retainers (expensive) and have sufficiently qualified senior staff to satisfy all of the regulators – and these are not cheap.
The ATO will also need to be dealt with (particularly if they want to claim charitable status) as will several other agencies. That is just the Federal government dealt with. The State government then regulates several other activities that they may want to do to pursue that type of business.
.
That’s why big business simply loves more regulation. It stops pesky little small businesses from even competing.
In a related vein, Daniel Pink has done some good work highlighting how contingent motivation (particularly financial) is not related to social good.
He had a very good ted talk on this a while back.
http://www.ted.com/talks/dan_pink_on_motivation.html
Andrew – we can’t have just anybody helping other people. That would be dangereous.
As an IT person with no formal economics training, I find this an innovative fascinating argument which I wholeheartedly agree with. I hope this idea helps overturn the current “conventional wisdom”. Thanks John!
Iain – thanks for the TED talk. It was great. I have featured it here:-
http://blog.libertarian.org.au/2009/09/26/do-incentives-work/
However it doesn’t make the case for more regulation or more intervention in markets. In fact the point about autonomy couples nicely with the notion that governments should stop micro managing what we do and how we relate to eachother.
Andrew Reynolds & TerjeP (say tay-a) & SeanG, maybe you should read up on micro-credit and how many now depend on social banking. Furthermore, in respect to innovative banking accross Africa mobile payments are transforming the continent, in Japan, mobile internet banking is changing their world, in Spain, social finance is top of the agenda and last year BBVA launched the first Web 2.0 banking application Tu Cuentas (You Count) and now Caja Navarra (CAN) has launched the first bank-led social lending system. The above few innovative examples is what JQ is trying to allude you three stooges to. Gotta go.
@SeanG
Sean G
You asked Moshie “Social banking – what is that? Giving money away to people who cannot afford it?”
I cant help myself Sean…Id say giving money away to people who cannot afford it seemed to be the mainstay of the contents of the pandoras boxes of CDOs which fuelled the US housing bubble. Is that what you call private sector social banking Sean? CDOs – the “hot potato” game. Last bank left holding them explodes.
@Jill Rush
Ive seen docos on this Jill. Its a great idea. Very small loans for small business ideas that the large global banks turn their noses up at (no collateral, or women in developing nations etc). Thats another massive problem of the global financial institutions. They arent operating on the ground willing to issue these micro loans where they are needed, typically in developing nations, yet they BS on about globalisation and free markets and de-regulation for themselves. They would prefer to fund some large global company to dump waste in the developing nation.
I haven’t criticised micro-credit. I think it is a great idea. See comment #26 above.
@Jill Rush
Jill,
If we are talking about microcredit then I am not about to criticise that. But this is on an entirely different scale. Giving someone a very small loan compared to a mortgage. This is the difference.
@Alice
CDOs didn’t fuel the housing bubble. Huge spare cash from China coming into the US, artificially low interest rates, subprime mortgage underwrting from Freddie and Fannie call contributed to the growth of credit BEFORE a CDO has ever been written.
SeanG, since you say you are an expert on and possibly an insider of the finance industry, would you like to explain
a) how the CDO experts understood Merton’s paper on risky debt portfolios
b) why CDOs were invented if Freddie and Fannie underwrote any amount of subprime mortgages
a) If we are talking about composing a CDO then it is far less complex than the portfolio problem. Firstly, you have the front office guys who are pushing for “the deal”. This is about getting the CDO compiled and to sell off individual tranches. “The deal” is primarily based around what the market can take in terms of risk premium for the individual tranches and they go around to the funds managers etc parading a CDO. This is a glorified technical position.
Getting onto Merton. I assume what you state “risky debt portfolios” we are talking about the interest rates paper from the 70s or are you talking about a different paper? I must admit, I have never heard anyone mention “now Merton said this”.
Putting together tranches is different from pricing those tranches.
I think you are potentially mixing up the buy and sell sides here. If you are on the sell side, you are trying to pump this out into the market and the pricing is determined by the current state of the credit markets and by the rating given by the credit ratings agencies. The buy side, e.g. right now, has enormous power to get a high risk premium because the law of supply and demand are in effect. Are you talking about how the securitisation team originally pricing the tranches?
b)
CDOs were invented so that different risk appetites can purchase tranches, or so if you purchase and entire CDO you can off-set good and bad debts.
Why were they invented if Freddie and Fannie underwrote debt? Because if you are a European bank you will still want to slice up your debt. Plus, if you bought debt from a financial company that was underwritten by Fannie and Freddie, when you onsell that debt there is a high change that it will not be reviewed by the buy-side who will slice that debt again and on sell it.
Slicing is important because it tries to find uncorrelated debt to put together. In theory this makes the securitised debt more attractive.
Ernestine,
I do not know your background, but maybe you can enlighten us about how warehousing is used by mortgage providers with securitisation?
SeanG,
Thank you for describing the practical side of creating and selling CDOs and the beliefs held by the practioners.
Given your description, the practioners failed to check whether the conditions for ‘slicing risky debt’ are fulfilled.
Specifically, practitioners who, as you say believe: “Slicing is important because it tries to find uncorrelated debt to put together” – because “In theory this makes the securitised debt more attractive” are misguided. Uncorrelated debt is not a sufficient condition. This is where R. Merton (and subsequent authors’) work on continuous time trading comes in. The development of this literature is in R. C. Merton (1990) Continuous Time Finance”, Oxford, Basil Blackwell.
My academic background is in general equilibrium theory (post 1950s). This body of literature is concerned about finding conditions under which ‘a market’ exists, its properties, including welfare and stability.
PS: Who knows, maybe you may never wish to work in the finance industry again if you study the theory seriously. Unfortunately, the negative externalities of people learning by doing are too big to be acceptable by the rest of society. I would not hesitate to agree with a substantial wealth tax on the practioners of financial innovation – I’d see it as an insurance policy against future damage.
Re your #40: I am sure you are in a better position than I to tell us about the pratical side of it.
A further question, SeanG,
Why is it that, in contrast to the UK and (and most if not all of the EU) and Australia the USA legal framework lacks a sharp distinction between debt and equity? That is, if debt is risky at the time of issue then it should be called equity. The CDO fiasco is but a version of the junk bond problem of not long ago.
Ernestine,
Uncorrelated debt is the combination of mortgages, university debt etc because when you get a deal proposal you have a list of the different components of that. If you are a funds manager and you see these, your credit risk people will say that mortgage debt is different to, for instance, university loans and that California debt is different to Illinois debt. It is a way, or so people thought, of having a lower risk product.
I’ll read up on Merton’s work. Admittedly, my academic background is not as in-depth as yours but I do have time to read some work (for instance, Prof Qs) but others as well.
It is true that people in finance earn on average more than people elsewhere. However, it is only a small percentage that earn massive amounts of money and the way the remuneration packages are structured does not work in favour of risk management. If you are in an investment bank and you are front office, your remuneration package will have a bonus element which is based off earnings (risk adjusted return on capital). The risk management team will have their remuneration package based on their relationship with you. If you are unhappy with them, then they will receive a smaller bonus and because they earn less than front office staff, this makes things worse for them.
In the UK and US, bonus packages are larger than in Australia. However, salaries vary and very often there is no automatic salary increases which force people to become more reliant on a bonus.
This is why I have troubles with pay caps or wealth taxes. They are trying to slap down a specfic segment of people in specific areas of finance whereas if the regulators were more forceful in getting the risk departments better remuneration packages in banks, then the risk departments would have no hesitation in being far more aggressive in containing risky activities.
I know this is slightly off-topic but I felt that this is a far more realistic approach.
Ernestine,
I do not think that there is a sharp difference between debt and equity in UK and Australia compared to the US. But if you are investing in instruments, your clients want a specific return on their investment. You are desperate to get it, so you are more willing to leverage up in the hope that a small return on assets can lead to a larger return on capital.
Junk bonds are far easier to understand than CDOs are because they are related, usually, to a single company.
If you are a financial firm, you want to be able to sell your debt. So you are going to issue one CDO with one overall credit rating but sell individual tranches with their own ratings to individual investors. The lowest rated tranche is the equity tranche and this is kept by the institution who issued to debt to show that when losses occur, they’ll take the first hit.
On the warehousing topic – this is an issue which is the agent-principal question comes into it and I will put a single post about it.
Warehousing is a financial innovation that can allow for greater competition in the mortgage market.
It has also helped create an asset bubble, is incredibly short-sighted and represents the primary problems with the financial industry today.
Whenever a bank lends money to mortgage holders and then securitises their debt, they create a special purpose vehicle (SPV) or investment vehicle (SIV). These are paper companies and the revenue flows from the mortgage payments pass through this SPV to investors who pay a lump sum for it. This is essentially a securitised asset. However, it is predicated on the bank having money in the first place.
I will try to explain warehousing using an analogy.
Imagine Professor Q gets bored at uni and decides to enter into finance.
He wants big profits, he wants good return on capital, BUT he has no real money himself. What to do?
Professor Quiggin establishes Quiggin Mortgages Ltd, headquartered at Brisbane. He then establishes Mars Alpha, an SPV based in the Bahamas or Jersey or some sort of tax haven for $100. Professor Quiggin, along with an investment banking buddy then go to all these pension funds across Australia or the world. Their pitch is simple: “if you devote $100m to this venture, then I can guarantee you a return of between 5-7% p.a. over a thirty year period”.
ProfQ explains that as the money comes in via the investors, it goes through the Mars Alpha to Quiggin Mortgages and will be lent out to people for mortgage rates between 6-11% depending on credit ratings done by an external agency. When mortgage interest payments come through, they are then sent off from Quiggin Mortgages to Mars Alpha and to the investors.
Some of the investors want the safest tranche, others want less safe but higher returning tranches.
ProfessorQ is happy. All he has is a website, mortgage brokers finding him prospective clients and doing most of the paperwork, and $100m to invest. This is warehousing.
But wait, it gets better.
Some of the pension funds/investors in the AAA rated part of Quiggin Mortgage loan book are worried. They want certainty. So Professor Quiggin shops around and finds an investment or commercial bank. Professor Quiggin says that these people want an insurance policy over their AAA rated part. The commercial bank says “we’ll do it, we want a fixed fee and if we have to reimburse them we want a guaranteed repayment plus interest”. Professor Quiggin does the mental calculation and realises that even with this, he still makes 0.5% margin for AAA-rated mortgages.
The deal is signed. A law firm sends out the legal documents. It is done.
Let us end the analogy there. This is a typical type of transaction. This is warehousing, a liquidity facility deal and securitisation wrapped up in one.
I have got a graphic that I would like to put on this website but I do not know how to do it. Maybe someone can help me? It is a breakdown of mortgage lending in the UK over a decade. The above transaction was so popular that it was one of the main causes for the property bubble that the Brits have experienced.
This is why I think it is short-sighted: you are lending out billions through conduits to people who are already over-leveraged, doing nothing productive, not achieving anything.
At least on a trading floor they are engaging in risk management for clients or trying to get returns for other clients. That is an investment or hedging operation.
In other areas, it is to ensure that a client can go to a branch and have all the possible products and options available for them.
This is innovative, it works, it makes money… but doesn’t this just sound like innovation for it’s own sake?
@SeanG
Oh for goodness sake Sean “CDOs didnt fuel the housing bubble…”
Of course they did. Since the day they were invented the madarins of Wall street realised they culd bundle these thingsn in a box and get them triple A rated by the shonks in the ratings agencies and ON FLOG them for a hefty commission…they wouldnt have cared if there was cow manure in the box and all they would have been interested in was inb getting as many suckers in the box as possible…come on on Sean – this is the real thing.
You get commissions for packaging and flogging things for which you bear no risk, and there were plenty hungry to buy them (triple A rated…ha ha…how could they lose…?? Housing just goes up forever right …ooops wrong). Now Sean – you have heard the stories have you not??? Salesmen paid attractive commissions to go out there and convert prime borrowers to subprime rates??
What did those borrowers know (really, really know) that in the fine print was a reset date…maybe three years away and then three years after that…where the initial very cheap borrowing rate suddenly turnsn into 12% and then 15% on the rest dates….?
And you are telling me CDOs didnt fuel the housing bubble in the US??
Utter rubbish Sean. Of course they did…backed by an army of aggressive commmission agents and a general public used to credit getting ever cheaper and not used to fine print (ultra fine print).
Yeah sure the Chinese lent to the US – so did every other country who held US as a reserve currency – so what? IT took the mandarins on wall street to bamboozle the borrowers and lenders with CDOs and cosy relationships with ratings agencies.
Game, set and match. A giant ponzi scheme.
Fair point. CDOs helped sellers find buyers in the wholesale market and when the loans went sour they had issues in finding out which loans were poor and which loans were good.
However, the growth in CDOs did not drive additional borrowing. People were willing to borrow money to purchase houses and there are a lot of agents making a lot of money. If you want to call it “greed” then everyone, including the people who borrowed to buy a house, was in on it.
@SeanG
And after this lucid example Sean….using Prof Quiggin as the “warehouser” – are you telling me the bubble wasnt the fault of CDOs? OK then – I concede defeat….it wasnt just CDOs…it was the entirety and complexity of everyone in the Casino wanting their take and getting it by conning investors..
No wonder I dont like the damn sharemarket…I was always taught “if investors dont have confidence in the integrity of the sharemarket that is a warning bell…there must be controls to safeguard against loss of investor confidence…etc etc bla bla…
I havent put a cent in the damn thing and I never will voluntarily because I see few controls these days and its become so corrupt and full of sheisters, spin and media hype its not only unpalatable – its entirely unbelievable …but I am forced to donate inputs by super regulations (why the hell should they have my money when I dont trust anything about the stockmarkets…its a gamblers paradise where the big firms always win (and if they dont they get bailed out). Why cant I pay off a mortgage with my super???? Huh??? Why I am being NOT told what ethereal assets are bought and sold in my name – and Im am not being told at all.. The losers here are decent taxpaying employees..and they about to lose again soon.
Its just a lose lose all round.
Alice, I have posted an examnple of how the free market fraudsters work. On 16 January 2009, Merrill Lynch paid $550 million to settle a collateralized debt obligation (CDO) lawsuit brought by the Ohio State Teachers Retirement System, among others for artificially inflating share prices of CDOs and other assets backed by subprime mortgages by issuing false and misleading statements about CDOs. Incomplete disclosures and unsuitable recommendations by investment advisers led many institutional investors, pension plans, and individuals to invest large portions of their accounts into these securities. These investors trusted those representatives with their investments only to watch their account values plummet when the subprime housing market started to unravel. Now, these accounts are worth a fraction of their original value. Bloody crooks.