pbs doc: inside the meltdown
Cheerful viewing. This is the recent PBS Frontline Documentary on the financial implosion. It’s got some heavy hitters, and I like it in some regards. My main criticism of the piece however is the focus on the problem as one of illiquidity–i.e. the implosion or the problem in question is in the banking sector. Rather the central core of the issue seems to me to be a deflationary-debt cycle which funneled through the financial sector via the shadow banking system of credit default swaps, collateralized debt obligations, mortgage securities, and all the rest. That the banking sector had so insanely over-leveraged itself is a serious systemic problem, but combined with a deflation of the American consumer (which then activated all their potential losses, toxic assets, and obligations post-losses, i.e. “the gig is up and gone” element to all this) becomes a dark dangerous and quite scary brew.
I’m not sure how (or if) this would have all gone down minus the deflationary-debt consumer cycle–it’s hard to separate them as one of but not the only main factor in the over-burdened debt of the consumer was via the irrational exuberance of the housing bubble (others include increased costs of education and health care)–but that’s all a what if game at this point. Perhaps the connecting thread through both sectors was the over-assumption of debt.
The documentary ends with the question about how much money it will take to bail out Wall Street and whether newly installed President Obama will be the guy to fix it. Whatever he can or can’t do on that front, the central issue is not illiquidity (although that is certainly making matters much worse) but insolvency. I don’t see how insolvency gets fixed through restoring bank to bank lending. As proof, AIG got a second round of bailout money Sunday.
All the money that is being spent on propping up what I think is a dead system (cf illiquidity/TARP I & II) nor neo-Keynesian demand side stimulus packages should in my opinion rather be spent on protecting and caring for lives through the transition period after the fall. The GOP only offers tax cuts and the Democrats only offer Big Gov’t spending. They both are offering 20th century solutions to what is in my mind a 21st century problem.
Anyway enough of my yabbering on, cue the sneak peak of the film… You can (and should) watch the full episode here.
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This report is a much better explanation than Frontline’s which left me wanting…I suspect (actually I’m hoping) Frontline will do a follow on the commodities bubble that simultaneously popped with the housing crisis. There are individuals who continue to report to Congressional committees explaining the connection between the two bubbles.Report
Interesting. I’d put the “First Tremors” at the Summer of 2007. I was at one of the investment banks at the time and it was around then that the credit markets began to shut down. Origination was becoming difficult and all of the sudden lenders were tightening the reins. By the fourth quarter, very little was going on.Report
Caltha-p,
Thanks for the link. It is an excellent piece. For anyone interested, here’s the link to the hour long program on This American Life.
I guess my question is why does the dude take the loan when he realizes that even the criminals won’t give him this kinda loan. I guess ‘cuz it (seems like) free money.Report
Dave,
I think they started with Bear & the like because people remember that, but I’m sure you’re right that Summer 2007 was when it started. I think it was in 2006 that Peter Schiff gave that talk to the mortgage lenders association and told them you all f–ed starting next year or the year after. I remember someone sending me the link to that Youtube in Summer ’07.Report
Agreed Chris. There were rumblings being made as early as 2006. By late 2006, JPMorgan was reducing its exposure to subprime mortgages and in the early months of 2007, people working in the debt side of the business were starting to see more volatility in pricing than they had.
Bear is probably a good starting point because it was the first of the major hits that really started to shake some people. I haven’t gotten that far into this but it’s good so far.Report
Dave @2,
You then, know more than I do about the subject. As an onlooker yes, August 2007 marked the period when liquidity seized – Bear Sterns was at the epicenter of credit market turmoil. By December 2007, analysts tried to assess how bad the damage to the economy was, or would be.
I suspected at that point – when I saw a segment on The Nightly Business Report – that the recession would begin in January 2008, and we now know it did.
It was determined by a few experts in commodities that by late spring 2008, speculation spread into the commodities markets. Analysts knew there would be bank consolidation at the end of December 2007, but I suppose no one thought on the scale we witnessed last summer – or knew that Lehman Brothers was so overleveraged (I want to say, though I could be wrong as I don’t recall the exact figure, but to the tune of something like, $600B) that no other banks would step in and buy Lehman. FRS and Treasury officials (Paulson, Bernanke and now Geithner) stated these institutions did not have the authority before Lehman’s collapse (I’m guessing, as I’m not an economist or financial services professional, Lehman’s was not a bank holding company? but an investment bank). The collapse took place on September 15, after Barclays walked away from the bargainng table with government officials . Whether or not it’s relavent, Lehman’s had a 20% in a href=”http://www.forbes.com/2008/09/03/ospraie-lehman-update-markets-equity-cx_ra_0903markets32.html” >commodities hedge fund , which crashed as a result of the commodities sell off that began in May 2008.
All the while we had regulators (of every stripe) either overworked and ignored, treated as whistle blowers, or completely non-existent and lacked the authority to do anything about what was happening.
That’s my theory…but I can’t prove it. So here we find ourselves with the markets gripped in fear and faced with a very long slog out of this mess – caused by greed. Well it’s not like bubble are anything new. It’s just another day in paradise in a world that seems to be getting smaller every day, and, disagreements on how best to proceed.
I highly recommend a few blogs, beginning with this one. Report
I neglected to cite the role of AIG. in all of this.Report