On the Financial Meltdown

As they say on Wait, Wait, Don’t Tell Me, “and now for some quotes from this week’s news.”

First, a delightful blog I discovered called The Big Picture by Barry L. Ritholtz. In a post titled The Underlying Basis of Finance and Credit, Mr Ritholtz observes:

Over the entire history of human finance, the underlying premise of all credit transactions — loans, mortgages, and all debt instrument — has been the borrower’s ability to repay.

Except for [the 5 year period from 2002 to 2007] the entire history of human finance was rather reasonable about the basis for making loans in general, and extending mortgage loans in particular.

For 99.9996% of the last 1.2 million years, loans were granted primarily on the condition of whether or not the lender believed that the borrower could repay. Between 2002 and 2007 this condition was dropped. Instead, loans were granted based on the lenders ability to sell the loan to someone else! Wow! I call that misaligned incentives.

Second, I am reading a delightful book called Traders, Guns and Money. In it Satyajit Daj offers an insider’s look at the complex world of financial derivates. Today I read the simple, self-evident line, To make money, you need to make it from someone else.

For several years now I have been baffled by the absurd amounts of money being earned in the financial sector. How can it be that these analytical magicians could continue to generate such enormous profits? Where is this money coming from? Today I understand. With $700 billion taxpayer dollars (and some say up to a trillion could be required), the scoundrels of the financial sector were simply taking profits on future payments from the US taxpayers.

Finally, I was moved by Senator Bernie Sanders’ Four Point Plan in his article in the Huffington Post. I particulalry like his fourth point:

We need to protect ourselves from being at the mercy of giant companies that are “too big to fail,” that is, companies who are so large that their failure would cause systemic harm to the economy. We need to assess which companies fall into this category and insist they are broken up. Otherwise, the American taxpayer will continue to be on the financial hook for the risky behavior, the mismanagement, and even the illegal conduct of these companies’ executives.

I couldn’t agree more.

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