Tuesday, March 18, 2008

Bearing up

Great thread here, where the comments throw up all the usual suspects. And the lead paragraph is just it: what Were they thinking? Scapegoat time, methinks....

My own take on things is that of a Bear of Very Little Brain:

Sadly for conspiracy theorists, the US debacle is much simpler, much more widespread, and much more worrying. There are four underlying causes:

1 - the US has for many years spent rather more than it has earned, hence a continuing and chronic deficit which must be funded with Other Peoples Money.
2 - the Greenspan years encouraged cheap credit, with a built-in 'buy now, pay later' incentive, which has become entrenched in consumers' minds, especially as they figured out that there was an ATM bolted to their house value, and kept going and punching its buttons. And cheap credit = price bubbles.
3 - financial institutions have re-discovered leverage (but in a new way, because it's Different this time), and have used it to unprecedented heights (or widths, or depths, pick your metaphor). Bear's book assets supported a 32x multiple of business...and the variety of option and Adjustable Rate mortgage products was all too tempting.
4 - accounting leniency (especially the Qualifying Special Purpose Entities - QSPE's) allowed most or all of this financial wizardry to exist outside conventional balance sheets, reporting requirements and other regulatory safeguards. The mess was out of sight, out of mind.

So this Ponzi (meaning, dependent on new suckers coming in and paying cash) edifice is what's coming apart before our eyes. There are a lot of 'unknown unknowns':

- because of the opacity of the QSPE's, and of how to value the cross-linking chains of financial instruments, no-one has any real grasp of where the financial bodies are buried, or how many there are. And most everyone has a cellar. Thus when another cellar is excavated and another crop of recently deceased is uncovered, the vital element of mutual trust is further eroded. 'Who's next?' is the whisper.

- the Fed is out of ammo: it's treating this whole thing as a liquidity issue, and pumping in money. That merely fuels inflation, while leaving untouched the real issue: solvency. The off-balance-sheet junk is coming back On.

- real assets such as houses, which have become well overpriced in traditional household-income-to-phouse-price multiples, are returning to the safe zone of 2.5-3.5. Rather suddenly.

- there is a flight to 'safe' havens such as Treasuries and commodities. Unfortunately, as money floods in to commodities such as wheat, gold and oil, which are all highly supply-inelastic, the old rule of supply and demand kicks in and prices rise. And as oil and wheat etc are our grocery bills in raw form, guess what's happening to them...

If you can recognise li'l ol' NZ in some of these conditions (the chronic deficit BH rightly fingers above) then, yes, we should be worried, too. But we are a commodities maker (food, gold and to some extent oil and gas) so may be well placed to take advantage. And we have some of the best accounting reporting in the world (yes, don't laugh). So we can probably say that our cellars are relatively safe. Maybe a mummified rat or hedgehog. Nothing real bad. Pity 'bout those houses, but.

There has to be a marketing slogan in here, surely?

"NZ - Home of the Lowest Level 3 Asset ratio in the World!"

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