The End of the Financial World as We Know It

We’ve all seen bloggers link to articles they claim best explain the current global financial mess. I’ve given a few such links myself. But this article opened my eyes and got me thinking like few others, and i strongly recommend you read it now. It’s simply the best single piece I’ve found.

I wrote a huge post with big snips but then realized the article speaks for itself, and I can’t tell it better than its authors. Please, read it.

The most illuminating aspect is its focus at the beginning on the Madoff scandal, illustrating how it is symbolic of why the whole train wreck took place. Sure, Madoff is just a sideshow of the Big Global Crisis going on in the main tent. But the authors show, dramatically, how the way it was handled, or mishandled, or not handled at all, tells us much of what we need to know about why we are where we are today. This is exquisite stuff, and the thesis is kicked off with a look at the efforts of a man who wrote a detailed and damning report seeking to alert the regulators about what was clearly a fraud of monumental proportions. It was ignored because exposing Madoff went contrary to the short-term interest of all involved. The regulators, the investment houses, everybody. And that is why the same regulators and banks failed to clean house even when all the evidence was in front of their eyes that we were heading toward a global calamity. It was bad for their own short-term interest. And the way they are handling the crisis now follows the exact same mold: they are shoring up their own short-term interests yet again. That’s what the bailout was all about.

It reminded me of another gem I saw today over at this site. It uses a rather crude metaphor to make its point:

Forrest Gump Explains Mortgage Backed Securities

Mortgage Backed Securities are like boxes of chocolates.
– Criminals on Wall Street stole a few chocolates from the boxes and replaced them with turds.
– Their criminal buddies at Standard & Poor rated these boxes AAA Investment Grade chocolates.
– These boxes were then sold all over the world to investors.
– Eventually somebody bites into a turd and discovers the crime.
– Suddenly nobody trusts American chocolates anymore worldwide.
– Hank Paulson now wants the American taxpayers to buy up and hold all these boxes of turd-infested chocolates for $700 billion dollars until the market for turds returns to normal.
– Mama always said: “Sniff the chocolates first Forrest”.

Hank Pauson is using his gift from you and me to yet again protect the immediate interests of an elite group of power brokers who, instead of seeking to stem the tide of failing mortgages, want mainly to focus on pushing stock prices back up (again, for their own short-term gain) with no consideration of the long-term consequences of their not actually fixing the heart of the problem. And the cycle continues. The NYT column gives you the entire picture, and makes you wonder why we are asking those who filthied the stables to now clean them up.

Again, read the whole thing, and prepare to shake your head in stunned disbelief.

The Discussion: 27 Comments

I read this late last night and agree, it’s excellent. I’m thinking maybe I should be Treasury Secretary. Why? Because even though I could barely explain to you what a derivative is, I’ve ranted FOR YEARS that short-term thinking and focusing on the next quarter’s profits at the expense of any long term goals was ruining this country. My other rant in recent years has been about how the hollowing out of our economy and wealth generation based on the financial industry was a ruinous path to follow. So appoint me. I’ll fix things.

January 5, 2009 @ 3:32 am | Comment

Soory Richard. Not directly related to the article, but very imortant to the quetion.

There are a lot of angles form which you can view the mess we are in now, and the many causes. One that was a bit more enlightening than most of the others that I saw was the one of Nicholas Taleb presented in his book: The Black Swan.

He was himself working on Wall Street for some years. But his judgement of the risk assessment and the tools they use is devastating.
Watch the video. Listen to the podcast. Read the book. Its enlightening and lets you understand a little more why we have the problems we have now.

http://www.econtalk.org/archives/2007/04/taleb_on_black.html
http://www.edge.org/3rd_culture/taleb08/taleb08_index.html
http://www.charlierose.com/view/interview/8635

And related to Maddof and his Ponzi scheme. Well, I like this story of a guy how wrote a book about such con artists and was fooled himslef buy Maddof. No one is immune. ๐Ÿ™
http://www.skeptic.com/eskeptic/08-12-23.html#feature

January 5, 2009 @ 7:27 am | Comment

seems my comment had to much links. pleas check. its clean. ๐Ÿ™‚

January 5, 2009 @ 7:29 am | Comment

[…] @ The Peking Duck, one of my long-time RSS subscriptions, recently linked to a New York Times’ piece titled […]

January 5, 2009 @ 2:30 pm | Pingback

Kai, nice article you wrote on this post. I suggest everyone go take a look.

January 5, 2009 @ 4:00 pm | Comment

My neck feels sore from all the disbelieving head-shaking. . .

January 5, 2009 @ 9:10 pm | Comment

ST, I appreciate your comments – but do you really need to use such an offensive moniker? Maybe you should consider something a little kinder and gentler? Just a friendly suggestion.

January 5, 2009 @ 10:43 pm | Comment

Why are you offended by a Star Wars reference Richard? I know you told him a while ago, and since then I was puzzled as to why.

January 5, 2009 @ 10:57 pm | Comment

Bao, here’s why.

January 5, 2009 @ 11:40 pm | Comment

Oh, I understand now… So that’s where Lucas got the term I guess and the analogy for the dark side, etc.

Thanks for the info.

January 6, 2009 @ 12:33 am | Comment

Michael Lewis also wrote a great piece for Conde Nast’s Portfolio last month. It’s long but well worth the read, check it out:

http://tinyurl.com/5vj34l

I’m certainly looking forward to the book he’s working on!

January 6, 2009 @ 1:28 am | Comment

It’s funny how Americans are getting screwed by the system that they designed. Too many Americans are deluded into thinking that their “democracy” will automatically make corporations and the government responsible and act on whatever is in each citizen’s best interest.

Hopefully they will have learned by now that you can’t survive anymore without at least a basic grasp of economic principles, and that it’s stupid to trust the empty rhetoric that American politics is built on.

January 6, 2009 @ 5:14 am | Comment

It’s way too early to see who’s gonna be screwed. Come back in 2 years and then you can say that again. Do not rejoice so fast.

Don’t be so easily fooled by the direct impact of the crisis, you might be in for quite a surprise later on.

January 6, 2009 @ 5:36 am | Comment

Don’t assume that anyone thinks they’re going to emerge from this untouched.

They’re not the ones deluded into dreams of eternal empire like Americans.

January 6, 2009 @ 6:18 am | Comment

“Theyโ€™re not the ones deluded into dreams of eternal empire like Americans”
I think they are just happy with ethernal decadence, and having a good time with it.

If that is decadence, give me more of it. Cheers!

January 6, 2009 @ 8:57 am | Comment

Sorry Richard. I know this might be offensive. But there is some truth to it. Ponzi-schemes are everywhere: http://www.cartoonistgroup.com/store/add.php?iid=28878

January 6, 2009 @ 9:51 pm | Comment

richard,

are you still going to quote alan greenspan as an expert on all things financial?

January 8, 2009 @ 2:02 am | Comment

I don’t think I ever did.

January 8, 2009 @ 8:16 am | Comment

i refer you to your own posts’ on your site, dated march 17th, 2008 and may 25th 2007, among others.

January 8, 2009 @ 11:37 pm | Comment

Ah, I see, where I wrote,

It does little to console us to see Alan Greenspan write today, โ€œThe current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the second world war.”

I never, ever praised Alan Greenspan on this blog nor did I ever call him an “expert” on anything (although I can’t deny I thought during the Clinton years he did as good a job as a Fed chief could be expected to do). Let me request that you not put words in my mouth. That comment of yours was really bizarre, and completely false.

January 8, 2009 @ 11:58 pm | Comment

comment #6 march 17, 2008 by richard:

“Marc, I have to quote Greenspan because, whether I agree with him or not, or like him or not, the man has influence, and when he speaks the world listens. And in this case, at least, heโ€™s completely right.”

sounds like praise and another way to call someone an expert to me.

January 9, 2009 @ 1:21 am | Comment

Marc, that is a real stretch. I said “like him or not, the man has influence” and that in this one case I thought he was right. One of three tiny references about Greenspan on this blog over the course of seven years, and that justifies the comment from you, “are you still going to quote alan greenspan as an expert on all things financial?” In case you’re struggling for a reply, let me help: No. It doesn’t.

January 9, 2009 @ 8:23 am | Comment

Yourfriend, you are not American, how would you know?

January 11, 2009 @ 7:48 pm | Comment

Actually, yourfriend alias Ferin is American. According to his own words he was born and raised in the USA so he’s as American as a human being can be and arguably more so than some Americans, e.g. the governor of California.

January 11, 2009 @ 10:22 pm | Comment

[…] @ The Peking Duck, one of my long-time RSS subscriptions, recently linked to a New York Times’ piece titled […]

February 12, 2009 @ 7:37 am | Pingback

Your looking in the wrong pond. but I suppose that was the idea. what does any of this matter, who is running what scam at what level, if a) your dollar is not backed by gold, b) competition does not reduce prices, in fact consider inflation, c) the collection of taxes is illegal, d) we get smarter technology, but get dumber by the day in how we treat/hurt each other. Ask your self why we can spend millions developing an ipad, but cant feed half the planet.

Consider this; if you took the money as an objective out of everything, would it still be done, would politicians still be a polititian, would we build so many luxuries such as cars, would we have so much energy / resources being used in consumables, if we didnt “Need” so many things could we actually help people be happy with what they have and not take from others at every level, from wars between countries to local crime to petty theft, would we be able to keep our word therefore our integrity if we didnt need to manipulate so many people around us to get what we wanted and stop them getting it first, if we werent so busy being distracted by consuming would we have time to be responsible in some way?

June 2, 2010 @ 6:52 pm | Comment

Those are some very heavy philosophical questions. Bottom line: when you understand what you really, truly need in life and free yourself of the constant pressure to consume, you can find true freedom. Most people will never do that. The market economy would wither and die, and those pulling the strings will have none of that.

June 2, 2010 @ 11:11 pm | Comment

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