The financial crisis

What next?


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I still say:


The last ime I said this, Economist, you killed my comment, so go ahead and kill this one. But I still say:


Dhirendra Krishna

This has become an interesting debate, but basic issues are not being addressed. (A)Accounts of Lehmans Brothers did not represent "true and fair" picture of this giant financial institution. Misrepresentation in accounts arose from not creating "provisions" in Balalance Sheet on account of uncertaininity in the value of property mortgaged to Lehmans Brothers, against loans. (B) Surbanes Oxlay Act pinpoints the responsability of correct accounts on the CEO, who is also required to sign a certificate to this effect. The certification by CEO depends upon certificates obtained from other executives. (C) Incorrect depiction of the value of loans for housing in the accounts, has resulted in undue benefits to CEO and other executives, as the Profit and Loss Accounts showed excessive profits, resulted in hefty bonus to them. (D) Is this not "cheating" according to the American laws? What are the legal consequences?

I will not join the debate on capitalism vs communism; it is a non-issue, anyway. Basic problem is the personal greed of individuals placed in a senior position (whether in private sector or the Government) on whome shareholders / public have to place their trust. The systems, procedures and public disclosure / transparency should make it difficult for any such person to misuse his position. It is for the Regulatory Authorities to ensure that public interests are protected, by disclosure of information.

Dhirendra Krishna IA&AS (Retired)
yahoo group rti4empowerment


What is the difference between finance and economics? -- the answer: one is based on ego, the other based on equality.

I'll explain:
- Take 10 people, and 9 of them are of average wealth and only one is super-rich. The super-rich guy buys a nice boat, and can look down at the other 9 guys and feel good about himself to boost his ego. That my dear, is finance.
- Now, take those 10 people, 9 of them are of average wealth and only one is super-rich, like above. The super-rich guy pays more taxes to educate the children of the other 9 people, along with his kids. The children all become engineers and scientists who can devise new methods to produce a nice boat cheaper with highly efficient manufacturing processes, robitics and advanced automation. This brings down the cost of a nice boat to reasonable levels that now all 10 people can afford that boat. Unfortunately, in this instance the rich guy can no longer look down on his fellow countrymen and boost his ego because now everyone has a boat! (hence the concept that wealth is only a relative term). That my dear, is economics -- and it requires socialist programs such as high quality mass education and good infrastructure to allow capitalism to function. Hey, those educated kids even opened up brand new industries (robotics, industrial engineered goods, mass produced boats, etc. -- high paying, high quality jobs a-plenty!!!) Therefore, true capitalism (defined under economic rules) incorporates socialism in a symbiotic, mutually beneficial way. False capitalism (defined under finance) is all about greed and ego...

Don't believe me? -- then why are socialist states like Canada, Scandinavia and others still doing well while we get corporate scandels with CEO's cooking the books?

Want to see another trick of finance vs. economics? Imagine 1 dollar = 1 euro. A German and an American both make $100,000 a year (which is a 100,000 euros for the German). Germany goes through a long period of 0 percent economic growth that after two years the German still makes a depressing 100,000 euros, but America's "vibrant" economy based on CEO's who know how to cook the book and doll out easy credit to pump up mortgage markets sees economic growth of 10% OVER TWO years. The American's income is now $110,000. To finance people, they're thinking, "Whoa, Americans are richer than Germans..." The ego comes in by Americans telling the Europeans and Japanese how they should manage their economies and how they should all be like Americans (creating a "Washington Consensus") of "liberalizing financial markets and labor standards and environmental standards". But, because America's economic growth is based on shotty fundamentals, the currency falls 20%...

But, hey! -- the American is still making $110,000 a year and the German is still making 100,000 euros. But with a new dollar to euro rate of 1 euro to 1.2 dollar, that German dude is really making $120,000 (still a sad 100,000 euros after two years of supposed economic stagnation).

To protect their egos, the Americans -- guided in finance than economics -- will say, "Oooooh...but the cost of living is so much higher in Germany, Sweden and elsewhere in Europe -- so adjusted for prices, Americans are better off." As an economist, I would say, "The cost of living might be higher in Europe than America, but the cost of living in America is higher than China and Brazil. That means that America's true economic well being is somewhere between a supposedly stagnant Europe and developing nations like China and Brazil...doesn't that make America more of a middle income country than high income Europe?"

My point: Economics is about equality by developing human beings to reach their highest potential, even if that means the state has to intervene to make sure people are highly educated (for free) and in good health (universal healthcare). What Europe, Canada, Australia, and Japan has are univeral healthcare systems and great public education systems that are of EQUAL quality throughout the country. America has a system that breeds a permanent aristocratic class and a permanent poor class because the rich suburbs have great schools where kids can shoot into Harvard with a C average (like Georgie boy), while inner city school kids are lucky if they get a teacher that comes to class everyday! The latter becomes permanently poor in our new "knowledgebased economy", that they get susceptible to those rich kids who grew up to be bankers that can sell high priced mortgages to those poor grown up kids. And without a proper education, due to a lack of socialism, those poor (grown) kids vote Republican thinking they'll get a tax cut when in fact most of the benefit of the tax cuts go to those rich (grown)kids who work in these investment banks. And when things start collapsing, those rich kids with their media power will find a way to get socialist policies to protect their ownselves like government bailouts!


"Finance is the brain of the economy. For all its excesses, it allocates resources to where they are productive better than any central planner ever could."I do not see other basis than ideology for the above assertion. With the modern IT, an intelligent central planner could achieve equally economically acceptable decisions.What happened in US finances was a mere Ponzi scheme based on the assumption that new money will enter the housing market, that housing prices will increase indefinitely, that even people without any capital can afford to buy and then sell houses at a profit no matter the ludicrous terms of the mortgage.Anyone knew this, it was advertised on mass media... only Wall Street and the Bush administration (Feds and Treasury included) were surprised to find out that resources are finite - 101 Economics.Even now, the gvt. insists that more money will keep the system running. The question is how long time will it last even with the new infusion of official numbers... that's cause real money aren't left any and the gvt itself has to borrow abroad to function.Hence, private or offical planning does not make any difference in this particular case.


New Dow high in boom then bust

"Indeed the temporary breaks in the market which preceded the crash [of October 1929] were a serious trial for those who had declined fantasy. Early in 1928, in June, in December, and in February and March of 1929 it seemed the end had come" (John Kenneth Galbraith, "The Great Crash", p.98).

History suggests, as I have arguing for a while, that the Dow will peak in the McCain presidency and then the bust will occur. The events of this week suggests to me that the final rally of the ‘bull’ market that started in early October 2002 is near or underway.

Tir Tairngire

Dear Author of the Article above:
Are you quite comfortable in your office? Is all well as you recline softly in your well cushioned desk chair? Are your needs being met in a timely manner as regards drinks and refreshments? Is pleasant music playing softly in the background to help you pen or type the delightful prose with which you make your living? Ah, good then. We must not have you disturbed. For you have a God-given right to spill out patter and posh palaver that states that YOU KNOW BEST and that whatever happens to us is what we deserve. For we are the stupid and the docile, the masses, as it were. Go gently, therefore, on your way as you breath precious scents and enjoy the privileges of power. We who must pay for the messes that you say "Need to be" are surely in your debt. You are so far- seeing and we are but taxpayers. Of course we'll follow your wise advice. It sounds just like the same drivel we've been fed by our own masters, Bush and his foul friends.
Tir Tairngire

Austin Fellowes

“But it helped produce healthy economic growth and low inflation for a generation”.

Remember who that generation is: the Boomers. They grew up spoiled by their War Generation parents. They had temper-tantrums when they were called to make a sacrifice (Containment of Communism, Vietnam). Then they became Yuppies, championing the I-want-it-now, me-first ethos of the 80's and 90's, deregulating the economy and lowering taxes for the super-wealthy in their trickle-down scam over the working and middle class. Their greed went rampant in the "irrational exuberance" high of the technology bubble, and rather than endure the deserved pain of the hangover, they lowered interest rates artificially (hair of the dog) and embarked on another greed-frenzy in the housing market and exotic financial instruments. They started doing business with China and Saudi Araba, totally undemocratic dicatorships, for the sake of profit and oil, and in the process sold the soul of America's democracy and destroyed its moral authority around the world. Yes the Boomers -- as a generation they are a corrupt and rotten lot who have never had to suffer and who care about nobody but themselves. Now they control the levers of power and what do they do when their ethos has brought them to ruin? They write themselves a big fat government check, knowing full-well that later generations will have to suffer for their excesses, in the form of high-taxes, reduced standards of living, lower-quality education, crumbling infrastructure, and a shipwreck of an economy.


Joseph Stiglitz has offered his six reforms needed to avert future financial catastrophes such as the past week’s denouement of eight years of Dubya. None of Stiglitz’s reforms are radical enough. You cannot legislate against stupidity. However, you can make stupidity not very lucrative, which has not been the case for the past decade. Sarbanes-Oxley was an attempt to legislate morality. Can't be done!

Herewith my six reforms:

Glass-Steagall will be re-enacted retroactive to September 1 to block the Bank of America takeover of Merrill Lynch. There is no way the reserves of a federally insured and regulated bank should be used to supply credit to a wild west derivatives trader. And extend the act to state regulated insurance companies. How can AIG be allowed to use its insurance reserves to be the credit for its derivatives activities?

The feds take over regulation of the insurance industry - some companies can remain state regulated but only if they do not engage in interstate commerce.

The CFTC is abolished and the SEC takes over.

The Treasury Secretary will not be from Wall Street. He or she will not have worked for any entity within 200 miles of the east or west coast.

All references to the oligopolistic rating agencies will be removed from all federal and state regulations. Let competition sort out the smart ones and destroy the stupid ones.

The government warrants on AIG are exercisable at one per cent of the average stock price over the week preceding the bailout, exercisable for 10 years. These warrant conditions hold for any other bailouts such as the auto manufacturers are seeking.

Any employee who has received over $5 million in cumulative compensation in the preceding five years will be terminated without severance and all employment contracts, stock options and any other deferred compensation for such employees are terminated at the date of the government bailout.

Haircuts will be spread around and not only absorbed by the taxpayers. All derivative contracts and insurance claims that have lost value will be settled at 50% of their lost value. This includes the Frannies’ mortgage guarantees on the CMOs.

A 0.1% stamp tax will be imposed on the notional value of all derivative contracts and swaps involving one or more parties (including their affiliated entities) with financial assets held in the U.S.

Any financial institution, including its affiliated entities, with over $100 billion in deposits will not have FDIC insurance but can obtain private insurance from firms such as AIG. No deposit taking institution will be too big to fail.

I think that is six but I am very upset so may have lost count due to this 'Heads the taxpayer loses, tails Wall Street wins' game that we are forced to play.



How the columnist dares this assertion?
The world “healthy” seems something like less than inappropriate, is a growth with a brain tumor healthy?
Healthy growth when everybody knew that since 2001 the constant increase of moral-hazard has prepared with patience the big crisis that is now hovering over our heads – what I’m writing which is here.
The economist and too many of people knew, and nobody did nothing, because it was deepening the pocket of those who have 80% of this paper’s capital.

“Low inflation for a generation”

Hum, clever.
And what about the differed inflation that massive speculation was preparing.
We know that there was a bubble, and its corollary that it will one day or another bust, thus goad the fed to cut rates and thus create inflation.
You are saying that this pattern created low inflation, as Abraham Lincoln once put it “you can fool the people one time, a group of people all the time but you cannot fool all the people all the time”. The Economist failed this golden rule; you have, tough indirectly created more inflation.

“It would take a very big recession indeed to wipe out those gains. Do not forget that in the debate ahead”.

These gains, sorry to teach you economics, but the two third of the gains you are speaking about where according to sure data monopolized by the 1% better-off.
You are making me laugh; you hope it will perhaps trickle down? The only thing this concentration of money can do is to erode our institution, in the first place democracy.

In any case; if you win the future debate by dirty tricks and populism it will one day or another explode in your own hands.

If you want to know what will happen; it will be the end of economically damageable and unregulated financial systems.

hidden orchid

Surprised at the corporate failures plaguing the USA today? Surely not. The last wave of failures in the late 1990s was shocking culminating in the deaths of many blue chips whom the shareholders adored at one time. It’s almost boring to recite them; Enron, Worldcom, go on. Less than five years on, we see more symptoms of the same disease, greed.
Again, history is repeating itself not for want of banking guidelines nor accounting standards for corporate governance. Only this time, we see the corporate victims in the form of major financial giants; Freddie and Fannie, Lehman Brothers, Merill Lynch, AIG…the list could go on in spite of the bailouts proposed or carried out. Will there be an axe heavy and sharp enough on the regulators responsible?
If the scale of these failures does not make a regulator worth his salt blush, nothing will. We are not talking one little, two little failures. We are looking at performances that really stink no matter what suave corporate images had been cloaking these corporations over the years. With all those brains and credentials at the watchtowers, to have these flops happening at a time when world poverty, depletion of valuable resources and trafficking crimes remain major wars governments continue to lose ground is mind boggling to say the least.
What are the causes of these corporate failures or more importantly what are the ingredients of these financial disasters? And will these responsible for manning these organisations be severely persecuted for the failures if they contributed advertently? What can be really done within the institutions minus financial investigations process of the law if some wrongdoing is found? Firms today face many obstacles in recovering assets partly due to ease of funds transfer and the complicity of transactions.
Notwithstanding bailouts, if the USA ostensibly fails in safeguarding the assets of its people, who will the developing nations and the third world be guided by in promulgating relevant and sound accounting rules and implementing them. The EU? Australia? China? These countries have long followed the leads of US’ experiences in innovating new standards. No country is immune from the scourge of corruption by ruthless individuals but what chances do the ordinary folks and commercially serious medium enterprises have in protecting their earnings in the midst of endless tsunamis of economic upheavals combined with unethical allocation of resources?
Among the answers are the leadership style of corporations and methods of funds control in the hands of the managements. And to see it happening within premium corporations proclaimed as world class financial guardians, now that’s quite a laugh. Seriously.
The repercussions of these financial failures will continue for several months and before the dusts settle, each of the affected institutions shall see some form of transfers, sackings, demotions and new engagements. And that’s just the human resource stuff. The transfers of ownerships will see massive documentations and endless work for the lawyers. Not that it’s a bad thing. To the victors go the spoils. But are we all fools again, for this is yet another vicious cycle of corporate failures which we have once seen not too long ago but only too myopic to heed and complacent to fight against.
Part of the blame must lie on power driven managers hiring blindly during heady times of sweet perks and pay, engaging equally ego inflated graduates with neither the financial astuteness nor the rudimentary ethical fortitude to blow whistles when things get rough and hazy. Because assets wrongly taken or even incorrectly applied must be returned, lest we begin to believe that crime does pay at least for many of the unscrupulous and pretentious. And this must be practiced by both public and private institutions. To not recover stolen assets if possible to all extreme is irresponsible, to not punish seriously is condoning the crime. There is no choice. For we are guardians of ever limiting resources of today’s young. Constantly, without fail.
Can rules be set and applied retrospectively if recourse to assets wrongly taken seems doomed to lengthy legal wranglings? Seizing of assets is an available avenue, but only if it is done by many against a few. But not if the rot is systemic. It goes without saying, that leadership must be bestowed not only in a few high ranking individuals should the opportunities for collusions arise, but approved and and engaged by most if not all within an organisations.
Since ancient times, soldiers found guilty in transgressing set laws of honorable armies were usually punished in accepted ways. Sun Tzu said, ‘if troops are well treated but cannot be employed, if they are loved but cannot be commanded, or when in chaos they cannot be governed, they may be compared to arrogant children and cannot be used’. Or if you feel a little blood thirsty, you may like his nephew’s, ‘if you kill the officers, then the officer


Oh and yes, its quite ironic that the government had to bail out AIG one of the premier insurance group. So much for risk management, Ha!


Your magazine noted years ago that statistical mmodels , VAR techniques coupled with BASEL I and II policies would do anything but exacerbate market gyrations.
This due to the fact that market agents, by reacting to similar risk/return patterns would render infromation essentially useless in terms of predicting possible catastrophic losses.
Another contributing factor to be taken into account is that a globalised market whose agents, trained in "the best" MBA programs, tend to think and act likewise in the presence of homogeneous information flows emerging from the likes of Reuters, Bloomberg,CNN,etc. Reactions synchronize, making policing tendencies much more difficult to control if p�nicky agents stampede into the same exit doors en masse. Only the apparent fools would survive.


Re: CoolHead1.Better to wait till Crude Oil reached plus $200 a barrel, and the US government goes bust (I for one haven't forgotten that baby boomers will be coming online on mass very soon - more "toxic debt" to add to the fire, if you believe in that sort of thing), before we have a revolution on mass.Who on here now believes that the US still merits a Treble A credit rating, and if not, who is bribing Moody's ?


Your assertion that finance is the brain of the economy is totally off the mark. The real brain of the economy is the entrepreneur/inventor/business owner who can take on some calculated risk to serve a demand for a product or service. Finance is merely the enabler that is supposed to allocate resources to these enterpreneurs. In a perfect market economy, this should happen on its own, without the need for "finacial geniuses" (actually bozos, as all of us now see). What we need is transperency and accountability, which is sorely missing. Somebody below says that waht is the problem, nobody's being killed. That is patently wrong. Whys should the ordinary taxpayer bail out these bozos for their stupid decisions? Each and every dollar that is used to offset these losses reduces the worth of every dollar that is floating in the market. Essentially, it is a printing of money and it makes everybodys net worth lesser than what it would have been had the bailouts not happened.
I am surprised why there are no riots in the streets. Ladies and Gentlemen, you are watching the greatest daylight robbery on earth. The transfer of trillions from poor working people to the bozos and without any resistance from the public.
What a sham!
It's time for the next revolution.


I want to marry a successful hedge fund manager. In the worst case, a well connected Republican politician might work as well.Any takers?


The US government seems to state that the "root cause" of the problem is the toxic debt. It isn't the root cause in my opinion, the root cause is that loans given out to low income earners could not longer be paid back. Why did this occur ? Because lower income earners (sub prime lending) got hit more badly in percentage terms by energy price rises than prime lending - and then an inverse trickle down effect took hold. The root cause is energy/resources, not toxic debt.


As a live long Republican it pains me to see what has happened by and large on the Republican's watch. Efforts to blame this on Greenspan and to say that the seeds of this crisis lies in the Clinton years is to dismiss the fact that the current administration accompanied by six years of Republican control of Congress make it an inescapable fact that the Republicans have again let the nation down. If Obama and the Democrats make political hay of this crisis, the Republicans have no one to blame but themselves. What a mess!



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