"Reeling and Writhing, of course, to begin with, and then the different branches of arithmetic -- Ambition, Distraction, Uglification, and Derision." - The Mock Turtle, Alice in wonderland
You would be forgiven to think that this post is an ode to the days of nursery rhymes, what with all the reference to Humpty Dumpty and Alice in Wonderland. As quaint as these analogies might sound, i couldn't but help invoking them in the context of Wall Street and The financial mess for the sake of irony; who would imagine a nursery rhyme to have lessons for few of the smartest people on Earth?
As most of us know, the entire thing started with housing bubble, loans were given to people who couldn't afford it and had dubious payment histories and it was assumed that house prices would rise indefinitely thus providing a security against any loss. Well, if only Economics 101 was studied more carefully! Not to be left far behind, Wall Street jumped into this by buying Mortgage Backed Securities (MBS) from lenders, thus spreading the risk of such sub-prime borrowers. Since these people couldn't afford their payments, they started defaulting on their loans, causing a viscious spiral resulting in the sub-prime crisis and the fall of the Wall Street. To cut a long story short, Greed was not good.
This is a larger problem, one of consumption driven by borrowed money and an entire culture of credit. Where you earn 100 but spend 200. And one which is beginning to unravel as America (and the rest of the world) begins to understand that such greed is simply not sustainable. Now, i have been opinionated about the government-industry complex, but this problem is far more critical as it is a reflection on an entire culture of the populace not understanding what consumption within their means is.
Economics they say is the science of incentive. When the incentive is growth, it leads to prosperity. But when greed (and not to mention lack of common sense!) supersedes growth, it leads to destruction of financial values and institutions and can have large reaching effects. While the way forward is definitely through tighter regulations of such complex financial instruments like MBS, it would do America (and the world) a whole lot of good to understand that such unmanageable debt (American debt is over $ 11 trillion! thats 15 times India's economy), as a way of economy, is not sustainable.
Will the Humpty Dumpty be put back again? America still does have strength in their educational institutions and democracy (so called) and i do really hope it is as my daal roti to a certain extent depends on Americans' propensity to spend. But Humpty Dumpty's great fall might just be the biggest stories of our times!
P.S. "When Genius Failed" by Roger Lowenstein is an excellent read on Wall Street, its businessmen and bankers, and its uninhibited greed
As most of us know, the entire thing started with housing bubble, loans were given to people who couldn't afford it and had dubious payment histories and it was assumed that house prices would rise indefinitely thus providing a security against any loss. Well, if only Economics 101 was studied more carefully! Not to be left far behind, Wall Street jumped into this by buying Mortgage Backed Securities (MBS) from lenders, thus spreading the risk of such sub-prime borrowers. Since these people couldn't afford their payments, they started defaulting on their loans, causing a viscious spiral resulting in the sub-prime crisis and the fall of the Wall Street. To cut a long story short, Greed was not good.
This is a larger problem, one of consumption driven by borrowed money and an entire culture of credit. Where you earn 100 but spend 200. And one which is beginning to unravel as America (and the rest of the world) begins to understand that such greed is simply not sustainable. Now, i have been opinionated about the government-industry complex, but this problem is far more critical as it is a reflection on an entire culture of the populace not understanding what consumption within their means is.
Economics they say is the science of incentive. When the incentive is growth, it leads to prosperity. But when greed (and not to mention lack of common sense!) supersedes growth, it leads to destruction of financial values and institutions and can have large reaching effects. While the way forward is definitely through tighter regulations of such complex financial instruments like MBS, it would do America (and the world) a whole lot of good to understand that such unmanageable debt (American debt is over $ 11 trillion! thats 15 times India's economy), as a way of economy, is not sustainable.
Will the Humpty Dumpty be put back again? America still does have strength in their educational institutions and democracy (so called) and i do really hope it is as my daal roti to a certain extent depends on Americans' propensity to spend. But Humpty Dumpty's great fall might just be the biggest stories of our times!
P.S. "When Genius Failed" by Roger Lowenstein is an excellent read on Wall Street, its businessmen and bankers, and its uninhibited greed
9 comments:
I had personally experienced the shock waves of the sub-prime mortgage crisis last year as the company I work for used to get most of its business from that market. However, after the initial shock subsided everyone thought and hoped that things are only going to get better. But alas, there is no end to man's greed and hubris.
I had been reading Taleb's Black Swan back then and it was amazing to see the impact of the unexpected unfolding right before my eyes.
Also, I can't help but feel good about this turn of events at some level. There seemed no end to the excesses of the whole wall street culture. These guys lived lives that would turn most kings green with envy, with their fast cars and private jets and yachts. And all this because they were considered smart enough to play with other people's money.
"You see what happens Larry! You see what happens when you f*** a stranger in the ass."
arre the dal roti is true for all of us. It seems many people beyond wall street have been part of this mess and will need a bailout. Jo bhi ho.....It's depressing but well written.
@ clever doll - That's true man, the whole wall street culture of excesses might just be a thing of the past. However, i wouldn't agree on the black swan point of yours; this was inevitable given the fundamentals and similar excesses on wall street have occurred in the past for e.g. the fall of LTCM (i am currently reading a book on it - When Genius Failed). Just that this time around, it might be big enough to cause some fundamental changes in capital markets!
@ Niloy - Yes sir! its too huge to affect any industry, finance is at the heart of any economy.
@rider, if the crash was completely unexpected, I guess the damage would have been far more extensive. But even after the mortgage crisis and the fall of other capital management firms in the last few years, the fall of Lehman and AIG's brush with a similar fate are all shocking and unexpected events.
It's also in our nature to deny the existence of the black swan event and pretend that the outcome was inevitable.
Swan or no swan, a falling humty dumpty it sure was.
my knowledge in economics is seriously limited. But was just wondering, will the asian markets which are not heavily in debts still be affected as seriously as the western economies?
the second point of my worry is the inflation. Is there any connection between the two? I think many people are loosing more money due to the inflation. No job gives a pay raise of more than 10%. No banks give a better fixed deposit rate than 8%. the stock market is falling. How will our money do better than the inflation?
@ clever doll - The intensity of the events is sure shocking. Events like these have occurred in the past (E.g. Asian Markets crisis, Mexico crisis etc.) , Just that the magnitude is enormous now.
@ Rahil - I guess the fundamentals of the Indian Market are still in place and the exposure is not that much. Also there is no home grown mortgage /housing trouble in India yet. Other Asian markets are really exposed, like China, Japan etc. The real problem now is in the interconnectedness of all events, the worldwide financial markets are so connected that anything happening in the U.S. will definitely have an impact here. Inflation too is subject to many factors. So , while the commodity and oil prices are going down, the liquidity in markets is getting sucked out because of the financial mess. God knows where its going. I guess -
"The struggle of man against inflation is like the struggle of memory against forgetting"
The millstones of taxation and inflation....eh? I guess there are more "tions" today than Lenin could have thought of.
dil mange more
I don't know why this blog reminds me of floyd. May be they also had something similar in mind when they wrote another brick in the wall, and who failure of each brick lead to collapse of the whole wall.
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