Heidegger

Cologne 11-Oct-2008

Jan Straathof schrieb Sat, 11 Oct 2008 01:04:56 +0100:

> Hi Michael, you wrote:
>
> >The ultra-low short-term US interest rates helped to keep the economic
> >interplay going after the bursting of the dot-com bubble, but they also
> >opened the door to the risky, imprudent strategy of borrowing short and
> >lending/investing long.
>
> JS: Risky yes, but imprundent no. In principle there is nothing imprudent
> in “going short”, on the contrary, shorting is an excellent instrument
> to weed out bad performing enterprises and as an overall strategy it is
> very healthy for the economy. Excessive shorting is only a marginal
> and temporary problem and in the end will be punished by the forces
> of the market (see:).
>

ME: “borrowing short” does not mean “going short”. The former means borrowing
short term money (say, at 3% for 3 months) and lending long term (say, at 7%
for 10 years), whereas going short applies to stocks (mainly) and means selling
the stock (which one has lent, or even does not have oneself: ‘naked shorting’)
in order to buy it back later at a lower price (if the market goes your way and
falls). Short selling is the same thing as a put option, but usually less
expensive. And, yes, short selling has a useful market function. Short
borrowing, on the other hand, (also known as the carry trade) is very risky,
but lucrative while it lasts. Witness Iceland, which profited from it for a
long time. When short term interest rates rose, that was the end of the carry
trade, Iceland’s currency and Iceland’s banks. Bear Stearns also indulged in a
kind of carry trade.

>
> >ME: with the support of the well-meaning US electorate, that underwrote
> >lower-than-market interest rates for ‘discriminated’ social groups
> >to the tune of trillions. This well-meaning policy depended on the Fed
> >keeping interest rates low to enable poorer house-buyers to make the
> >threshold to eligibility for a mortgage.
>
> JS: I am still of the view that the underlying causes are to be found in the
> Fed’s 20 years long policy of money pumping and low interest rates.
> By increasing credit expansion and increasing the money supply, central
> banks allover the world (but lead by the Fed’s example) have created a
> systemic fault-line that stretched the monetary demand far beyond their
> economies’ economic resources. It was this policy that has created all
> previous inflation-induced boom-and-bust-cycles and that has ultimately
> brought us to our current unsustainable debt levels. The sub-prime debt
> crisis actually pales in comparison to the other debt bubbles still waiting
> upon us, namely, the credit card debt, the overvalued stock- and bond-
> markets and the immense and dubiously financed CDS-market, to name
> a few, which run into trillions of dollars. To put the blame foremost at
> the feet of the social policy of FM/FM is misleading and risks a further
> continuation of the monetary failures which would cause economic and
> political damage to the greatest possible extent.
> (see: )
>

ME: I tend to agree. The ’socially minded’ lending policy of Freddie and Fannie
only exacerbated the problem. The ultra-high debt levels of the US government
and US consumers are also coming home to roost. What is absolutely
mind-boggling, however, is how the credit default swap market was allowed
(Greenspan had a hand in this) to establish itself, without regulation, quasi
as the insurer for all those sliced-and-diced-and-packaged (securitized)
mortgages. That was the downfall of AIG, among others. The insurance industry
needs to be, and mostly is, heavily regulated to ensure that insurance
companies don’t do wacky things with their assets (incl. customers’ premiums).
Insured risks have to be diversified for sound insurance, but that is extremely
difficult with credit risk because, when credit goes bad, it tends to go bad en
masse. I.e. in the language of mathematical statistics: the probability of A
defaulting and the probability of B defaulting are not independent variables in
the default distribution.

It was only after 2000 that interest rate levels, with the Fed’s lead, became
abnormally low. This spurred lenders to take extra risks to get anything like a
normal yield. It greatly encouraged the housing boom because house prices are
capitalized interest rates, i.e. the lower the interest rate, the higher the
capitalized market value of the piece of real estate. When interest rates go
up, real estate prices fall.

_-_-_-_-_-_-_- artefact text and translation _-_-_-_-_-_-_-_-_-_
_-_-_-_-_-_-_-_-_-_-_-_- made by art _-_-_-_-_-_-_-_-_-_-_-_-_-_ http://www.arte-fact.org _-_-_-_-_-_-_ artefact at t-online.de _-_-_-
_-_-_-_-_-_-_-_-_-_-_-_-_-_-_-_-_-_-_-_ Dr Michael Eldred (c)_-_-
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Posted on Sunday, October 12th, 2008 at 6:04 am
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