Simple. I dont believe that subprime mortgages had anything to do with the current crisis. It was a 300 million dollar potential loss, presumed loss, which had yet to happen. The Krach started as most things do, like the Industrial Revolution and The Beatles revolution, in the Roman City of Eboracum (*) in Britannia Inferior. In September 2008 there was a run on the UK Northern Rock Mortgage Bank. People feared that their savings were in danger and wanted to hide them in their cookie jars till they calmed down. Then they would have returned the money to the Bank. What else can they do with it?
The fact that a major UK bank needed the Bank Of England to promise support as it ran short of funds freaked depositors out, who swooped in over the weekend and lined up to make withdrawals. No one had envisaged a run on a high street bank.
To increase the loss of confidence in the Bank, Northern Rock ran a banner advertisement across The Daily Telegraph's front page promising 6.30% interest on cash deposits, more than 250 basis points above the average rate-of-return offered on time deposits by UK banks in August. The result: Now people KNEW that the Bank was in trouble, and the smell of fear was perceived even by investors of the other side of the Atlantic. They were soon infected by mass hysteria and an excited chorea sancti viti was registered in the walls and the streets.
That was the moment I should have sold all my portfolio and buy god metal. The panic, as panics are, was contagious and soon the mechanisms of mass hysteria started to do their work, prices fell, people lost faith in the solvency and honesty of the banks and the government, and everything stopped in sheer blood freezing fear.
It took a charismatic new President and bold impressive moves to start stabilizing the situation and slowly warm up the people to start working and investing. Now the next phase is coming, a mad return to excessive hope and prices. After an anxiety attack comes the manic phase. I am fully invested in expectation of the coming mass euphoria. Already I am 50% above the lowest point of my portfolio.
(*) Dont be lazy, look it up.
7 comments:
Well, the whole system is very unstable. If you look at all things separately -- f.e., over-leverage, bad regulation and unwise deregulation, financial scandals, CDS & CDO trade, trade deficits and budget deficits in the US, slow growth in Europe and Japan, Greenspan's low interest rates, reckless money printing by central banks, Bush's dreams of Republican-voting Latino's, etc.,etc. -- the crisis looks pretty small and containable.
But, alas, little things add up to pretty big things. So, like you, I also don't think that the influx of Mexicans into the four US states caused this crisis -- although it sure didn't help either.
I don't expect the markets to bounce back at all. Actually, I think the financial system of Western economies is in dire need of some common sense -- save money and production of goods vs. borrowing money and consuming goods -- and harsh regulation by unusual smart men.
It's going to be rough until we get there, but we'll get there. We always do.
The system is very stable all the time that people perceives it to be stable. When people loses confidence in the system, an instantaneous change of phase takes places, and from liquid passes to solid and it freezes. It happens in a second. The system, to work, needs confidence and an alert enforcer. When the enforcer sleeps, the participants lose their faith in the system and the game changes in an abrupt transition. Thanks God the enforcer, the United States Government, is not sleeping and soon will restore the confidence in the game.
It is nice to see you back, Secret Engineer. I was tired of Taki.
York.
Always a pleasure to read one of my favorite history nerds even if I'm not completely sure of the analysis.
Joseph,
I am not a history nerd. I am a working water engineer and an active investor. I am learning the patterns of history, out of curiosity and as a tool for understanding the possible future.
I've been reading Shiller's book the past few weeks. He's a great read, both informative and optimistic.
Highly recommended.
"I am learning the patterns of history, out of curiosity and as a tool for understanding the possible future."
My definition of a history nerd.
I too have a profession, well, trade. I still like to read history and be aware of the world.
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