This blog was created to gather information for an interactive timeline application to provide people with tools for analyzing the factors, history, people, events related to the economic crisis of the late 2000's. The timeline application prototype is a work in progress.
John Bird and John Fortune are a British satirical team that participated in a four-part mini series in November 2008, called Silly Money. Their humorous sketches reflect truths about the ongoing economic crisis. Enjoy!
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Part 1 of 3
Part 2 of 3 (Discusses correlation concept, behavioral finance, quants)
Part 3 of 3
(Note: Some parts off the discussion might be offensive.)
Some quotes from the clips: "You have to remember two things about the markets. One is that they are made up of very sharp and sophisticated people who are the greatest brains in the world. The second thing, the markets are, to use a common phrase, are driven by sentiment".
The two go one to explain the dynamics of sentiment on the market, the relationship between dodgy debt packages and structured investment vehicles, and so on, how this relates to hedge funds with fancy names.
"Somehow this package of dodgy debts stops being a package of dodgy debts and starts being called a "structured investment vehicle".
"Shouldn't you have seen this coming?"
"Well, we didn't exactly foresee it, in the strict sense of the word."
"Or in any sense of the word."
"Yes, but when it happened, we DID notice it, which is almost as good, isn't it?"
"It's not us that will suffer, it is your pension fund".
Over the past few months, Iceland's financial sector imploded, and recently, the government collapsed. The following two videos, from the Wall Street Journal Online, explain some of the dynamics behind this country's reverse of fortune.
HOW ICELAND COLLAPSED 12/26/08
"WSJ's Andy Jordan examines how Iceland's economic miracle came to an abrupt end and explains why the world should care about the collapse of the small country's financial system."
ICELAND COALITION GOVERNMENT COLLAPSES 1/26/09
"Iceland's Prime Minister Geir Haarde is preparing to step down after announcing the collapse of the county's coalition government. Video courtesy of Reuters."
"The bankers and government effectively turned Iceland into a gigantic hedge fund sitting in the middle of the North Atlantic...What they failed to implement was the necessary supervision or enforcement of banking regulations."
The above picture will link you to the Wall Street Journal's interactive graphic, "Madoff's Circle of Friends". The larger circles represent larger investors. Mousing over the circles and dots will provide more information.
The main question asked in this video: Just what is going on with Bank of America? Sins of commission, sins of omission?
"WSJ's Dennis Berman says the Bank of America and Merrill Lynch merger is raising questions about the government's role during negotiations. He tells colleague Evan Newmark its apparent actions conflicted with shareholders' rights."
The following three videos are from the Wall Street Journal's website and are adapted from the book, The Wall Street Journal Guide to The End of Wall Street As We Know It, by David Kansas. The book, published by Collins books, will be released in paperback on January 27, 2009. The Kindle Edition is currently available. Below each video, I've added some quotes and paraphrased some of the content. (I wasn't able to get the names of some of the people quoted from the videos.)
You'll have to buy the book to catch it all.
End of Wall Street: What Happened(Wall Street Journal, 1/05/09) Chapter One:
"In the first of this three-part series, Journal reporters explain how the housing bubble inflated and burst, and why easy money led to the collapse of Wall Street's biggest financial institutions"
The push for home ownership from the government led Fannie Mae and Freddie Mac to lend home loans at lower rates than others. Banks tried to follow suit, in order not to lose market share, and look for ways to make money, such as offering sub-prime mortgages, which were offered to people with a higher risk, at a higher rate than prime mortgages.
To make more money, banks developed a strategy of "mortgage bundling", which in theory, would reduce the risk if a few of the mortgages weren't being paid. The bundles then were traded back. and forth. According to the WSJ video, these bundles were really like poisoned sausages.
In 2002, the Federal Reserve reduced short term lending rates to 1%, known on Wall Street at easy money. "All of the constraints seemed to go out the window". It was easy for everyone to borrow money and rely on credit cards. This period of easy money went on into 2007. People were qualified for large mortgages for homes that they should not have been allowed to purchase, given their incomes.
Investment banks found that they could rely on large amounts of borrowed money to finance their operations. This resulted in a surge of growth in Wall Street, and a growth in the amount of debt (leverage). New ways of dealing with investments emerged that were complicated to understand. These strategies and deals, on the surface, made Wall Street folks richer than before. The "herd" mentality set in, and the new sophisticated practices, relying on computer modeling to minimize the "risk", became acceptable for the norm.
As the market increased in size, banks came up with even new ways of managing risk. During the late 1990's, JP Morgan developed the concept of credit default swaps, which is insurance on the debt of a company. Once the insurance was purchased, if the company went belly-up, the owner of the insurance would make money. This concept was initially practiced during the 1800's when people laid bets on weather or not a ship would return from sea. People were greedy and sank ships, so friends could collect the insurance.
The same sort of thing happened during the present crisis. Two hedge funds managed by Bear Stearns, a large Wall Street investment company, imploded. Billions of dollars of bonds were sold, and investors demanded to get back cash.
End of Wall Street: Why it Happened (Wall Street Journal, 1/05/09) Chapter Two:
"What was going through the minds of CEOs, corporate boards, fund managers and mortgage lenders as they created hard-to-understand derivatives Warren Buffett once called "weapons of financial mass destruction." "There is plenty of blame to go around. I think in retrospect that lots of people who were doing stupid things." -Alan Murray, WSJ Deputy Managing Editor
"..The regulators did not keep a careful eye on what was happening on Wall Street. Indeed, in some cases, they looked the other way. The regulators were too interested in watching Wall Street succeed in going from rich to riches. -Dave Kansas
"The purpose of a regulator is to make sure that the banks DO have risk controls, and that they are aware of what is going on."- Daniel Hertzberg
"Alan Greenspan... believed that complex derivatives, complex investment instruments, were ultimately good, healthy, and safe for the economy. Warren Buffet, the greatest investor in America, said these were weapons of financial mass destruction...After his term, he was called back to congress to testify in relation to the financial crisis. In that testimony, he conceded that perhaps he had been wrong about derivatives and the need for greater regulation in the financial system." -David Kansas
"...so the things we got wrong were not details. The things we got wrong were major checks and balances and safety valves in the global financial system." -David Wessel, WSJ Economics Editor
"The story of the credit rating agencies is a story of a colossal failure" -Henry Waxman, House Oversight Committee Chairman
"There were huge failures of the ratings agencies, who clearly didn't understand what they were giving triple A ratings to, because suddenly they don't have triple A ratings any more, and that is a huge failure..."
(Banks stopped lending money. The economy basically stopped.) "At some point, there needs to be a longer term solution. We're still in crisis management mode. They haven't even started to figure this thing out, but the entire financial architecture is going to have to be reconsidered as a result of what we've just been through."
End of Wall Street: What Happens Next(Wall Street Journal, 1/05/09) Chapter Three:
"This final chapter of the crisis on Wall Street tells the story of the $700-billion bailout, as seen through a reporter's eyes, and looks at what's ahead for the global economy."
"You have the destruction of the US financial industry. People don't want to say it, but, it's been destroyed."
"...This is one of the reasons why the calamity was so severe, because everyone had the same bets going on at the same time."
"We've come to believe all these things about the institutions in our country, that is supposed to give you a sense of well-being or confidence, but the financial system has failed us. The governmental system that is supposed to regulate, oversee this, direct this financial system utterly failed us. We as individuals took as much money as we could, as fast as we could, in a way that has failed the country."
"For too many years, people borrowed too much, spent too much, lived beyond their means, and the time of reckoning has come, too all of us."
"I think we've been living in a consumer-debt driven era for quite a long time."
The problem? How will Wall Street bankers make money? What jobs will they do?
"They just don't have much work. Debt and stock markets are virtually shut, merger volume is down by 28%, and whole lines of structured finance are closed for good"
Is it impossible for experts to model the current state of the world economy?
For a few insights about the current global economic situation, take a look at the video analysis with Andy Jordan and Tom Lauricella from the Wall Street Journal below.
Are there glimmers of hope in this massive decline of global markets? How can we really know?
WSJ Article -10/25/08: Fresh Tumult as Signs of Recession go Global (Kelly Evans, Joellen Perry,Yumiko Ono and John Lyons) "In rich countries and poor countries alike, markets are plunging, companies are scrambling for credit and cutting their growth plans and consumers are keeping cash in their pockets. The U.S. and some governments in Europe and Asia are spending heavily to stanch the problems in markets and Main Streets globally, but the attempts have not halted the damage."
Economic Sounds and Sightsis my on-line filing cabinet for resources and links related to our current economic crisis. (I am not an economist, and I do not belong to a political party.)In my quest to become a better-informed citizen, I know that I have much to learn. This blog is my way of sharing what I discover with others. I'd like to take this information to the next level, but I can't do this alone.
My vision? A collaborative multimedia, multi-modal interactive time-line might help us to understand the complex, interrelated factors and events more effectively. It would provide an opportunity for the inquisitive to view things from a broad perspective, and also explore things in rich detail. Ideally, the time-line would support multi-touch, multi-user interaction on larger displays and interactive whiteboards.
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