Saturday, January 05, 2008

You may want to know...

Exactly what the iceberg that has hit our Titanic economy looks like, so here are some excellent visual aids for those who don't know a CDO from tranche*.

And what happens when things go wrong...

But an even better explanation about how simple home loans got so complicated is here.

The easy thing to do after the fact is to rant sanctimoniously how obvious the flaws in this system were. But I seem to remember the housing boom powering our economy, providing jobs and increased standards of living, record tax revenues, and general optimism. That boom was made possible in part by the ability of lenders to access investment funds via novel exotic instruments like CDO's.

Many people made slightly bad decisions, but at the time, they did not seem so. Pres. Hoover did likewise at the beginning of the Great Depression, but not for corrupt or foolish reasons.
Herbert Hoover has been accused of being a do-nothing president who allowed the country to continue to slide into its worst depression ever. Some will grudgingly admit that Hoover did take some action, but that it was too little, too late. But the truth is far more complex. Hoover did intervene after the Stock Market crash, but the acts passed by Congress and signed by Hoover were the worst kind of intervention: they actually exacerbated the problem. The most famous of these interventions was the Smoot-Hawley Tariff Act. Raising tariffs was one of the worst things that could be done. Remember, both free market advocates and Keynesians agree that lowering prices would cure a depression, it's just that the Keynesians believe government intervention is necessary. A tariff does exactly the wrong thing by raising prices. Thus Smoot-Hawley was guaranteed to worsen any depression, not improve it. Other acts passed during Hoover's administration had similar effects of either raising prices or keeping them artificially high when they should have been dropping. Thus, it's not that Hoover was a do-nothing president, it's that he intervened in exactly the wrong way. [More]
Just as economists learned much about money supplies as a result of the Great Depression, we are learning something about the immense wealth of the world economy and the power of ingenuity to deploy it to create even more wealth. To not expect errors like this would be the greater foolishness.

*Of course, alarm bells should have gone off when we started using French words.

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