It's the Economy Stupid Wednesday

Why did the credit markets freeze? That is a good question and it goes to a major root of our current fiscal mess.

This American Life recently had another stupendous show this month on what lead to the credit freeze. "Another Frightening Show About the Economy" is broken down into three parts. The first part deals with paper. Paper? Yes the commercial paper market. The second part deals explains what the fuck Credit Default Swaps (CDS) are, how we got them, and why the broke the buck. "Break the buck" you say, and I say, yes, so go listen to it. Part three is about why CDSs aren't regulated. You will better understand what is going on right now that any other explanation I have heard or seen on teevee. They explain everything in terms that non-economists can understand, but not in the childish and occasionally insulting way that has recently appeared on my idiot box.

More on CDSs. Rolling Stone's Matt Taibbi and The National Review's Byron York argued over a few things in a New York magazine online discussion. Taibbi, though I don't always agree with him (or his politics), never suffers fools lightly and on economic issues he takes York out to the woodshed. (Disclaimer: I don't know if everything Taibbi is true, but I know York is off his fucking rocker.)

B.Y.: [O]n the financial meltdown in particular, if you're suggesting that that is a Republican creation, or even more specifically a McCain creation, I think you're on pretty shaky ground. M.T.: You don't think the unregulated CDS market was a major factor in the current crisis? Were you watching when AIG almost went under? Were you watching the Lehman collapse? B.Y.: I think that Fannie Mae and Freddie Mac were also major factors. And I believe that many of the problems in the mortgage area can be attributed to the confluence of Democratic and Republican priorities: the Democrats' desire to give mortgages to people, particularly minorities, who could not afford them, and the Republicans' desire to achieve an "ownership society," in part by giving mortgages to people who could not afford them. Again, I believe that if you are suggesting that the financial crisis is a Republican creation, or even more specifically a McCain creation, I think you're on pretty shaky ground. M.T.: Oh, come on. Tell me you're not ashamed to put this gigantic international financial Krakatoa at the feet of a bunch of poor black people who missed their mortgage payments. The CDS market, this market for credit default swaps that was created in 2000 by Phil Gramm's Commodities Future Modernization Act, this is now a $62 trillion market, up from $900 billion in 2000. That's like five times the size of the holdings in the NYSE. And it's all speculation by Wall Street traders. It's a classic bubble/Ponzi scheme. The effort of people like you to pin this whole thing on minorities, when in fact this whole thing has been caused by greedy traders dealing in unregulated markets, is despicable.

Interesting new focus on Brooksley E. Born, head of the Commodity Futures Trading Commission (CFTC), who screamed in the wilderness in the late 1990s about regulating the derivatives market. Seems she was right and luminaries such as Greenspan, Rubin, and Summers were, how do say this with some tact, looking left for oncoming traffic in London.

The Beige Book was awful reading today. The WSJ, however, found the few bright spots.

Things could be worse, you could own a house in Detroit.


_John

image: "Paper rolls at the Seattle Times plant" from buddyspotz