Wednesday, November 26, 2008

Rethink S'pore economic growth model, says don

The Straits Times (Singapore)

October 25, 2008 Saturday

Rethink S'pore economic growth model, says don

SINGAPORE should relook its economic growth model in an era of tighter government regulation and multilateral oversight that could evolve in the aftermath of the global financial crisis.

Professor Linda Lim from the Ross School of Business, University of Michigan, told the Singapore Economic Policy Conference yesterday that the growth model that has served Singapore may be out of place in a changed environment.

Prof Lim said the growth strategy - the 'EDB (Economic Development Board) model of give them a tax break and they will come' - has both tried to do too much and achieved too little in terms of delivering high and secure incomes and living standards.

'We've 40 years of savings and repressed consumption, so do we throw it at UBS and Citigroup and lose 60 per cent of the value, or do we use it for ourselves?' said Prof Lim, a Singaporean and a frequent contributor to The Straits Times.

Instead of letting the state make big bets on a few major, capital-intensive, projects dependent on foreign capital, labour and skills in which they have no intrinsic comparative advantage, it might be worthwhile to consider releasing capital and talent to local entrepreneurs, she said.

These people can innovate and create value in smaller but nimbler locally rooted enterprises, she added.

Prof Lim said that a national government, for example, should not use domestic savings to create employment disproportionately for foreigners simply in order to claim success in establishing a particular sector of its choosing that may not be validated by underlying market forces.

Singapore, she said, can become a 'global model' for environmentally-friendly buildings and lifestyle.

Other clusters of 'regionally integrated' economic activities might be in the creative fields of traditional and modern Asian and Western arts and culture.

Another cluster is social and health services in, for example, developing policies, systems, products and services for an ageing population, Prof Lim said.

'Don't think of yourself as an outpost of a declining empire, or a second Shanghai or a second Boston. Why not be a first Singapore?' she told the audience of economists and academics.


Copyright 2008 Singapore Press Holdings Limited All Rights Reserved

Struggle for Obama to fulfil economic vows

The Straits Times (Singapore)
November 18, 2008 Tuesday

Struggle for Obama to fulfil economic vows
BYLINE: Linda Lim

WE ARE entering an era when the adage 'all politics is local' will give way to the truth that 'all economics is global'. That transition is not going to be a comfortable one for Americans.

Specifically, they will find that paying for the profligacy of the past, and meeting the obligations of the future, will require a loss of political autonomy and the surrender of many cherished ideologies of both the left and the right - from tax cuts to trade protectionism.

In international economics, the main reason the United States is 'not just another country' is its ability to borrow from foreigners in its own currency. This is because the US dollar has been a reserve currency since World War II.

When countries like Brazil or Indonesia borrow from abroad, they borrow in foreign currencies, most commonly the US dollar. If they run persistent fiscal and current account deficits, their currencies will depreciate and the burden of their foreign debt will increase.

That does not happen to the US, which can make foreigners bear the currency risk of lending to it. If the dollar falls as a result of persistent US fiscal and current account deficits, it is foreign creditors, not Americans, who suffer, since Americans can pay their foreign debts in their own currency.

One reason the dollar depreciated for more than five years prior to this July is that foreigners became less and less willing to hold the currency. Once the current unwinding of dollar carry trades, repatriation of foreign capital to shore up domestic balance sheets and panic-driven 'flight to security' - all of which have temporarily strengthened the greenback - end, we will be back in weak-dollar territory.

A number of other factors make it unlikely that foreigners will treat the US as gently as they have in the past: A deep and long US recession will cause a loss of confidence in its financial markets; and those markets, as a result of recent excesses, are likely to enter a period of regulatory stranglehold that will crimp investment returns. Sovereign wealth funds that took a beating by prematurely buying shares in US financial institutions will also become more cautious.

China's government, for one, has been excoriated by bloggers at home for devoting the country's hard-earned savings to loss-incurring US investments. It will be politically difficult for Beijing to continue bailing out the US, especially if the incoming administration and Congress accuse it of 'currency manipulation'.

In addition, the East Asian economies with surpluses - China, Hong Kong, Japan, Singapore and South Korea - have rapidly-ageing populations and will in all probability reduce their savings rates.

For these and other reasons, US President-elect Barack Obama will not be able to fulfil his economic promises to the American people. Economists agree that immediate fiscal and mone

Page 2

tary stimulus will be required to fight the recession. But beyond that, Mr Obama's longer- term promises will be undeliverable.

The Obama administration will inherit a large budget deficit, greatly increased by all the financial crisis bailouts. The deficit for fiscal year 2008 will amount to at least US $800 billion (S $1.2 trillion) and next year's deficit may hit US $1.4 trillion. Besides the bailouts, government spending typically increases in a recession, as unemployment payments increase while tax revenues shrink.

There is no way that Mr Obama can raise enough tax revenues from the top 5 per cent of income-earners to cover all that he has promised to spend on job-creation, R&D, infrastructure, health care and education, while at the same time follow through with a so-called middle-income tax cut.

Raising taxes on corporations is also a non-starter in a recession, especially since US corporate taxes are already the second highest in the developed world (after Japan).

Mr Obama cannot borrow more from Americans. They will have little to lend from their falling incomes and declining wealth. And he probably will not be able to borrow more from foreigners, who have been funding much of the last quarter-century's budget deficits and high private consumption.

The last remaining way that the US government can pay for its expenditure is to print money, just like Latin American 'banana republics' used to do. The downside is that printing money will create inflation and further devalue the dollar, which in turn will discourage foreign investments. During a severe recession, when deflation is likely, you don't have to worry about inflation, but once the global economy recovers, it will become a serious limitation.

In a sharp reversal from the Bush administration's unilateralism, multilateral policy coordination - whether in trade, monetary policy, international investment, foreign policy or environmental policy - will constrain and define the Obama administration.

The US will no longer be able to 'go it alone'. It is in for a major transition from being 'the world's sole superpower' to being 'just another country', even if it remains primus inter pares. What does this mean for that mythical creature, the 'ordinary American'?

First, wars of choice - such as in Iraq - will no longer be possible. Not only did Iraq contribute to busting the US budget, but it also undermined US national security and moral authority.

Second, two decades of tax cuts and anti-government ideology, propagated by Republicans, are over. Even after the financial crisis eases, foreign borrowing will remain difficult, local borrowing is unlikely to replace it, and there will be more government regulation of markets.

Third, for households, the days of getting into debt to live beyond their means are over. Credit will become more costly because of increased regulation, reduced foreign borrowing, a massive wave of imminent baby-boomer retirements as well as more competition with government spending for scarcer domestic and foreign savings. Excess debt and consumption will give way to thrift, downsizing and energy conservation.

Fourth, attracting foreign direct investment - to help cover the budget deficit, rescue bankrupt corporations, lift depressed asset prices, fund new private- sector technological innovations - will require foreign-friendly policies. No more CNOOC-Unocal and Dubai Ports World fiascos.

It will be a long time - beyond his second term, if he wins one - before Mr Obama's many proposed spending and tax initiatives will bear fruit.

The writer, a Singaporean, is professor of strategy at the Ross School of Business, University of Michigan. Economic Watch is a weekly column rotated among Senior Writer Tion Kwa and guest columnists.

Copyright 2008 Singapore Press Holdings Limited All Rights Reserved

Is Singapore trying to excel in too many areas?

Business Times - 25 Oct 2008

Is Singapore trying to excel in too many areas?

WHY aspire to be a second Boston or second London and not a first-rate Singapore?

It's time - particularly during a global crisis - for Singapore to rethink its economic model and employ niche targeting right where it has unique strengths to become a world leader, rather than stay a follower in various sectors, an economist suggests.

While highly successful so far, Singapore's growth model - built on wooing multinationals to drive key sectors here - may not be sustainable in the changing environment, says Linda Lim, professor of strategy at the University of Michigan's Ross School of Business and director of its Center for South-east Asian Studies.

A Singaporean academic who has been in the US for some four decades, she was a speaker at the Singapore Economic Policy Conference yesterday.

In her view, the Singapore growth model has both tried to do too much - going against what theories such as comparative advantage and diminishing returns propose - and achieved too little in terms of delivering returns for Singaporeans relative to foreigners and foreign firms.

'Singapore cannot be internationally competitive and a world leader in semiconductors, life sciences, healthcare, education, financial services, creative industries and casino tourism, all at the same time,' she says in her paper for the conference.

Speaking to BT, Prof Lim said: 'Of course you can make an argument for doing 10 sectors instead of three; you say diversify. But if we do all, everyone becomes uncompetitive; all face rising costs as they compete with each other for scarce land and talent.'

Outlining her alternative strategic vision, she says that the starting point is to take stock of 'what you have, including your geographic location'.

Then look for a strategy of differentiation: 'What do you have, what can you do that nobody else can do? You want to develop a blockbuster drug? Any number of places in the world can do it. You have to look at what is specific about you.

' Perhaps it may be that if we want to have financial services, then we cannot have life sciences, integrated resorts. You have to make a choice, you cannot have everything. You choose the thing you can do better than anybody else.'

And one indicator of a 'market advantage', she says, is whether a country needs to provide 'inducements, or investment incentives, otherwise known as subsidies' to attract talent.

'If people are naturally coming here, that's fine.'

And not least, 'let the private sector do it', she says, suggesting that capital and talent be released to local entrepreneurs, to be allocated according to market forces. When and if private enterprise fails, it will take only small parts, rather than big chunks, of the economy down with it, she argues.

Singapore is particularly well-placed for a whole cluster of economic activities 'from finance to forestry and fisheries', Prof Lim says.

'Where are we? We're next to the biggest forests in the world. Why not be a carbon finance centre? People are doing this in San Francisco! They are doing Indonesian . . . avoiding deforestation . . . out of San Francisco! Why can't we do it from here?

'Why do we want to be a second Boston or second London? We want to be a first Singapore. There are already second, third and fourth Singapores all over the world - people are copying our strategy.'

Singapore could also be a centre of expertise in creative fields such as traditional and modern Asian arts and culture. Already, Singapore is the best place in the world to do South-east Asian studies, Prof Lim says.

Economic growth here has focussed on quantitative targets, but it may be time to look at the qualitative aspects such as its 'purpose' and nature.

'I'm saying, look at net value creation for citizens. 'People for growth' - growth as an end in itself - is not the same as 'growth for people', growth as a means toward greater welfare for people.'

Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.

Thursday, November 6, 2008

Thoughts on the global financial tsunami

The following video link was forwarded by an ACSian from a google video titled Global Imbalance - An Imminent Dollar Crisis

Tuesday, November 4, 2008

Worse than the Great Depression

Forwarded by an ACSian cohort with the following comment:
there are a few advocates of worse case scenarios out's one of them...
From the following url:

Tuesday, October 28, 2008

The Credit Crunch

A trader: "This is worse than a divorce. I've lost half my net worth and I still have a wife."

President Bush said clients shouldn't be concerned by all these bank closings. If the bank is closed, you just use the ATM, he said.

George Bush said that he is saddened to hear about the demise of Lehman brothers His thoughts at this time go out to their mother as losing one son is hard but losing two is a tragedy.

The problem with investment bank balance sheets is that on the left side nothing is right and on the right side nothing is left.

There are 30 billion prime numbers below 700 billion. The rest are all subprime.

How do you define optimism? A banker who irons 5 shirts on a Sunday.

What do you call 12 investment bankers at the bottom of the ocean? A good start.

Why are all MBAs going back to school? To ask for their money back.

For Geography students: What's the capital of Iceland? Answer: About Three Pounds Fifty...

If you want to gamble, go to Las Vegas. If you want to trade in derivatives, God bless you.

Whats the difference between a guy who just lost everything in Vegas and an investment banker? A tie.

Whats the difference between a bond and a bond trader? A bond matures.

Lehman have changed their recommendation on Lehman from hold to sell.

Forty years ago I sold fifty shares of my company stock and had enough money to purchase a brand-new 1967 Ford pickup. Last week, I checked it out, and if I sold another fifty shares, Id have enough money to buy a 1967 Ford pickup. So, the market has stabilized.

The above was forwarded by an ACSian cohort.

Wednesday, October 22, 2008

Bar Stool Economics 2: How the Taxes REALLY Works

The following is an alternative scenario of taxes on the lifes of our 10 beer drinking comrades as described in full on the web.

How Taxes Really Work
To start with . . . .

In the US and throughout most of the rest of the world, the tenth man would have paid off a politician for $10 to get a beer subsidy of $30 per night(to create jobs for the bartender). Of this $30, $10 of course would have covered the lobbying expense, $10 would go in his own pocket, $1 would go to the bartender to keep his mouth shut, and $9 would go to the bar.

The Bar would give him a kickback of $10 each night for bringing in his 9 buddies to make them into alcoholics, repeat customers for life.

The Bar would then raise their prices to $130 citing inflation and higher taxes.

The tenth richest man would then secure his finances in a Dutch Holding Company managed by a trust in Ireland which invests in Chase and Bank of America. He would then explain to his buddies that he is as poor as the rest of them and can’t afford to pay himself as he cries into his beer that night citing his latest financial report which shows him to be broke on paper so that he doesn’t have to pay taxes in the United States ever again.

Citing his former generosity, the other nine men would agree that the tenth man can now pay nothing like the 4 poorest.

The others would then be faced with an adjusted amount of

The fifth would pay $3.
The sixth would pay $10.
The seventh would pay $22.
The eighth would pay $38.
The ninth would pay $57.
Now the group would recognize that this is not fair and so would lobby the Government for an Earned Drinking Credit for the Poorest men. The government would oblige and give the four poorest men $2 each, but they would tax the 5th - 9th men $2 each as well.

4 men receive a total of $8 and 5 men pay $10.
The adjusted amounts would then look like this for all 10

First Receives $2 pays $2 Net 0
Second Receives $2 pays $2 Net 0
Third Receives $2 pays $2 Net 0
Fourth Receives $2 pays $2 Net 0
Fifth Pay $1 to bar pays $2 to tax net paid $3
Sixth Pay $8 to bar; pays $2 to tax net paid $10
Seventh Pay $20 to bar; pays $2 to tax net paid $22
Eighth Pay $36 to bar pays $2 to tax net paid $38
Ninth Pay $55 to bar; pays $2 to tax net paid $57
Tenth Man: Tax Credit Received: $30 ;
Pays $10 to politician;
$1 to bartender;
Receives $10 from Bar
Net RECEIVED $29 per night and free beer
Of course this can not go on forever as the sixth, seventh, eighth and ninth men can’t afford to pay those rates forever. So they start paying with their credit cards held by Bank of America and Chase.

The tenth man would start demanding a higher Return on Investment from his investment managers, who would be hearing similar requests from all of their other investors. They would then expand their holdings into mortgaged back securities where a good deal more profit could be made.

Meanwhile the Fifth through ninth men are racking up debt on their credit cards from drinking every night, their health care costs are increasing as their liver fails, and they are also spending more on gasoline as they drink and drive as they can no longer afford to cab it.

Ultimately, they end up refinancing their credit cards into their house where they have equity. The mortgage broker promises them a 4.9% interest rate on the refinance which sounds good as their credit card interest rate is up to 21%. The broker promises them that they will not have to verify their income, provide W2’s nor copies of their tax paper work.

Their mortgage broker doesn’t tell them, but lies about the value of their house in order to refinance their credit and help them avoid paying private mortgage insurance. At their current income levels, and without verifying their income, their mortgage would be classified as Sub Prime and the interest rate would be 10.9%

The mortgage officer lies about their income levels as well to boost the internal credit scoring mechanism and get them financed, not at 4.9% but 5.9%, which is better than 10.9% and happens to pay the mortgage broker a higher commission than a loan at 4.9% that is not sub prime.

The mortgage broker also promises them a payment of $900 per month, but fails to mention the balloon payment of $50,000 in the 5th year and doesn’t mention the adjustable rates in year 3.

The men separately show up with a hangover and sun glasses on the date of their close for their new mortgages. They trust their broker and do not read the paperwork in detail flipping and signing almost as fast as they could raise a beer bottle to their lips.

The loan closes, the mortgage broker gets a fat commission, the bank securitizes the mortgages by selling them to an Irish Hedge Fund and pockets collectively a billion dollars in profits that year.

The hedge fund holds the investment for a year, shows a 35% gain on paper and starts selling shares to retirement funds and 401ks in the US that the Sixth through 9th men just happen to have the rest of their life savings sitting in.

The tenth man sees the writing on the wall, literally magic marker on a stall in the restroom of the bar.

“The end is Nigh”

He pulls his money out of the Irish Hedge fund invested in real estate and invests in Gold at $600 a troy ounce.

Meanwhile, he lobbies congress to tighten bankruptcy laws for credit cards which he still has a sizable investment in. Congress tightens bankruptcy laws and makes it impossible to absolve credit card debt, forcing people into chapter 13 where they must pay off the debt within 3 years or go to debtors prison where they can work it off in 7 years.

Gas prices are still going up so the President ignores a minor terrorist threat, allows the terrorists to blow up a major building and then goes to war with the terrorists home country where there is no oil, and simultaneously with a country that sits on 10% of the worlds oil reserves that has a decimated military infrastructure.

Oil prices shoot through the roof with Gold following close behind. The President whose family comes from oil barons make a fortune and become famous at their skull and bones country club outside of Yale.

Meanwhile our famous 10 guys, start paying even more money at the pump. The first 4 guys end up taking second jobs working at Wal-Mart and have to give up drinking at the bar so that they can try and beat their teenage kids out of a promotion.

The fifth and sixth guys get foreclosed upon. They were forced to stop paying their mortgage payments so that they could pay their mandatory credit card payments as required by the new bankruptcy law.

The seventh, eighth and ninth men all previously traded up their homes for McMansions that they can not afford with interest only payments of $2300 a month. When foreclosures start happening their plans on flipping their McMansions and cashing in on the equity slips through their fingers.

To make matters worse seven and eight get laid off from the companies they work for when their jobs get outsourced to China. The ninth man keeps his job at a law firm, but fails to notice that his 401k fund is slipping and has lost 10% in the last year. Things are looking up as his law firm seems on the edge of landing a big contract with Merrill Lynch.

Then the real estate crash and sub prime mortgage scandal erupt. Banks start dropping like flies to be saved not by the cash strapped government that can barely afford the war for oil any longer, but by China. Oil and Gold soar, Gold hits $900 a troy ounce and Oil hits $130 a barrel (about the same amount for 10 rounds of beer prior to the crash). Beer prices hold steady for the first few months, but then start to edge up as gas prices for delivery creep into the bar owners expenses.

Then the first four men one night remember their favorite bar. They sneak around back around 4:30 am and steal 50 empty kegs that just happen to be made of pure aluminum. Those kegs are now worth about half the value of a keg that is full in scrap metal prices or about $80.

They are not stupid and don’t want to get caught turning the kegs in at the dump where the police are already looking for keg thieves. So they head out to the closed down manufacturing plant where they used to work. They start a big fire, and melt down the aluminum into big messy aluminum splashes on the cement.

They turn in the aluminum for cash and get caught up on their back alimony and child support before heading back to work at Wal-mart where they now work for their teen age kids that beat them out for that promotion earlier in the month because their job skills weren’t as good as recent high school graduates. They then begin dreaming of new ways to find aluminum alimony allowances.

Meanwhile, the banks and mortgage companies lobby congress spending about $10,000 a head in an election year to bail out the economy. Congress provides the major banks with government backed loans to refinance the bad sub prime loans so that the government can personally guarantee those bad loans. They also put $100 billion of actual cash into the hands of Americans hoping to stimulate the economy.

Americans however, are all in debt up to their eye balls and use the extra $1200 they receive to make 2-3 credit card payments. They take the $300 for each kid and buy groceries for the month and then they start worrying about next month.

The banks get away free as they have Chinese financing now and no bad loans as they have refinanced them over to the US Government. The US government had to print more money to pay for all of these actions and so Gold goes up to $1500 a troy ounce.

The tenth man is now worth Billions and moves to Costa Rica to retire taking the new trophy wife that used to be the bartenders girl friend with him.

The first four men end up going to county prison for 3 months for stealing aluminum dog crap receptacles after running out of kegs to steal.

The fifth and sixth men end up living in an apartment and then homeless after they lose their jobs at Wal-Mart.

The seventh and eighth men whom we previously left hanging in our story after they lost their jobs and ability to pay for their homes, end up losing their homes, and their kids. They and their spouses are each convicted of mortgage fraud by the FBI in a major sting operation after it is revealed that they lied on their mortgage applications. Their mortgage brokers who actually did the paper work cop a plea agreement in exchange for immunity with the Feds and rat out each of their unsuspecting customers.

The ninth man ends up losing his entire retirement fund which took a big hit as the dollar rapidly plummeted into free fall. He ends up refinancing his own house under a government backed loan for $650,000. Unfortunately, a tornado comes through that winter in a freak coincidence and levels the home. FEMA promises to provide assistance but never shows up and the ninth man freezes to death attempting to salvage the shreds of his belongings. His home insurance policy refuses to pay as they claim that his house was over valued and then they prove it with comparables studies from his own mortgage brokers database.

The tenth man ends up dumping his new bride a year later, moving back to the states a year after that when the US appears to have hit rock bottom and he leads up a Chinese real estate investment initiative in the states. He makes another $10 billion in ten years, but is then executed in Beijing for espionage.

Meanwhile, the bar tender goes on to win American Idol and sleep with Paula Abdul. They are now blissfully happy, doped up on anti-psychotics, and the biggest two idiots the world has ever seen.

Posted: Monday, February 4th, 2008 at 4:43 pm under: Viral Conspiracy Theory, Viral Emails, Viral Story by brettbum.

Bar Stool Economics refuted.

ACSian High Finance Comments: Our Tax System Explained: Bar Stool Economics

On researching the internet, we find that David R. Kamerschen, a well know Economics professor has refuted the assertion that he wrote the story. Here is the information from a web page of his. Note the refutation in the first line after his picture

Our Tax System Explained: Bar Stool Economics

The following was forwarded by email by a friend of ACSian-blogger:

Our Tax System Explained: Bar Stool Economics

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100.

If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that's what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. 'Since you are all such good customers,' he said, 'I'm going to reduce the cost of your daily beer by $20.' Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free.

But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?'

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer.

So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

'I only got a dollar out of the $20,'declared the sixth man. He pointed to the tenth man,' but he got $10!'

'Yeah, that's right,' exclaimed the fifth man. 'I only saved a dollar, too.

It's unfair that he got ten times more than I got' 'That's true!!' shouted the seventh man. 'Why should he get $10 back when I got only two? The wealthy get all the breaks!'

'Wait a minute,' yelled the first four men in unison. 'We didn't get anything at all. The system exploits the poor!'

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, ladies and gentlemen, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.
Professor of Economics
University of Georgia

Tuesday, October 21, 2008

el blog de la sourdough: Forrest Gump Explains Mortgage Backed Securities

This item was forwarded by an ACSian; as far as can be seen, the earliest version was published October 9, 2008 at the following
el blog de la sourdough: Forrest Gump Explains Mortgage Backed Securities:

Mortgage Backed Securities are like boxes of chocolates.
Criminals on Wall Street stole a few chocolates from the boxes and replaced them with turds.
Their criminal buddies at Standard & Poor rated these boxes AAA Investment Grade chocolates. These boxes were then sold all over the world to investors.
Eventually somebody bites into a turd and discovers the crime.
Suddenly nobody trusts American chocolates anymore worldwide.
Hank Paulson now wants the American taxpayers to buy up and hold all these boxes of turd-infested chocolates for $700 billion dollars until the market for turds returns to normal.
Meanwhile, Hank's buddies, the Wall Street criminals who stole all the good chocolates are not being investigated, arrested, or indicted.
Mama always said: 'Sniff the chocolates first Forrest'.

Monday, October 20, 2008

Credit, credibility and political creed - by Linda Lim

Credit, credibility and political creed
Linda Lim, For The Straits Times

14 October 2008
Straits Times
(c) 2008 Singapore Press Holdings Limited
THE United States and European governments have announced a bewildering, and still incomplete, array of policies aimed at stabilising financial markets.

These include: interest rate cuts; massive and novel liquidity injections into financial markets; bailouts and forced mergers of failing financial institutions; expanded guarantees of bank and money-market deposits; liberalised state lending facilities for banks; government purchases of financial institutions' 'toxic assets'; and governments taking equity stakes in private sector banks, amounting to partial or complete nationalisation of banking systems. These sweeping and unprecedented actions have not yet worked in persuading banks to lend to each other.

There are many reasons for this. To begin with, the rescue measures occurred in piecemeal and sequential fashion, creating an impression of trial and error. Rushed out in a hurry, some proposals were insufficiently detailed and specific to convince cynics that they would work. And some - like the temporary ban on short-selling, and perhaps the failure to prevent the Lehman bankruptcy - may in retrospect prove to have been misguided. In the US, the delay in approving Treasury Secretary Henry Paulson's US$700 billion (S$1 trillion) bailout package, and in all countries, the appearance of a lack of decisive leadership, undermined confidence.

Until the weekend, coordinated action among governments was also lacking despite the increasingly global nature of the crisis. Coordination is necessary in order for individual national policies not to 'beggar my neighbour' and thus worsen the overall situation. For example, if one country guarantees all bank deposits whereas others do not, this could lead to capital flowing out of the latter countries' already cash-starved banking systems.

Already, emerging economies with otherwise healthy finances, like Brazil and South Korea, have suffered massive capital outflows and currency devaluations as developed-country financial institutions repatriate capital from small markets overseas to shore up their deteriorating balance sheets at home. This lack of international coordination is the result of a leadership vacuum in global financial markets. No multilateral monetary institution currently exists to coordinate policy for financial crises in developed countries.

Also, the US is particularly unable to exercise world leadership at this time. The deeply unpopular lame-duck President George W. Bush's previous unilateralist foreign policy severely damaged America's credibility in the world community, while his domestic policy of fiscal and monetary laxity and aggressive deregulation contributed to the current financial mess. It seems that every time Mr Bush addresses the nation and the world, the market downturn accelerates. Though a Harvard MBA, he, like Mr Paulson, seems unable to explain what is happening to the general public. This is naturally taken by many to reflect a lack of understanding and loss of control.

On top of this, a contentious US presidential election season is entering its tense final weeks, with the Republican ticket in particular unable to convince the American people, let alone a nervously watching world, that its candidates understand the crisis. In addition, their jingoism - as well as hatred directed at the
Democratic presidential candidate Barack Obama, whipped up by the otherwise inarticulate Governor Sarah Palin - have already drawn sinister parallels with the 1930s.

The irony is that virtually all economists agree that the way out of this mess requires more and not less government intervention, regulation and even ownership of financial institutions, at least for the short- to medium-term. Many right-wing Republican politicians have condemned this as 'socialism'. Retreat to 'America-first' parochialism and populism is woefully inappropriate at a time when global cooperation and global solutions are needed, including continued US dependence on foreign capital inflows.

The Democratic ticket is less scary, but still needs to watch its protectionist promises to the increasingly anti-globalisation working class white voters whose support it needs to win the election. Beyond the need for liquidity and fiscal and monetary stimulus, the Great Depression taught us that trade protectionism and currency manipulation did indeed 'beggar my neighbour' and myself as well.

Given the anti-business rhetoric of the campaigns on both sides, uncertainty about the likely economic policies of the next US administration and Congress is deterring domestic and foreign investors' re-entry into financial markets, a situation that is likely to last at least till the next administration's policies are known.
Fear and panic are understandable in financial crises. But their manipulation for bad policy recommendations, ideological advantage and electoral gain, is not. Truly, the stakes in the US presidential election are very high, for America and for the world, as financial creditworthiness and political credibility increasingly, and perhaps dangerously, overlap.

The writer, a Singaporean, is Professor of Strategy, Ross School of Business, University of Michigan.

Truly, the stakes in the US presidential election are very high, for America and for the world, as financial creditworthiness and political credibility increasingly, and perhaps dangerously, overlap.

Document STIMES0020081014e4ae0002d

New era of caution and prudence?

The Straits Times (Singapore)
October 17, 2008 Friday
New era of caution and prudence?
BYLINE: Linda Lim, For The Straits Times

AS GLOBAL credit markets unfreeze with the help of more and more government involvement in bank recapitalisation, extended loan guarantees and the like, what lies ahead for the United States and world economy?

The recession in the US will be deeper, and recovery slower, than anticipated just a month ago. Heavily indebted households and a depressed housing sector laden with excess capacity will retard the recovery of consumer spending.

Past US recessions were usually short- lived and shallow because consumer spending was almost always maintained. Weak consumer spending will mean a harder climb out of high unemployment and a slower revival of business investment.

The US government, laden with accumulated and new debt obligations, is unlikely to provide more than short-term fiscal stimulus next year. Whoever is elected the next president will have to shelve most of his spending and tax cut proposals. The evidence of the post-Reagan years has unequivocally shown that far from 'paying for themselves' by stimulating growth, tax cuts result in massive budget deficits. These must eventually be paid for by reduced consumption (higher savings), particularly if the deficits were spent on current consumption, rather than on longer-term productivity- enhancing investments in education, health, infrastructure and research and development.

Significantly, neither presidential candidate has talked about the severe benefit cuts and tax increases that would be required to save Social Security and Medicare for the large number of people from the baby-boom generation about to retire. This factor, together with the heightened risk aversion and increased regulatory costs arising from the financial crisis, will exert a drag on future US economic growth. Capital is likely to become more costly for businesses, and returns more constrained, though there is likely to be some relief from lower commodity prices in response to slower growth.

Globalisation could help mitigate the US downturn. But recession or slow growth in other major markets means exports cannot immediately take up much of the slack in domestic demand, though underlying dollar weakness should return once the current panic-driven flight to the safety of US treasuries recedes. In the longer term, emerging market growth, particularly in China, should recover strongly.

Foreign capital inflow - particularly direct investment attracted by depressed asset values - could help alleviate capital constraints, while stabilising the dollar, rescuing bankrupt companies and creating employment. The American distaste for inward foreign investments is likely to recede with the crisis.

But the problem of international macroeconomic imbalances still needs to be resolved. As the US current account deficit shrinks, so must the surpluses of other countries. Japan, China and other economies that have managed their currencies to maintain large export surpluses will have to rebalance their domestic economies. In Japan's case, this will partly happen naturally, over time, as its ageing population draws down its savings.

Chinese officials already recognise the social, political and economic logic of increasing domestic consumption which, at only 40 per cent of GDP, is lower than in nearly all other economies. This will require continued appreciation of China's currency, as well as reform of its financial sector, so that domestic savings can be more efficiently transformed into productive domestic investments. Unfortunately, slowing growth at home, and recession in the US and Europe, will make currency appreciation and reduced dependence on exports more painful than it otherwise would have been.

In this context, it is unfortunate that the implosion of Western financial systems, hitherto upheld as aspirational models, has reduced their credibility. The motivation and political will to continue with market-oriented reforms to free up low-return savings for more productive use in societies like China's is likely to be dampened.

New multilateral policy coordination mechanisms are likely to emerge. Already, pre-crisis, the emerging academic consensus was that free capital flows across borders may on balance not be good, especially for small economies. Now it is likely that governments around the world will become more cautious about opening up their capital accounts, at least to short-term flows.

It has been suggested that 'finance will become more local' since it is easier to assess and manage risk locally than globally. Even in the US, most small local banks did not over-extend themselves with risky mortgages, unlike the more 'sophisticated' regional, national and global banks.

What about international trade, which has played a distinctly understated role in the US presidential campaign? Recent polls show that only a bare majority of Americans supports globalisation - a sharp decline from just a few years ago, and much lower than the proportions in other developed countries. The main concerns of free-trade opponents are not with trade per se, but rather job loss, income stagnation and increasing inequality in the US. These are inaccurately attributed to trade liberalisation, import competition and outsourcing rather than to technological and business process changes, and regressive fiscal policies.

The income stagnation or decline experienced by over 90 per cent of American workers over the past eight years has been blamed for not just rising protectionism but also for the current financial crisis. As income increases eluded them, Americans sought to maintain and increase their standard of living through debt. This was partly financed by foreign creditors, and partly by domestic financial institutions that offered innovative financial instruments that purportedly diversified risk, and thus, for a time, lowered the cost of borrowing.

It is not entirely a bad thing that this era has ended.

The writer, a Singaporean, is professor of strategy at the Ross School of Business, University of Michigan.

Copyright 2008 Singapore Press Holdings Limited
All Rights Reserved

Reversal of Fortune

Reversal of fortune
By Matt Miller

Published October 10, 2008 at 12:44 PM

A financial meltdown scorched Asian economies a decade ago. Easy money, bad loans, real estate bubbles, poor savings rates, overpriced currencies and inadequate current-account reserves ignited a devastating crisis of confidence.

Sound familiar? What happened next doesn't.

Thailand, Indonesia, South Korea and others sought economic lifelines. International Monetary Fund bureaucrats, Washington regulators, even many Wall Street bankers demanded a kind of Faustian bargain in return for bailout loans: Let economies contract and banks fail. Don't print more money. Don't descend into deeper deficits. Don't impede trade flows. Don't bail out. Privatize. Don't hinder acquisitions of assets by foreign bargain hunters. Above all, let the markets sort themselves out.

Now comes the reversal of fortune. The know-it-all doctor has become the wounded patient, unable or unwilling to submit to the same medicine and rehabilitation it once prescribed. Over the past decade, the patient has become healthy, strong and fiscally responsible.

Role reversal is tempting in various Asian capitals these days, but it hasn't happened for good reason. America's banking collapse has weakened capital markets around the globe. Without overstating the obvious, the crisis is global.

"Is there resentment? So far, no," says Linda Lim, a professor at the University of Michigan's Ross School of Business and a Singapore native. In the current crisis, "Americans are much more focused on greed and lack of regulation. Asians are more concerned with the impact on themselves, that their major market is going into a recession."

Longer term, however, Asian economic planners, regulators and investors will almost certainly see the current financial wreckage as an inflection point. Everything from monetary policy to investment flows could be reassessed and affected. "The credibility of the U.S. model as a guide for much of Asia is lost," says Brad Setser, fellow at the Council on Foreign Relations' Greenberg Center for Geoeconomic Studies. "Fewer will emulate the U.S. model in the near future."

"Any kind of regulatory proposal of the U.S. government is going to get laughed right out of the room," adds Marcus Noland, senior fellow at the Peterson Institute for International Economics in Washington. "If the [United States Trade Representative] or Treasury wants to change, say, an insurance regulation ... or any micro-level regulation to the advantage of a U.S. service provider, it will be tough sledding."

While some now worry that liberal macroeconomic policies in Asia could suffer, changes will more likely reflect less ideological decisions than pragmatic ones. But the current crisis could become an excuse for moderating or peeling back everything from takeover regulations to exotic financial instruments. Leveraged buyouts will be viewed more critically. Asia's own appetite forU.S. debt is bound to get a rethink. Perhaps most importantly for the global system, over time, the enormous trade surplus ofChina and other Asian nations will be recycled less into U.S. financials and more into Europe. That process began before the crisis and reflects the growing importance to China and the rest of Asia of the European market. No one is predicting a sudden, wholesale selloff of U.S. financial assets, which would cripple Asian economies as much as America's. A gradual diminution, however, will continue.

"From Asia's point of view, Europe displaced the U.S. as its main export market. China's surplus with the EU is now larger than with the U.S.," says Setser. "That shift will have a big impact."

Right now, Asian central banks have their hands full trying to contain the current mess. Unlike in the U.S. or Europe, no major Asian financial institution has needed a rescue package -- at least so far. However, throughout Asia, credit has tightened and the liquidity tap is being ratcheted down. Growing concerns that a deep U.S. recession could infect the rest of the world has caused local banks and businesses to dump local currencies. Stock markets throughout Asia are in freefall. Asian equities have already suffered because foreign investors have been pulling out. After years of foreign net buying of Asian equities, Fitch Ratings estimated foreign net selling totaled $13.7 billion during the first half of this year. That pullout will continue.

"Risk aversion" is the mantra of the day.

To counter, central banks from Taiwan to Indonesia are buying local currencies and cutting interest rates. Japan's central bank pumped $200 billion into the country's money markets in September. Expect more to follow. The latest action came Oct. 8, when China's central bank cut interest rates by 0.27 percentage points.

According to James Seward, who works on financial-sector issues related to Asia for the World Bank, a number of Asian governments have considered in recent months the type of stock market stabilization fund that Hong Kong established during the Asian crisis. That hasn't happened yet. However, the Chinese government has directly intervened in the stock market. After markets plummeted in the week of the Lehman Brothers Holdings Inc. bankruptcy, Merrill Lynch & Co.'s sale to Bank of America Corp. and the American International Group Inc. bailout, Beijing ordered China Investment Corp., the country's sovereign wealth fund, to shore up the country's three largest publicly traded, but state-owned, banks. CIC bought 2 million shares in each of the banks, whose share prices had been tumbling even before last month's crisis struck.

Because they are state-controlled and have relatively conservative capital requirements, no one is talking about the need for a major government bailout. But the Chinese banks aren't immune, either. Like their European counterparts, they fell prey to the siren call of U.S. asset-backed securities linked to subprime loans. According to a January Congressional Research Service study, the largest of the three, Bank of China Ltd., reported $15 billion in U.S. asset-backed securities in mid-2006. Bank of China held $7.5 billion in subprime mortgage-backed securities in September 2007, the study said.

Even India, which was largely insulated from last decade's Asian crisis, has witnessed steep equities selloffs and panicked bank withdrawals. Immediately after the Lehman bankruptcy, the Reserve Bank of India said it would pump money into the system if necessary. Two weeks later, the RBI announced it would provide ICICI Bank Ltd. with cash after the beginnings of a run on India's largest private bank. Last week, the central bank said it would relax cash-reserve ratios for commercial banks.

With few exceptions, Asian economic planners maintain their countries are fundamentally strong. Thailand, for example, triggered the financial crisis in 1997 with a run on its currency, which the government unsuccessfully countered by spending its precious reserves on propping up the baht. Now the baht is strong. Thailand's nonperforming loans stood at a scant 3% in August, according to the country's central bank governor, Tarisa Watanagase. Local lending actually increased in August, she told local reporters.

That doesn't mean there's complacency or a belief that Asia is somehow immune to events now taking place in the U.S. and Europe. "I just returned from a two-week trip in Asia," explains Noland. "When I first got there, it was schadenfreude. Over time, that was replaced by fear."

For a few antagonistic or nationalistic commentators in Asia, today's crisis provides added impetus for pushback. There's an undercurrent -- how strong is a matter of dispute -- that wants to sweep away dependence of Asian economies on the U.S. and Western Europe. This notion of economic decoupling promotes "Asia First." The model isn't new; it became a popular rallying cry after the Asian crisis. But it's getting another showing thanks to the current mess.

An emphasis on regional trade is difficult to envision. "Uncoupling is a myth," said Ifzal Ali, chief economist of the Asian Development Bank, in a September press statement that came just before the financial meltdown. "The region still depends on industrial countries to fuel its growth."

Calls have been renewed to stimulate domestic economies and no longer focus only on exports and trade. Some, such as longtime Asia commentator Philip Bowring, suggest regional cooperation in this stimulus effort, including a regional market in local currency government bonds.

A program that allows swaps between Asian central banks is developing and now totals some $80 billion, according to Noland. If the crisis picks up in Asia, as now seems certain, its smaller countries could avail themselves of this facility even further and test this regime.

But other forms of regional monetary cooperation are difficult to see. The problem is that in Asia, economic development and exports remain practically synonymous. Policies that favor domestic consumption over the reliance on exports are often bandied about, and necessary in the long term, but so far rarely acted upon.

Since almost all Asian countries remain tightly tethered to high investments and exports for growth, they compete for business rather than complement each other. Selling to each other has increased over time, but it's never been a substitute for the American and European markets. Even Japan has proved incapable of providing a robust Asian destination for goods and services.

More so than investments in risky U.S. securities, that's why Asia is so troubled by what's happened on Wall Street. A U.S. recession will most certainly batter Asian shores. Asian economic planners also understand how devastating and long-lasting such a situation can be. "Right now, there's a discordant disconnect between a booming Asia and a slowing U.S.," says Setser. Today's financial crisis has some important antecedents in the disaster of the late 1990s. One of these is the uncertainty of its extent.

As the Asian crisis moved from country to country, as corporations and banks failed, nations were terrified to realize that even regulators couldn't determine the level of bad debt. (In late 1997, during the summit of Asia-Pacific leaders, I challenged a topranking Korean official in a televised press conference that the actual total of his country's bad debt was at twice what was being made public; he couldn't refute me.)

There was no question that the region's economies were seriously out of whack. Banks were undercapitalized, reckless and, often, corrupt. Reform was necessary. Asia needed help.

What happened, however, was the kind of devastating economic correction American officials and Wall Street now are desperately attempting to prevent. Known as the "Washington consensus," the American-backed, IMF dicta demanded shock treatment in return for assistance. (Even then, American aid was parsimonious. Japan provided the bulk of the necessary loans.) Looking back, just about everyone admits that while the banking system in Asia strengthened, the "Washington consensus" contained elements that were, at best, ill-conceived and, at worst, socially disastrous.

High interest rates and stiff monetary policies exacerbated an already steep recession. Poorer countries such as Indonesia and Thailand couldn't pump money into their economies to stave off widespread joblessness, economic contraction and even food shortages. Longtime Indonesian dictator Suharto fell as economy-related protests turned political. As Shawn Crispin, Asia Times' Southeast Asia editor, recently pointed out, one of the most dramatic images of the era was IMF head Michel Camdessus, arms crossed, looming over Suharto as he signed a bailout agreement.

It took years to recover. Even now, some Southeast Asian officials bristle about its effects. During a workshop in Malaysia last month, Rizal Ramli, a former Indonesian economic minister, slammed IMF policies and warned that continued liberalization was responsible for stock market and real estate bubbles in his country. "The more hot money flows into Indonesia, the more vulnerable the economy becomes," he warned, according to press reports.

As a result of the crisis, most Asian currencies sharply devalued, making exports far more attractive to American and European consumers. At the same time, Asian savings rates rose steadily. Current accounts moved firmly into surplus.

In one respect, however, most Asian nations held firm. Rather than allow their currencies to freely float as Western regulators demanded, most Asian nations maintained a peg, usually to a basket of currencies that included the U.S. dollar, euro and yen. That insured export competitiveness wouldn't suffer when economic recovery led to rapidly appreciating exchange rates.

These countries -- most notably China -- built up huge foreign exchange reserves in the process. Trade surpluses underwrote the effort, as did foreign direct investment. China's central bank kept purchasing dollars in a deliberate effort to keep the value of the renminbi low.

China's foreign exchange reserves last year topped $1.5 trillion, a more than fivefold increase from 2002 and more than double 2004. But it isn't the only country with bulging coffers. Singapore, a city-state of 4.5 million, held foreign exchange reserves of $141 billion. Through the first half of last year, foreign exchange reserves in all Asian countries eclipsed $3 trillion. Asia has not only the largest international reserves in the world, but the highest savings rates. Debt levels are way down. Current accounts are now in surplus, not in deficit.

Governments have to recycle mammoth dollar holdings some way. Recent attention has focused on various sovereign wealth funds and their estimated $3 trillion in capital. Especially in the case of China, however, the state itself poured far more surpluses into U.S. Treasuries, corporate debt and securities than into its $200 billion sovereign wealth fund. In July, China held some $518.7 billion in Treasury securities, an 8% gain over a year earlier and more than 5 times what it was in July 2002.

"More than 25% of China's GDP went to the U.S. government unconditionally and at very low rates," says Setser.

The Congressional Research Service study estimates total Chinese holdings in all forms of U.S. securities may have eclipsed $1 trillion last year.

As Lim points out, then-Princeton University economics professor Ben Bernanke suggested a few years back that foreign capital, created by a "global savings glut," could finance U.S. government deficits for years to come.

That dollar recycling is one of the biggest reasons why liquidity in the U.S. skyrocketed beginning in 2003. It also helps to explain why, for example, Chinese banks earlier this year held more than $20 billion in debt issued or guaranteed by Fannie Mae and Freddie Mac. (The Bank of China, which held $17.2 billion on June 30, sold off $4.5 billion in the two months that followed.)

American securitization was peddled offshore. New types of instruments -- including some that proved poisonous -- wound their way from the U.S. to Asia. Lehman Brothers, for example, pedaled some of its structured products to retail markets in Hong Kong, Taiwan and Singapore. These so-called mini-bonds were structured notes in which corporate debt was tied to currency fluctuation, stock movements or interest rates and usually involved swaps. Lehman issued a total of more than $11 billion of these structured notes in private placement, according to a London-based structured products data provider, Mtn-i. Asian retail customers hold as much as $3 billion in these notes, according to estimates, including more than 50,000 in Taiwan and 10,000 in Hong Kong.

The market for Lehman-issued structured notes indicates a return of pennies on the dollar. Officials in Hong Kong and Singapore have been swamped with requests for help. Both the Hong Kong Securities and Futures Commission and the Monetary Authority of Singapore have said they will investigate and punish any offenders who misled investors, according to wire reports.

This certainly will give pause to further embracing exotic derivatives. "It is very likely that Asian financial regulators will now be extremely cautious in approving any new forms of securitization and structured financial products," believes Seward, writing in a blog.

Adds the University of Michigan's Lim: "There will definitely be a step back from the view of U.S. i-bankers' [words] as the gospel."

The crisis will also reinforce views long held in many Asian countries that unfettered exchange rates and money movements are not necessarily beneficial. "For China, the whole case of [capital liberalization and reform] has gone down the tubes," Lim believes. "They will be less willing to embrace globalization of capital flows."

Individual Asian institutions have displayed no hesitation in picking over the wounded. Most notably Japan's Nomura Holdings Inc. grabbed Lehman Brother's Asian, European and Mideast equities and investment banking operations.

During the current crisis, however, sovereign wealth funds have been conspicuously absent. That isn't at all surprising, given some previous investments -- including CIC's $5 billion stake in Morgan Stanley in December and a $6.88 billion bet on Citigroup Inc. a month later by the Government of Singapore Investment Corp. -- didn't exactly turn into financial blockbusters. (Singapore's other SWF, Temasek Holdings Pte. Ltd., fared far better, however. It made more than $1 billion
from its $6.6 billion January investment in Merrill Lynch, which was sold to Bank of America last month. That profit stemmed from a reset payment Temasek received from earlier losses in Merrill, which it used to make further investments.)

More to the point, these are investment vehicles, not government-sanctioned largess. Tony Tan, the GIC executive director and a former finance minister, hinted to reporters earlier this month that his fund wouldn't be averse to further investments in the U.S. but for the time being sees more opportunities closer to home.

More likely, it's all part of a deliberate go-slow policy until Asian regulators get a better handle on just what's going on.

"There's a holding pattern on everything, including policy," concludes Lim.

Shedding light on the factors - by Linda Lim light on the factors.pdf

Shedding light on the factors
Linda Lim, For The Straits Times

13 October 2008
Straits Times
(c) 2008 Singapore Press Holdings Limited

HOW did things get so bad so fast? Truth is, the current global financial crisis was a long time coming.

Huge current account surpluses built up in Asia and other countries after the 1997-98 financial crisis funded huge US budget and current account deficits ushered in by the election of President George W. Bush in 2000.

Aided by a Republican Congress until the 2006 mid-term elections, the Bush administration embarked on expensive foreign wars and chalked up large domestic expenditure without requiring Americans to pay for them.

Instead, foreign borrowing allowed taxes to be cut while the Federal Reserve under Mr Alan Greenspan kept interest rates too low for too long, which, added to foreign capital inflows, made cheap money available to all. Not surprisingly, personal savings rate fell to below zero, stocks boomed and an asset bubble developed,
most notably in the housing market.

Believing that housing values would not fall, Americans bought more expensive houses. Some invested in multiple properties with borrowed money, a major reason for the excess supply now weighing on the housing market's recovery. Home equity loans also enabled Americans to borrow against the rising value of their homes for current consumption. Economists call this a 'positive wealth effect'. People spend more as their assets rise in value even if their real incomes stagnate or decline, as they have done for more than 96 per cent of US workers since 2000.

At the same time, a US administration preaching free-market principles while practising fiscal profligacy pursued an agenda of financial (and other) deregulation. This encouraged the 'financial innovation' that gave us sub-prime mortgages, collateralised debt obligations, credit default swaps and other complex instruments, not to mention the amazingly high leverage ratios and risk tolerance that came along with them.

It is this house of cards that has now come crashing down, dragging the whole world economy with it.

Could all this have been predicted? It was - by many, including my University of Michigan colleague, the late Edward Gramlich, a Fed governor from 1997 to 2005. He repeatedly and unsuccessfully tried to persuade Fed chairman Greenspan to crack down on excessive and predatory mortgage lending practices.

But predictable and predicted though it was, the crash, when it came, was precipitated by a coincidence of factors that produced a 'perfect storm'. The debt-fuelled US economic boom caused the current account deficit (the excess of exports over imports) to balloon to nearly 7 per cent of GDP by 2006. This exerted continuous downward pressure on the US dollar and foreign creditors found better outlets for their surplus funds elsewhere - in Europe as well as in emerging markets whose own export-led boom was itself partly the result of insatiable US appetite for imports.

The depreciating dollar and rising commodity prices increased US inflation, requiring the Federal Reserve, as well as other central banks, to accelerate raising interest rates in 2006, even as the US economy was beginning to slow down.

Soaring oil prices in the past two years aggravated nervousness about the economy. Oil-dependent sectors such as auto makers, airlines and tourism were badly hit and began laying off people. And some sub-prime mortgage holders with adjustable rate mortgages found themselves unable to service their mortgages at the
higher rates.

While the proportion of such defaulting sub-prime mortgages was small, they had been packaged together with 'regular' mortgages in mortgage-backed securities. Rated as low-risk securities, they had been issued, distributed, insured and held by many blue-chip financial institutions. Greed too often trumped prudence in
these largely unregulated private-market transactions.

As the defaults began, uncertainty about the riskiness of individual securities rose. The lack of transparency and the lack of understanding of the securities themselves led to a 're-pricing of risk' and a brutal downward spiral of 'de-leveraging'.

Financial institutions, fearful that they may be holding unacceptably risky assets, began unloading them into increasingly illiquid markets, while 'mark-to-market' accounting rules rapidly eroded balance sheets and capital bases. This forced the afflicted institutions to raise more capital. In the end, capital simply dried up as
investors were unwilling to throw good money after bad, not knowing what they were buying.

Thus ensued the current vicious global credit crunch. Banks are no longer willing to lend to each other, due to a lack of trust. If banks cannot get credit from each other, neither can corporations and households. Eventually, various sectors grind to a halt as credit transactions evaporate.

In this environment, the policy actions and inactions of the US government, including its flawed public communications, not only failed to reassure markets, but also injected a further sense of panic. Savings withdrawals and investment redemptions contributed to bank failures and plunging stock prices.

Ideological objections from both the left and right to 'government bailouts' as well as a lack of understanding by a furious electorate on the verge of a momentous presidential election further heightened overall uncertainty. And thus we had a perfect storm.

The writer is professor of strategy, Ross School of Business, University of Michigan.

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Friday, October 17, 2008

Buy American. I am - by Warren Buffet

This article was forwarded by an ACSian from the New York Times

Published: October 16, 2008 Omaha
Brad Holland

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.


A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

More Articles in Opinion » A version of this article appeared in print on October 17, 2008, on page A33 of the New York edition.

Tuesday, October 14, 2008

We Are Facing an 'Inflation Holocaust': Jim Rogers

This was forwarded by an ACSian from an article on CNBC

Sunday, October 12, 2008

All That Money You've Lost - Where Did IT go?

The following article from the New York Times discusses where the money disappears.

All That Money You've Lost _ Where Did It Go?

Published: October 11, 2008
Filed at 12:41 p.m. ET

NEW YORK (AP) -- Trillions in stock market value -- gone. Trillions in retirement savings -- gone. A huge chunk of the money you paid for your house, the money you're saving for college, the money your boss needs to make payroll -- gone, gone, gone.

Whether you're a stock broker or Joe Six-pack, if you have a 401(k), a mutual fund or a college savings plan, tumbling stock markets and sagging home prices mean you've lost a whole lot of the money that was right there on your account statements just a few months ago.

But if you no longer have that money, who does? The fat cats on Wall Street? Some oil baron in Saudi Arabia? The government of China?

Or is it just -- gone?

If you're looking to track down your missing money -- figure out who has it now, maybe ask to have it back -- you might be disappointed to learn that is was never really money in the first place.

Robert Shiller, an economist at Yale, puts it bluntly: The notion that you lose a pile of money whenever the stock market tanks is a ''fallacy.'' He says the price of a stock has never been the same thing as money -- it's simply the ''best guess'' of what the stock is worth.

''It's in people's minds,'' Shiller explains. ''We're just recording a measure of what people think the stock market is worth. What the people who are willing to trade today -- who are very, very few people -- are actually trading at. So we're just extrapolating that and thinking, well, maybe that's what everyone thinks it's worth.''

Shiller uses the example of an appraiser who values a house at $350,000, a week after saying it was worth $400,000.

''In a sense, $50,000 just disappeared when he said that,'' he said. ''But it's all in the mind.''

Though something, of course, is disappearing as markets and real estate values tumble. Even if a share of stock you own isn't a wad of bills in your wallet, even if the value of your home isn't something you can redeem at will, surely you can lose potential money -- that is, the money that would be yours to spend if you sold your house or emptied out your mutual funds right now.

And if you're a few months away from retirement, or hoping to sell your house and buy a smaller one to help pay for your kid's college tuition, this ''potential money'' is something you're counting on to get by. For people who need cash and need it now, this is as real as money gets, whether or not it meets the technical definition of the word.

Still, you run into trouble when you think of that potential money as being the same thing as the cash in your purse or your checking account.

''That's a big mistake,'' says Dale Jorgenson, an economics professor at Harvard.

There's a key distinction here: While the money in your pocket is unlikely to just vanish into thin air, the money you could have had, if only you'd sold your house or drained your stock-heavy mutual funds a year ago, most certainly can.

''You can't enjoy the benefits of your 401(k) if it's disappeared,'' Jorgenson explains. ''If you had it all in financial stocks and they've all gone down by 80 percent -- sorry! That is a permanent loss because those folks aren't coming back. We're gonna have a huge shrinkage in the financial sector.''

There was a time when nobody had to wonder what happened to the money they used to have. Until paper money was developed in China around the ninth century, money was something solid that had actual value -- like a gold coin that was worth whatever that amount of gold was worth, according to Douglas Mudd, curator of the American Numismatic Association's Money Museum in Denver.

Back then, if the money you once had was suddenly gone, there was a simple reason -- you spent it, someone stole it, you dropped it in a field somewhere, or maybe a tornado or some other disaster struck wherever you last put it down.

But these days, a lot of things that have monetary value can't be held in your hand.

If you choose, you can pour most of your money into stocks and track their value in real time on a computer screen, confident that you'll get good money for them when you decide to sell. And you won't be alone -- staring at millions of computer screens are other investors who share your confidence that the value of their portfolios will hold up.

But that collective confidence, Jorgenson says, is gone. And when confidence is drained out of a financial system, a lot of investors will decide to sell at any price, and a big chunk of that money you thought your investments were worth simply goes away.

If you once thought your investment portfolio was as good as a suitcase full of twenties, you might suddenly suspect that it's not.

In the process, of course, you're losing wealth. But does that mean someone else must be gaining it? Does the world have some fixed amount of wealth that shifts between people, nations and institutions with the ebb and flow of the economy?

Jorgenson says no -- the amount of wealth in the world ''simply decreases in a situation like this.'' And he cautions against assuming that your investment losses mean a gain for someone else -- like wealthy stock speculators who try to make money by betting that the market will drop.

''Those folks in general have been losing their shirts at a prodigious rate,'' he said. ''They took a big risk and now they're suffering from the consequences.''

''Of course, they had a great life, as long as it lasted.''

Saturday, October 11, 2008

The Reckoning - Taking Hard New Look at a Greenspan Legacy

The following article revisits Alan Greenspan's speeches in light of today's financial turmoil and was forwarded by an ACSian. The original link is on the website of the New York Times.

October 9, 2008
The Reckoning
Taking Hard New Look at a Greenspan Legacy
“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” — Alan Greenspan in 2004

George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.”

And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives — exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, the former Federal Reserve Chairman Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street. “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Mr. Greenspan told the Senate Banking Committee in 2003. “We think it would be a mistake” to more deeply regulate the contracts, he added.

Today, with the world caught in an economic tempest that Mr. Greenspan recently described as “the type of wrenching financial crisis that comes along only once in a century,” his faith in derivatives remains unshaken.

The problem is not that the contracts failed, he says. Rather, the people using them got greedy. A lack of integrity spawned the crisis, he argued in a speech a week ago at Georgetown University, intimating that those peddling derivatives were not as reliable as “the pharmacist who fills the prescription ordered by our physician.”

But others hold a starkly different view of how global markets unwound, and the role that Mr. Greenspan played in setting up this unrest.

“Clearly, derivatives are a centerpiece of the crisis, and he was the leading proponent of the deregulation of derivatives,” said Frank Partnoy, a law professor at the University of San Diego and an expert on financial regulation.

The derivatives market is $531 trillion, up from $106 trillion in 2002 and a relative pittance just two decades ago. Theoretically intended to limit risk and ward off financial problems, the contracts instead have stoked uncertainty and actually spread risk amid doubts about how companies value them.

If Mr. Greenspan had acted differently during his tenure as Federal Reserve chairman from 1987 to 2006, many economists say, the current crisis might have been averted or muted.

Over the years, Mr. Greenspan helped enable an ambitious American experiment in letting market forces run free. Now, the nation is confronting the consequences.

Derivatives were created to soften — or in the argot of Wall Street, “hedge” — investment losses. For example, some of the contracts protect debt holders against losses on mortgage securities. (Their name comes from the fact that their value “derives” from underlying assets like stocks, bonds and commodities.) Many individuals own a common derivative: the insurance contract on their homes.

On a grander scale, such contracts allow financial services firms and corporations to take more complex risks that they might otherwise avoid — for example, issuing more mortgages or corporate debt. And the contracts can be traded, further limiting risk but also increasing the number of parties exposed if problems occur.

Throughout the 1990s, some argued that derivatives had become so vast, intertwined and inscrutable that they required federal oversight to protect the financial system. In meetings with federal officials, celebrated appearances on Capitol Hill and heavily attended speeches, Mr. Greenspan banked on the good will of Wall Street to self-regulate as he fended off restrictions.

Ever since housing began to collapse, Mr. Greenspan’s record has been up for revision. Economists from across the ideological spectrum have criticized his decision to let the nation’s real estate market continue to boom with cheap credit, courtesy of low interest rates, rather than snuffing out price increases with higher rates. Others have criticized Mr. Greenspan for not disciplining institutions that lent indiscriminately.

But whatever history ends up saying about those decisions, Mr. Greenspan’s legacy may ultimately rest on a more deeply embedded and much less scrutinized phenomenon: the spectacular boom and calamitous bust in derivatives trading.

Faith in the System

Some analysts say it is unfair to blame Mr. Greenspan because the crisis is so sprawling. “The notion that Greenspan could have generated a totally different outcome is na├»ve,” said Robert E. Hall, an economist at the conservative Hoover Institution, a research group at Stanford.

Mr. Greenspan declined requests for an interview. His spokeswoman referred questions about his record to his memoir, “The Age of Turbulence,” in which he outlines his beliefs.

“It seems superfluous to constrain trading in some of the newer derivatives and other innovative financial contracts of the past decade,” Mr. Greenspan writes. “The worst have failed; investors no longer fund them and are not likely to in the future.”

In his Georgetown speech, he entertained no talk of regulation, describing the financial turmoil as the failure of Wall Street to behave honorably.

“In a market system based on trust, reputation has a significant economic value,” Mr. Greenspan told the audience. “I am therefore distressed at how far we have let concerns for reputation slip in recent years.”

As the long-serving chairman of the Fed, the nation’s most powerful economic policy maker, Mr. Greenspan preached the transcendent, wealth-creating powers of the market.

A professed libertarian, he counted among his formative influences the novelist Ayn Rand, who portrayed collective power as an evil force set against the enlightened self-interest of individuals. In turn, he showed a resolute faith that those participating in financial markets would act responsibly.

An examination of more than two decades of Mr. Greenspan’s record on financial regulation and derivatives in particular reveals the degree to which he tethered the health of the nation’s economy to that faith.

As the nascent derivatives market took hold in the early 1990s, and in subsequent years, critics denounced an absence of rules forcing institutions to disclose their positions and set aside funds as a reserve against bad bets.

Time and again, Mr. Greenspan — a revered figure affectionately nicknamed the Oracle — proclaimed that risks could be handled by the markets themselves.

“Proposals to bring even minimalist regulation were basically rebuffed by Greenspan and various people in the Treasury,” recalled Alan S. Blinder, a former Federal Reserve board member and an economist at Princeton University. “I think of him as consistently cheerleading on derivatives.”

Arthur Levitt Jr., a former chairman of the Securities and Exchange Commission, says Mr. Greenspan opposes regulating derivatives because of a fundamental disdain for government.

Mr. Levitt said that Mr. Greenspan’s authority and grasp of global finance consistently persuaded less financially sophisticated lawmakers to follow his lead.

“I always felt that the titans of our legislature didn’t want to reveal their own inability to understand some of the concepts that Mr. Greenspan was setting forth,” Mr. Levitt said. “I don’t recall anyone ever saying, ‘What do you mean by that, Alan?’ ”

Still, over a long stretch of time, some did pose questions. In 1992, Edward J. Markey, a Democrat from Massachusetts who led the House subcommittee on telecommunications and finance, asked what was then the General Accounting Office to study derivatives risks.

Two years later, the office released its report, identifying “significant gaps and weaknesses” in the regulatory oversight of derivatives.

“The sudden failure or abrupt withdrawal from trading of any of these large U.S. dealers could cause liquidity problems in the markets and could also pose risks to others, including federally insured banks and the financial system as a whole,” Charles A. Bowsher, head of the accounting office, said when he testified before Mr. Markey’s committee in 1994. “In some cases intervention has and could result in a financial bailout paid for or guaranteed by taxpayers.”

In his testimony at the time, Mr. Greenspan was reassuring. “Risks in financial markets, including derivatives markets, are being regulated by private parties,” he said.

“There is nothing involved in federal regulation per se which makes it superior to market regulation.”

Mr. Greenspan warned that derivatives could amplify crises because they tied together the fortunes of many seemingly independent institutions. “The very efficiency that is involved here means that if a crisis were to occur, that that crisis is transmitted at a far faster pace and with some greater virulence,” he said.

But he called that possibility “extremely remote,” adding that “risk is part of life.”

Later that year, Mr. Markey introduced a bill requiring greater derivatives regulation. It never passed.

Resistance to Warnings

In 1997, the Commodity Futures Trading Commission, a federal agency that regulates options and futures trading, began exploring derivatives regulation. The commission, then led by a lawyer named Brooksley E. Born, invited comments about how best to oversee certain derivatives.

Ms. Born was concerned that unfettered, opaque trading could “threaten our regulated markets or, indeed, our economy without any federal agency knowing about it,” she said in Congressional testimony. She called for greater disclosure of trades and reserves to cushion against losses.

Ms. Born’s views incited fierce opposition from Mr. Greenspan and Robert E. Rubin, the Treasury secretary then. Treasury lawyers concluded that merely discussing new rules threatened the derivatives market. Mr. Greenspan warned that too many rules would damage Wall Street, prompting traders to take their business overseas.

“Greenspan told Brooksley that she essentially didn’t know what she was doing and she’d cause a financial crisis,” said Michael Greenberger, who was a senior director at the commission. “Brooksley was this woman who was not playing tennis with these guys and not having lunch with these guys. There was a little bit of the feeling that this woman was not of Wall Street.”

Ms. Born declined to comment. Mr. Rubin, now a senior executive at the banking giant Citigroup, says that he favored regulating derivatives — particularly increasing potential loss reserves — but that he saw no way of doing so while he was running the Treasury.

“All of the forces in the system were arrayed against it,” he said. “The industry certainly didn’t want any increase in these requirements. There was no potential for mobilizing public opinion.”

Mr. Greenberger asserts that the political climate would have been different had Mr. Rubin called for regulation.

In early 1998, Mr. Rubin’s deputy, Lawrence H. Summers, called Ms. Born and chastised her for taking steps he said would lead to a financial crisis, according to Mr. Greenberger. Mr. Summers said he could not recall the conversation but agreed with Mr. Greenspan and Mr. Rubin that Ms. Born’s proposal was “highly problematic.”

On April 21, 1998, senior federal financial regulators convened in a wood-paneled conference room at the Treasury to discuss Ms. Born’s proposal. Mr. Rubin and Mr. Greenspan implored her to reconsider, according to both Mr. Greenberger and Mr. Levitt.

Ms. Born pushed ahead. On June 5, 1998, Mr. Greenspan, Mr. Rubin and Mr. Levitt called on Congress to prevent Ms. Born from acting until more senior regulators developed their own recommendations. Mr. Levitt says he now regrets that decision. Mr. Greenspan and Mr. Rubin were “joined at the hip on this,” he said. “They were certainly very fiercely opposed to this and persuaded me that this would cause chaos.”

Ms. Born soon gained a potent example. In the fall of 1998, the hedge fund Long Term Capital Management nearly collapsed, dragged down by disastrous bets on, among other things, derivatives. More than a dozen banks pooled $3.6 billion for a private rescue to prevent the fund from slipping into bankruptcy and endangering other firms.

Despite that event, Congress froze the Commodity Futures Trading Commission’s regulatory authority for six months. The following year, Ms. Born departed.

In November 1999, senior regulators — including Mr. Greenspan and Mr. Rubin — recommended that Congress permanently strip the C.F.T.C. of regulatory authority over derivatives.

Mr. Greenspan, according to lawmakers, then used his prestige to make sure Congress followed through. “Alan was held in very high regard,” said Jim Leach, an Iowa Republican who led the House Banking and Financial Services Committee at the time. “You’ve got an area of judgment in which members of Congress have nonexistent expertise.”

As the stock market roared forward on the heels of a historic bull market, the dominant view was that the good times largely stemmed from Mr. Greenspan’s steady hand at the Fed.

“You will go down as the greatest chairman in the history of the Federal Reserve Bank,” declared Senator Phil Gramm, the Texas Republican who was chairman of the Senate Banking Committee when Mr. Greenspan appeared there in February 1999.

Mr. Greenspan’s credentials and confidence reinforced his reputation — helping him to persuade Congress to repeal Depression-era laws that separated commercial and investment banking in order to reduce overall risk in the financial system.

“He had a way of speaking that made you think he knew exactly what he was talking about at all times,” said Senator Tom Harkin, a Democrat from Iowa. “He was able to say things in a way that made people not want to question him on anything, like he knew it all. He was the Oracle, and who were you to question him?”

In 2000, Mr. Harkin asked what might happen if Congress weakened the C.F.T.C.’s authority.

“If you have this exclusion and something unforeseen happens, who does something about it?” he asked Mr. Greenspan in a hearing.

Mr. Greenspan said that Wall Street could be trusted. “There is a very fundamental trade-off of what type of economy you wish to have,” he said. “You can have huge amounts of regulation and I will guarantee nothing will go wrong, but nothing will go right either,” he said.

Later that year, at a Congressional hearing on the merger boom, he argued that Wall Street had tamed risk.

“Aren’t you concerned with such a growing concentration of wealth that if one of these huge institutions fails that it will have a horrendous impact on the national and global economy?” asked Representative Bernard Sanders, an independent from Vermont.

“No, I’m not,” Mr. Greenspan replied. “I believe that the general growth in large institutions have occurred in the context of an underlying structure of markets in which many of the larger risks are dramatically — I should say, fully — hedged.”

The House overwhelmingly passed the bill that kept derivatives clear of C.F.T.C. oversight. Senator Gramm attached a rider limiting the C.F.T.C.’s authority to an 11,000-page appropriations bill. The Senate passed it. President Clinton signed it into law.

Pressing Forward

Still, savvy investors like Mr. Buffett continued to raise alarms about derivatives, as he did in 2003, in his annual letter to shareholders of his company, Berkshire Hathaway.

“Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers,” he wrote. “The troubles of one could quickly infect the others.”

But business continued.

And when Mr. Greenspan began to hear of a housing bubble, he dismissed the threat. Wall Street was using derivatives, he said in a 2004 speech, to share risks with other firms.

Shared risk has since evolved from a source of comfort into a virus. As the housing crisis grew and mortgages went bad, derivatives actually magnified the downturn.

The Wall Street debacle that swallowed firms like Bear Stearns and Lehman Brothers, and imperiled the insurance giant American International Group, has been driven by the fact that they and their customers were linked to one another by derivatives.

In recent months, as the financial crisis has gathered momentum, Mr. Greenspan’s public appearances have become less frequent.

His memoir was released in the middle of 2007, as the disaster was unfolding, and his book tour suddenly became a referendum on his policies. When the paperback version came out this year, Mr. Greenspan wrote an epilogue that offers a rebuttal of sorts.

“Risk management can never achieve perfection,” he wrote. The villains, he wrote, were the bankers whose self-interest he had once bet upon.

“They gambled that they could keep adding to their risky positions and still sell them out before the deluge,” he wrote. “Most were wrong.”

No federal intervention was marshaled to try to stop them, but Mr. Greenspan has no regrets.

“Governments and central banks,” he wrote, “could not have altered the course of the boom.”

Copyright 2008 The New York Times Company