a little gloating
Posted by Jason Apollo Voss on Oct 16, 2008 in Blog, Predictions | 3 commentsToday’s post is necessarily short because I am currently onboard a motor home in Palm Springs as we move down East Palm Canyon Drive. Yes, I am on the road with my gorgeous, wonderful wife, Dawn.
However, lest you think that I am not paying attention, I saw the Dow Jones’s fall yesterday of over 700 points due to bad economic news. I won’t say I told you so…just take a look at the previous post.
We have a lot of blood letting still to take place before real meaningful change has taken place.
Next post will be about shoegazers…yes, shoegazers.
J
Thanks for the link its great finding your blog. I look forward to reading your posts as I know that you are not only a very smart guy but have been through a few markets as well. And a friend. Motorhoming threw Socal? Alright!
Mark in Seattle
Jay Jason, Nice to see your blog is coming along. A short note to stir the pot and elicit your two cents. I must admit the two kids, a company, and living oversees has me a bit in the dark on several issues. The only thing I get over here is that America is evil, damn the American. It gets old. I have come off track…..
Care to discuss the issue of “Mark to Market” and its role in perhaps creating a great deal of the mess. I have read (which is always dangerous) that less than .5% of households are in foreclosure and something like 3% of mortgages are in default ( I admit I have not fact checked this with official organizations). I ask the question; given these low percentage how can it create such a train wreck? Transparency in financial institutions is always critical, particular as normal consumers (not multi millionaire who may be able to weather storms) as they allocate their limited resources. However, when transparency comes at the expense of the “last transaction” in a limited liquidity market (housing) where media likes to over excite things to evaluate billions of assets seems a bit silly. Could it be our overzealous search for Transparency and the “perfect market” contributed a great deal to the train wreck? Random ramblings and thoughts at this point. Care to comment?
Hey Anonymous Northlander,
Sure I would be happy to comment. First, let me make sure I understand your comment about “mark to market” accounting. You are saying that you think the huge decline in “paper” values of mortgages, as “mark to market” accounting necessitates, combined with a steroidal press-corp, led to a huge drying up of liquidity? Did I get that right?
In answer to that point: I think that “mark to market” accounting certainly contributed to some of the decline. The problem wasn’t with the adherence to the accounting standard, though. It was the fudging of the data that determines the value for Mortgage Backed Securities that caused such a stark decline. It’s my understanding that many institutions prolonged the reckoning/recognition of the true value of their MBS in hopes that the market would turn around. Once the market declined beyond a “range of reasonableness,” then institutions could no longer “fudge,” ne fake, the values of their portfolios. In other words, it wasn’t “mark to market” it was those damned liers who took advantage of the flexibility of “mark to market” accounting to overvalue their securites for so long that then consequently led to a dramatic and rapid loss of confidence in the financial system that is more to blame.
The best analogy that I can think of is imagining if your spouse had an opposite sex co-worker that they spent a lot of time with at work and out of work. If you began to suspect an affair and questioned your spouse about it, and your spouse said, “No, nothing is wrong.” So you stop doubting your spouse because you trust her/him and their convincing affirmation of the value of your marriage to them. Imagine the shock and horror then when your spouse asks for a divorce so that they can marry the co-worker? Your trust in them would decline almsot immediately, and probably permanently.
I said above that I thought that “mark to market” was a portion of the problem, so indulge me a little and I will talk about something that I hope begins to address one of your excellent points. Namely, the size of the damage is seemingly very small, yet it is having a very outsized, disproportionate effect on markets, how can this be? Well remember that financial institutions are heavily leveraged. Your average commercial lending institution (i.e. a bank) is leveraged 10:1. That is, they are only required to have $1 dollar of deposits on hand to support $10 of loans (and other investments). So even a small write off in the value of their loan portfolio values requires a huge injection of cash in order to maintain proper liquidity ratios. Does this make sense?
Contributing to this problem was the fact that many of the bad practices were concentrated at individual institutions that cranked huge transaction volume through their doors (e.g. WaMu) so they had an outsize effect on markets. Does this all makes sense?
All of this said, I think that the response to the crisis has actually been about something else: a nagging feeling by many folks at upper and lower echelons of society that the ethics supporting capitalism have eroded so that the foundation does not support a rise, but instead, a collapse.
Great question! Keep ’em coming!
Anyone else out there, care to comment and contribute to our overall understanding?