The End of Wall Street's Boom - National Business News - Portfolio.com
I'm about 3/4 of the way through Alan Greenspan's book as well. One "little known fact" (at least by me) is that the whole of the world equity (stock) markets are "a pimple on the ass of world finance" in the crude terms of one of the guys in this article.
The cumulative world stock markets are something order $30-$40 TRILLION (they vary--a LOT). The Bond markets are like $50 Trillion (they vary less), and the Derivatives Market is like $500 Trillion !!! or something like 12x the value of the entire world GDP for a year. Derivatives are complicated -- the easiest to understand is the "futures contract" that is commonly used by farmers or people buying their fuel for next winter the summer before, or farmers selling their crops expected in the fall in the spring. The contracts have a couple of functions -- spreading risk and providing a speculative vehicle. The homeowner buying in the summer speculates that the prices are lower in the summer than the winter -- but this year, that is likely wrong by a lot. A fuel contract purchased in the summer is likely very costly compared to the actual price of the fuel if one had waited until the winter to purchase it. BUT, it COULD have been much higher-- so the person buying the contract "hedged" against that risk and speculated that they would actually pay less in the summer than the winter.
Farmers likewise might usually assume that corn prices will be lower in the fall than in the spring, so selling part of their crop in the spring allows them to speculate on that assumption and hedge against the risk that the price will be lower. This year the prices were A LOT higher in the spring than they now are, so a farmer could see 2-3x as much profit off the grain in his field if he had sold it in advance.
I'm not even going to try to go into the long and short sales of stocks, credit default swaps, etc, but suffice it to say that it is all those derivatives build off the home "mortgage backed securities" that blew up when the sub-primes were downgraded. It is those losses that drug down the financial system, and are a major reason that the way forward is quite unclear. Greenspan certainly believes that the world markets need those derivatives, but given the level of leverage that was created, it seems that it may be very hard to unwind all of this to get the system operating again.
Add in all the uncertainties of "change" with the upcoming coronation of BO, and even with the rather staid picks he has made to date, a lot of his economic claims during the campaign would lead one to believe that he may at least desire to do a lot of tinkering with the financial engine, and it is an engine that tends to react badly to uncertainty.
In any case, the article is long but quite worthwhile. This is a nice little anecdote about how far out of hand things got when folks thought that Freddie and Fannie would be bailed out and housing values would always rise:
I'm about 3/4 of the way through Alan Greenspan's book as well. One "little known fact" (at least by me) is that the whole of the world equity (stock) markets are "a pimple on the ass of world finance" in the crude terms of one of the guys in this article.
The cumulative world stock markets are something order $30-$40 TRILLION (they vary--a LOT). The Bond markets are like $50 Trillion (they vary less), and the Derivatives Market is like $500 Trillion !!! or something like 12x the value of the entire world GDP for a year. Derivatives are complicated -- the easiest to understand is the "futures contract" that is commonly used by farmers or people buying their fuel for next winter the summer before, or farmers selling their crops expected in the fall in the spring. The contracts have a couple of functions -- spreading risk and providing a speculative vehicle. The homeowner buying in the summer speculates that the prices are lower in the summer than the winter -- but this year, that is likely wrong by a lot. A fuel contract purchased in the summer is likely very costly compared to the actual price of the fuel if one had waited until the winter to purchase it. BUT, it COULD have been much higher-- so the person buying the contract "hedged" against that risk and speculated that they would actually pay less in the summer than the winter.
Farmers likewise might usually assume that corn prices will be lower in the fall than in the spring, so selling part of their crop in the spring allows them to speculate on that assumption and hedge against the risk that the price will be lower. This year the prices were A LOT higher in the spring than they now are, so a farmer could see 2-3x as much profit off the grain in his field if he had sold it in advance.
I'm not even going to try to go into the long and short sales of stocks, credit default swaps, etc, but suffice it to say that it is all those derivatives build off the home "mortgage backed securities" that blew up when the sub-primes were downgraded. It is those losses that drug down the financial system, and are a major reason that the way forward is quite unclear. Greenspan certainly believes that the world markets need those derivatives, but given the level of leverage that was created, it seems that it may be very hard to unwind all of this to get the system operating again.
Add in all the uncertainties of "change" with the upcoming coronation of BO, and even with the rather staid picks he has made to date, a lot of his economic claims during the campaign would lead one to believe that he may at least desire to do a lot of tinkering with the financial engine, and it is an engine that tends to react badly to uncertainty.
In any case, the article is long but quite worthwhile. This is a nice little anecdote about how far out of hand things got when folks thought that Freddie and Fannie would be bailed out and housing values would always rise:
Long Beach Financial was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking homeowners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.
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