---Harvard Economic Society, October 19, 1929
Posted on 09/21/2007 8:04:08 PM PDT by shrinkermd
One of the world's leading experts on credit derivatives (financial instruments that transfer credit risk from one party to another), Das is the author of a 4,200-page reference work on the subject, among a half-dozen tomes...
Das is pretty droll for a math whiz, but his message is dead serious. He thinks we're on the verge of a bear market of epic proportions...
The cause: Massive levels of debt underlying the world economic system are about to unwind in a profound and persistent way.
He's not sure if it will play out like the 13-year decline of 90% in Japan from 1990 to 2003 that followed the bursting of a credit bubble there, or like the 15-year flat spot in the U.S. market from 1960 to 1975. But either way, he foresees hard times as an optimistic era of too much liquidity, too much leverage and too much financial engineering slowly and inevitably deflates.
...to warn anyone who will listen -- mostly banks and hedge funds that pay him consulting fees -- that the jig is up.
Rather than joining the crowd that blames the mess on American slobs who took on more mortgage debt than they could afford and have endangered the world by stiffing lenders, he points a finger at three parties: regulators who stood by as U.S. banks developed ingenious but dangerous ways of shifting trillions of dollars of credit risk off their balance sheets and into the hands of unsophisticated foreign investors, hedge and pension fund managers who gorged on high-yield debt instruments they didn't understand and financial engineers who built towers of "securitized" debt...
"Defaulting middle-class U.S. homeowners are blamed, but they are merely a pawn in the game," he says. "Those loans were invented so that hedge funds would have high-yield debt to buy."
(Excerpt) Read more at thestreet.com ...
or like the 15-year flat spot in the U.S. market from 1960 to 1975
***I thought the 1960’s were a boom time? I recall the term “unbridled prosperity”.
Thanks for that info!
---Harvard Economic Society, October 19, 1929
It’s hard to take a dunderhead author seriously when he doesn’t know the difference between “inflexion” and “inflection”. He must have snoozed through 12 years of English study. Did he sleep through Econ, Finance and Calc, too?
And that is the ultimate reality... We traded IOUs for durable goods. IF there is a problem, I’d rather hold the durable goods (a bit hard for foreign companies to repossess over here), than the IOUs...
No, those countries holding our IOUs have to help solve the problem, because they are more dependent upon their end of the bargain than we are on ours.
If I am not mistaken, inflexion and inflection are just alternative spellings of the same word.
1950's and 1960's: Practicing "duck and cover" and building bomb shelters for the impending nuclear war with Russia.
1970's: Hoarding silver for the coming financial crash.
1980's: We'd succumb either by the "Reagan Debt" or a "Nuclear Winter".
1990's: The "Millenium Bug" would destroy every computer in the world.
Now this.
Or maybe he is an Indian who learned English in India and/or the UK, and thus spells English words according to their British spellings?
If we're in an epic beer market, there's only one thing to do.....
Well, there’s that...
;OD
we live in an area that does not enjoy the ridiculous increases in home values, but then again, we don't get the bad downturns....
except lake property....that is outrageous here....
Not really. Maybe you're thinking of T-bills and such. That's not what he's primarily talking about here. What he's talking about is that "we" (banks) package up a bunch of, say, loans (the IOUs) and sell them to others as a "security" that pays a decent yield for the higher risk. Then they are swapped back and forth in an active market. No "durable goods" per se need change hands as part of this particular process.
That said, I find Cassandra warnings such as this to be facile. The incentive is all on the side of predicting doom: if he's wrong, no one'll remember anyway, but if he turns out to be right, he's a "genius". Let's look at the flip side, have you ever seen an article about a wunderkind who predicted "everything's gonna be great for an extended period of time"? Why not, if they're so smart? Hasn't that ever happened?
The real test for me is always whether people put their money where their mouth is. Everyone who believes this guy's warnings should put all their leverage into going short on CDOs (if that's possible - I don't really know but I imagine it must be), or take an equivalent position. Right?
Well, speak up. Who's doing this?
“Das is the author of a 4,200-page reference work on the subject”
I will report back when I finish reading his work! If you don’t hear back from me on this within a few years, assume either Armageddon or the issue resolved itself.
Excellent explanation about a market built on smoke and mirrors. I have read numerous articles over the years, many of them here at FR, about the perils of Derivatives. Because they are hard to understand, the don’t get the scrutiny they deserve, and we are now up to our asses in alligators because of them.
Great post, bookmarked...
Yes, I looked at that. Seems well written and cogent. Thanks.
Positive Angles is a publication on the positive message of today’s real estate market: (VIA EMAIL)
Subprime Reality Check
The sub prime problem is certainly serious, but it is a short-term problem, mainly involving mortgages originated during 2004-2006 and playing out over the next two years or so.
This issue will be mitigated by public and private efforts to help the families in distress. There is no reason for it to spread to the prime market.
Lenders are trying to work out a modified repayment plan if there seems to be a realistic chance that the borrower can catch up. In the FHA’s experience, about half the borrowers in the program do become current within a year. If the lenders and the regulators follow through, they can ease the problem substantially.
We have been here before, and not that long ago. Delinquencies and especially foreclosures on prime mortgages remained low during 2000-2002, consistently around 1% for serious delinquencies and 0.2% for foreclosures. The sub prime spike had no impact on the prime market then. There is no reason to expect one this time. The delinquency rate has again been stable, so far, while foreclosures have edged up to 0.25% from 0.2%.
Loans originated in 2003 and earlier pose no unusual problem.
Homeowners who are able to make their payments are not going to lose their homes because other homeowners are losing theirs. The roof is not caving in on housing.
- Desperate House Loans? (subscription required) John Weicher, Wall Street Journal, Aug. 29, 2007.
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