the rational post » contagion

oil slick = euro trick

The Editor — Sat, 15 May 2010 01:15:35 +0000

Stopping the spread of financial contagion is deceptively similar to plugging a ruptured deep-sea oil well: the cost is epic, the risk of failure is catastrophic, and expectations of success may be more hopeful than realistic. Recent efforts to address both crises share so many elements that a few tweaks to the following report on the Gulf catastrophe also freakishly describes efforts by the Eurozone to head off the risk of cascading sovereign defaults…

[European Central Bank] to [inject $1 trillion] to stop flow from [Club Med economies]
Adapted from an article on guardian.co.uk Friday 7 May 2010

The [$1 trillion facility] that remains [Europe's] best hope of containing the disaster in [Greece, Spain and

…

macrofinancial stability

The Editor — Sun, 05 Jul 2009 01:46:45 +0000

Armchair financial quarterbacks would do well to tune out the mass media every so often and tune into the real global dialogue on the nature of the recent crisis and our prospects for a sustainable recovery. It is no coincidence that those whose perspective is truly global consider the fundamental nature of our modern political economy in terms of decades not days, systems not statistics, and welfare not wealth.

In this speech, given just weeks before the March 2008 arranged marriage of Bear Stearns and JPMorgan, this banker to central bankers dissects the credit crisis of 2007 and calls attention to dangerous fault-lines that presaged the apocalyptic deleveraging of the next 18 months…

Past financial crises, the current financial…

eternal sunshine of the spotless balance sheet

The Editor — Wed, 22 Apr 2009 00:23:29 +0000

Noted financial blogger Barry Ritholtz comments on macroeconomic housekeeping, the unexplored links between shrinking demand and credit-starved supply, and support for commodities and commodity-linked markets/currencies once institutional capital resumes its existential search for yield…

The Eternal Optimism of Opening Day

As we are one week removed from Opening Day, the eternal optimism this time of the year is always apparent. The weather gets nice and the forever belief of a fan is always ‘this is the year.’ Cub fans can relate, with no disrespect to them as I am the Cubs of my baseball fantasy rotisserie league, aka never won. There is also the hope now that 2009 will be the bear killer as we are just a…

syntax error

The Editor — Tue, 17 Mar 2009 02:40:01 +0000

Contagion could be used to describe much of the activity in the capital markets over the last 40 years, as global financial flows have accelerated, trade and capital barriers have disappeared, regulatory oversight has diminished, and financial innovation has made the packaging and sale of securities as easy as ordering a Big Mac combo. From defaults on recycled petrodollars in the early 1980s, to the Mexican peso crisis in 1994, to the “Asian Contagion” in 1997-98, and most recently the Great Collapse of 2008, what began as sanity checks on asset values and risk metrics quickly evolved into stampedes of herding capital feeling to higher ground. In this look at the nature and understanding systemic collapse, Kotok explores whether…

synchronicity

The Editor — Sun, 01 Feb 2009 15:58:15 +0000

This TED talk by mathematician Steven Strogatz “shows how flocks of creatures (like birds, fireflies and fish) manage to synchronize and act as a unit when no one’s giving orders”. The parallels to market behavior and financial panic are implicit but obvious. We often perceive of our decisions during a crisis as unique and self-preservational, but the tendency toward spontaneous order is a powerful impulse. Coordinated reaction to natural threats, be it a hungry seal or predator hawk, can often increase a group’s biological fitness and probility of survival, while a coordinated reaction to financial crises can actually amplify individual risk – like Strogatz’s example of London’s Millenium Bridge – and only make matters worse…

next shoe to drop

The Editor — Mon, 01 Dec 2008 17:27:27 +0000

With all eyes on traditional residential mortgages, analysts are now looking for clues in related asset classes for any signs of recessionary contagion. In his weekly review of the U.S. economy, Nouriel Roubini highlights the vulnerability of commercial mortgage back securities – which typically lag their residential cousins by 2 years – as well as plunging retail sales, a worsening inventory cycle, and the soaring fiscal deficit…

Focus on the U.S. Economy
RGE Monitor

The current U.S. and global economic conditions, remain at the very least quite challenging. The good news is that President-elect Barack Obama has unveiled a first rate economic team to drive the economy towards the recovery. Larry Summers, Tim Geithner and…

bailout

The Editor — Sun, 12 Oct 2008 20:24:56 +0000

As finance ministers from around the world congregate in Washington D.C. this weekend, various “solutions” will be floated that either compliment, contradict, or completely ignore America’s best efforts to fix its broken banking system. Coordination will be critical to preventing a protracted global recession, and Paulson and Bernanke’s ambitious plan – as examined below by a pair of Senior Fellows from the Brookings Institution – will either be the first step toward rational intrabank lending, or the final nail in the coffin of deregulated financial services…

Making the Rescue Package Work: Asset and Equity Purchases
The Brookings Institution, October 10, 2008

If the main purpose of the Emergency Economic Stabilization Act of 2008 is to…

sanity check

The Editor — Sat, 11 Oct 2008 04:42:26 +0000

Words of cautious wisdom from the celebrated biographer of risk, back in November of 2007…

Crazy Little Thing Called Risk
By PETER L. BERNSTEIN

BACK when I was managing other people’s money, I had a client, a doctor, who enjoyed giving away money to his daughters. He was lucky, because an extended bull market was under way with only minor interruptions. The more he gave away, the more the market replaced what he had parted with. As generosity appeared to be a cost-free form of recreation, he considered the whole thing a riskless enterprise.

Whenever I saw my client, he immediately thanked me for making him whole after his most recent spate of giving. I…

hot potato

The Editor — Sat, 17 May 2008 16:59:38 +0000

As financial institutions continue to navel gaze in the aftermath of the credit crisis, confidence in their ability to self-regulate continues to decline. With little trust in their assets, their markets, or even their peers, these global banking titans have sworn off their independence and, like disenchanted teens, are returning home to be cared for by risk-averse, populist policy-makers and their never-ending pool of taxpayers’ dough. The danger here is that both sides are still reacting to deeds already done, and nobody has yet proposed a solution to avoid similar financial chaos going forward. With threats to global income in the order of nearly a trillion dollars, whoever ultimately grabs this hot potato better have pretty thick skin…
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speakerphone diplomacy

The Editor — Wed, 02 Apr 2008 21:56:07 +0000

We’ll probably never know how close we came to systemic financial collapse this March, but if anyone had any idea about the scale and scope of the global credit crisis, it was this ragtag collection of Wall Street rainmakers who gathered by phone last Sunday to rescue the world…

Leveraged Planet
By Andrew Ross Sorkin

Just after JPMorgan Chase announced its initial $2-a-share deal to buy Bear Stearns, government officials held an extraordinary impromptu conference call. The participants on the Sunday night call, who got a preview of the deal, were Wall Street’s biggest power brokers: Lloyd Blankfein of Goldman Sachs dialed in from home. John Mack of Morgan Stanley rushed to the office to listen on speakerphone.…

hot potato

The Editor — Sun, 26 Aug 2007 01:44:19 +0000

With international markets still reeling from the “sub-prime meltdown” and investors already bracing for the next financial quake, it’s good to know that some of the world’s economic shepherds are well aware of the wolves on the horizon, however unprepared they might be to fight back. Unlike their more political and rhetorical peers, enlightened stewardship from the IMF and its sister organizations may be the global macro-economy’s only hope against the coming valuation storm, as risk quietly shifts from sophisticated financial institutions into the hands of the unsuspecting Everyman…

“Responding to Shifts in Financial Risk: the Need for Leadership”
Speech by Rodrigo de Rato, Managing Director…

serenity now

The Editor — Thu, 07 Sep 2006 02:31:00 +0000

Morgan Stanley’s chief global economist adds his voice to the growing choir of doomsayers, predicting heartbreak for employees and consumers throughout the high-cost, developed world. His thesis is simple: growth in the world economy has come not from soaring wages but from bubbalicious home prices, soaring corporate profits, American consumerism and low-cost third-world labour. As jobs continue to stream offshore and the markets pray for a “soft landing”, recession may be the only tune this chorus is willing to sing…

Global Growth Paradox
by Stephen S. Roach

The global labour arbitrage tilts…