Stilltitled

Ms. Jacoby said, something different is happening: anti-intellectualism (the attitude that “too much learning can be a dangerous thing”) and anti-rationalism (“the idea that there is no such things as evidence or fact, just opinion”) have fused in a particularly insidious way.

Walking home to her Upper East Side apartment, she said, overwhelmed and confused, she stopped at a bar. As she sipped her bloody mary, she quietly listened to two men, neatly dressed in suits. For a second she thought they were going to compare that day’s horrifying attack to the Japanese bombing in 1941 that blew America into World War II:

“This is just like Pearl Harbor,” one of the men said.

The other asked, “What is Pearl Harbor?”

“That was when the Vietnamese dropped bombs in a harbor, and it started the Vietnam War,” the first man replied.

At that moment, Ms. Jacoby said, “I decided to write this book.”

“The problem is that every piece of news we’re getting continues to be bad,” said Stephen Cecchetti, a former New York Fed bank research director, and now a professor at Brandeis University in Waltham, Massachusetts. “They will have to ease more. It’s the only thing they can do.”

During the 1970s, the US banking system stood as an intermediary between oil-exporter surpluses and emerging market borrowers in Latin America and elsewhere. While much praised at the time, 1970s petro-dollar recycling ultimately led to the 1980s debt crisis, which in turn placed enormous strain on money center banks. It is true that this time, a large volume of petro-dollars are again flowing into the United States, but many emerging markets have been running current account surpluses, lending rather than borrowing. Instead, a large chunk of money has effectively been recycled to a developing economy that exists within the United States’ own borders. Over a trillion dollars was channeled into the sub-prime mortgage market, which is comprised of the poorest and least credit worthy borrowers within the united states. The final claimant is different, but in many ways, the mechanism is the same.

— Rogoff and Reinhart: Is the 2007 US Sub-Prime Financial Crisis So Different?

And a potential model for understanding the current crisis through the prism of the Nordic banking crisis and Sweden’s experience

Norges Bank Conference on Banking Crisis Resolution – Theory and Policy, Oslo 16 June 2005

The circumstances, going into the crisis:

• Deregulation
  • “in early 1984 – the government started a process of swift removal of credit regulations”
• Monetary & Fiscal Policies – low interest rates, high spending
  • “Real estate growth peaking at ten percent in 1985!”
• Lending Growth
• Prudential capital regulation – general erosion in banks’ capital base
• Supervision
  • “on-site inspections decreased sharply – from 57 in 1980 to 8 in 1987!”

The Banking Crisis

“With the benefit of hindsight, the banking crisis was an “accident waiting to happen”. And sure enough, when the economy was hit by a strong negative shock and a cyclical downturn, loan losses and non-performing loans soared, wiping out the capital of many banks.”

“It’s sort of a little poetic justice, in that the people that brewed this toxic Kool-Aid found themselves drinking a lot of it in the end”

—Warren Buffett on Financial Engineering

Sol Waksman, president of Barclay Group, an alternative investment database, said that three-quarters of the 1,241 hedge funds that have reported returns for January lost money.

“That’s a scary number,” Mr. Waksman said.

“We will lower our non-comp expense materially, and I do mean materially,” Roger Altman said.

“It’s that sad dawning when you realize the market is so much bigger than you are,” Mark Fishman, of Sailfish Capital, said.

“Hey, you try wagging these puppies around a while and see if you don’t have back problems,” she explained, without any mention of problems in the hedge fund world.