by
Keith Gessen
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One thing is when the short-term credit market ground to a halt [in October], a huge percentage of the bulk cargo ship fleet just went idle. Trade just wasn’t happening. It felt apocalyptic. The system had ground to a halt. Now you’re getting the hangover of that. Companies that had to stop operating for a month—they don’t go belly-up immediately, but now you’re seeing they’re starting to have layoffs, their suppliers are having problems, and their suppliers are having layoffs. The auto companies are a great example. They’ve been in trouble for a long time, but car sales in October were down like 40 percent year to year, and that was because people were like, “Gee, I don’t know if I’m going to lose my job, I don’t know if I can get a car loan, I don’t know what’s going to happen, I’m just not buying a car.” And now you see the impact of that. The car companies went from limping along in precarious shape to being in a position where they can be out of business if they don’t get an extraordinary infusion of resources from the government by year-end.
This is not a crisis that was caused because there was a drought, or because a meteor hit London and obliterated it, or because there was a war that destroyed productive capacity. This is because there was a misallocation of resources, because people had too much of that neurotransmitter in their brain, that then caused them to have too little of it, and now all they want are risk-free assets, and that causes the machinery of finance to really shudder to a halt.
Because financial decision making is about risk. What you do when you’re trading is apportioning risk. It’s about moving consumption from today to tomorrow, or vice versa, and about the risk associated with that, about transferring the risk associated with that. If nobody wants to take the risk, then nothing happens.
You know, it’s easy to understand how living standards would go down if somebody bombed all the factories in America. What’s kind of hard to get your head around is that those factories are still there! All that good stuff we were buying, there’s still the capacity to make it. But somehow it’s not getting done, because people’s attitudes about risk have changed. And as long as I’ve been in the financial markets, that’s still crazy and awesome and hard to get your head around.
Meanwhile, the U.S. government has extended so much aid to various other sectors of the economy, and it’s expected to have to do more, that now people are worried about U.S. credit. To buy credit protection on U.S. government debt now costs you more than to buy credit protection on Campbell’s soup! But, I mean, buying credit protection on the U.S., it’s sort of a mind-bending concept. The U.S. only issues in dollars; it only issues in its own currency. More importantly, from whom are you going to buy protection on the U.S. government’s credit? I mean, if the U.S. government defaults, what bank is going to be able to make good on that contract? Who are you going to buy that contract from, the Martians? [...]
pretty funny, though this does kind of contradict a point he makes later on, where he implies that the US spending too much could fuck up its credit rating? (which Keith Gessen does push back on, lightly.) like surely you need to explain your geopolitical assumptions before you make such an audacious claim
[...] This was a year where any trade you had on that other hedge funds had on, that was a popular hedge fund trade, performed poorly because there were other hedge funds that were forced to unwind that trade. [...]
cool illustration of how finance is all about predicting other people's actions
[...] bubbles create other bubbles, they’re like derivative bubbles, so to the extent that there was a bubble in credit or a bubble in the mortgage market, that created a bubble for people who could trade those products. There was just a misallocation of resources not only into mortgages, let’s say, but also into the trading of mortgages, and it sucked talent into those areas that probably should be deployed other places. And the way talent gets sucked into those places is by a price signal, the compensation going out. The pay scale for finance was just—incredibly out of whack. You had guys who were literally just a couple of years out of college, maybe they’d done a year or two at an investment bank, making several hundred thousand dollars a year doing pretty low-value-added Excel modeling tasks.
like the gold rush & selling shovels
related: think about how this relates to tech! can i create a short story out of this?
[...] In October, it was like a patient having a heart attack: the short-term credit market ceased to function. That’s the heart of our economic system; it ceased to function. The government was like the doctor. The government runs into the heart attack patient’s house, steps over the heart attack patient, goes to his refrigerator, opens it up, and says, “I have to take out all the fatty foods in the refrigerator.” Meanwhile the guy’s dying of a heart attack.
not sure how much i agree with this analogy but it's p funny
[...] The SEC tends to be focused on stuff that’s a lot more technical. They’re very focused on technical violations of insider trading laws. And, you know, what are the consequences of insider trading? I don’t know. If people believe the market is rigged, then people aren’t going to trade in the market, okay, but the kinds of violations that they go after are not going to cause the same magnitude of damage as selling really risky derivatives to a company to the point where you could blow up that company. I mean, that’s just much more disruptive. But it’s not as clear a violation of the rules as, “Okay, Joe Schmo had material nonpublic information about company X, because he was on the restructuring committee, and then he decided to sell his bonds. Even though maybe that information didn’t have a meaningful effect on the price, technically it’s material nonpublic information, and we are going to punish that guy.” It seems to me they’re focused on the wrong things. Not because they’re bad people or because they’re not intelligent people, but because if you’re a lawyer, that’s how you think.
talking about American investment banks which sold very risky derivatives to companies in Brazil/Mexico, which resulted in bankruptcies
I was in China, mostly Beijing, a couple of weeks ago, checking on a property investment. The property sector is important: A lot of the pressure on raw materials prices supposedly coming out of China was related to the property sector, to construction. The amount of building that had been going on was enormous and visible, all over Beijing. I saw one luxury housing development after another, most of them just in the process of construction, or recently completed, and…sales had last year just come to a halt. It was amazing, the physical reconstruction of that city. A lot of it had to do with the Olympics, but a lot of it also had to do with property speculation.
And Beijing really is not the city that had the most residential property speculation. The optimism that pumped up that sector was pretty incredible. Here you have a provincial city where there was maybe one 4-star hotel—suddenly there are four 5-star hotel projects under construction, and you just wonder who the heck is going to stay in them. A city that really didn’t have much in the way of luxury housing suddenly has tons of luxury projects sprouting up, a lot of those getting sold to speculators, with nobody at the end of the chain. Toward the end of last year people realized just how far supply had outrun real demand, and how far prices had run up.
this makes me think of the Fordist compromise, where workers were paid decent wages so they could afford to consume the products they helped create. that compromise, of course, is long over; the successor model in tech (the gig economy) may come undone for similar reasons. eventually, there may be no one at the end of the supply-side chain, or maybe even the demand-side chain. or there'll be an imbalance that will threaten the whole system. (think about this more)
[...] some of the banks have come out and said that their business in January and February and March was profitable—Citi was the first to do it, Bank of America said so, Goldman actually reported this week. Personally, I think it’s a load of bollocks. I mean, as a bank, you have a lot of freedom to mark your assets where you please, particularly the loan book. You can show a profit, you can show whatever profit you want. You have a lot of scope to manage your P&L [profit-and-loss statement]. In the emerging markets I’ve often seen banks showing quarterly profits until the day they go belly-up.
worth remembering. the valuations are arbitrary!! and unlike stock market valuations, they're decided internally, by fiat essentially
(think about tech billionaires' net worth)
[...] the way they think doesn’t admit of a world where Citibank gets nationalized. It’s just so inconceivable to them that they say, “You just can’t do that! It’ll cause all of these horrible problems.” Well, that was true when the economy was in an extremely unstable state and risk aversion was extreme and panic was abroad in the land. But now I don’t think that’s the case, and your lack of imagination is not a good grounds for a policy judgment.
i love this. (on the govt's lacklustre response after the crisis)