Tuesday, March 10, 2009

Macro-wreckonomics: a 30,000-foot view

Gillian Tett, the Financial Times' credit markets whiz, has a detailed account today of how credit derivatives markets went bad. Framing the sorry tale of bad loans packaged in opaque securities and parked off-balance sheet in special investment vehicles is a sidebar that drains a bit of blame by bringing the macroeconomic causes into sharp focus:
there is a strong case to be made that the current crisis is in the strictest sense a crisis of globalisation, fostered and transmitted by the rapid and deep integration of very different economies. Fast-growing developing countries with underdeveloped financial systems were exporting savings to the developed world for packaging and re-export to them in the form of financial products.
The global economy during the period of boom and savings glut had something in common with the old communist workers' joke: we pretend to work and they pretend to pay us. The current variant for emerging economies was, we work, you pretend to pay us, we prop up the value of your pretend payments. Our banking system drowned in a flood of cheap money:
The collapse in market discipline and regulatory supervision was most extreme in securitised markets for US housing finance. Yet it is hard to see this as simply a crisis of financial innovation when there was excessive risk-taking in many other areas. At the same time that US and UK banks were amassing subprime mortgage securities, they were also making mispriced loans to private equity. Austrian banks were making risky loans to households in eastern Europe and Japanese banks were buying corporate equities. This suggests larger economic forces were at work.

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