Tag Archives: risk

American views on the economy

As the American stimulus plan progresses whilst we encourage the former bank chiefs to self flagellate in public[1. Anyone else find it amusing that they were apologising in the Thatcher Room? There’s one woman who will surely never apologise for helping us down the road to where we are now.], I figured I might as well point you all to a few American media pieces I’ve read or heard in the past year that have really helped me make sense of what’s going on.

By far the most accessible and most important are two programmes from This American Life, a weekly radio show made by PRI which has an outstanding ability to delve into topics in depth in a way that often puts some British radio to shame.

First up we have The Giant Pool Of Money, which has tracks down some interesting voices caught in the middle of the crisis as it was by May of last year, and is particularly good at explaining the issues with how much money was flying around:

Ceyla Pazarbasioglu: This number [of all the money in the world] doubled since 2000. In 2000 this was about 36 trillion dollars.
Adam Davidson: So, it took several hundred years for the world to get to 36 trillion. Then, in six years, to get another 36 trillion.
Ceyla Pazarbasioglu: Yeah. There has been a very sharp increase.

This was then followed up by Another Frightening Show About The Economy which was a particularly fascinating show as it came just after the last bailout bill and explained a lot about what was happening in the Credit Default Swap market:

Alex Blumberg: Like many parts of the financial system these days, credit default swaps are so complicated, simple bankers couldn’t have created them. They were invented by people like this guy, Gregg Berman:
Gregg Berman: Actually my formal training is in physics. So I studied experimental physics and nuclear physics before joining finance in 1993.

These two particular episodes helped give birth to a fantastic little show called Planet Money which has a great podcast. Incidentally, another great episode of This American Life available on the PRI website is Ground Game which dissected the efforts of the Obama and McCain campaigns in Pennsylvania. In essence what I’m also saying is make a space in your podcast feeds for This American Life, it’s good, and if you really like it, donate, as unlike the UK, American public radio depends on sponsors.

However, I’m not all about the radio shows. The New York Times has had a series of rather lengthy and worthwhile stories. My particular favourites include an article explaining Value At Risk, a risk modelling technique that underpinned a lot of the growth in leverage:

Risk managers use VaR to quantify their firm’s risk positions to their board. In the late 1990s, as the use of derivatives was exploding, the Securities and Exchange Commission ruled that firms had to include a quantitative disclosure of market risks in their financial statements for the convenience of investors, and VaR became the main tool for doing so.

Given the calamity that has since occurred, there has been a great deal of talk, even in quant circles, that this widespread institutional reliance on VaR was a terrible mistake. At the very least, the risks that VaR measured did not include the biggest risk of all: the possibility of a financial meltdown.

Also, there was another great article in the New York Times at the end of last year on Washington Mutual, a lender that got in far too deep in the mortgage market thanks to being the bank that liked to say yes.

At WaMu, getting the job done meant lending money to nearly anyone who asked for it — the force behind the bank’s meteoric rise and its precipitous collapse this year in the biggest bank failure in American history.

The road from here is naturally complex. I’m no Brown fan, but I’m even less of a fan of Cameron, and I think if all we have left to place in capitalism is faith (wither poor hope and charity) then we might as well pack up the economy and go home to the caves.

Lastly, a touch more audio courtesy of Hugh McGuire’s handy pointer on twitter, Robert Reich, one of Obama’s advisors on his expectations for the economy of 2009, a fascinating and wide ranging talk, courtesy of the Commonwealth Club. The point I took most from it is that there is still plenty of demand in the economy but the issue is wealth distribution and that we must be willing to finally confront redistribution of wealth to get the economy fixed. [2. Though as it’s so long since I listened to it there’s always the risk that that is not in fact what he said…]

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