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An important rule for an investor is to never invest in something you do not understand. No one, and believe me, no one understands CDOs, so no one should be investing in CDOs. They are an abomination that needs to go.

But how? If you come to the conclusion one day that CDOs must go, how can you go about making sure that it happens? What is the typical life of CDO? Could youo just let the mature and die of natural causes? Is there a way to accelerate the death?

The feeling is palpable…

From Reuters:

In American crisis, anger and guns

But, as columnist David Ignatius put it in the Washington Post, “there’s an ugly mood developing as people start looking for villains to blame for the economic mess.” In November, an analysis published by the U.S. Army War College’s Strategic Studies Institute listed “unforeseen economic collapse” as one of the possible causes of future “widespread civil violence.”

This paper was written in October 2008. It is sad to see how clueless they were way back then (like 5 months ago). I'm considering removing the paper from the thread, but will likely leave it here as a lesson. The three "myths"

  1. Bank lending to non…nancial corporations and individuals has declined sharply.
  2. Interbank lending is essentially nonexistent.
  3. Commercial paper issuance by non…nancial corporations has declined sharply, and rates have risen to unprecedented levels.

were not so mythical after all.

Facts and Myths about the Financial Crisis of 2008 (pdf)
Federal Reserve Bank of Minneapolis Research Department
October 2008

The last couple of years can be described succinctly by the tired expression, "Watching a train wreck in slow motion." Many people, including those bloggers listed on the side panel, saw the inevitability of the current crisis long before it began to hit mainstream news. To some extent, as daunting as it may seem, the real crisis hasn't even found its way to mainstream media yet. Perhaps that is one reason for the lack of outrage displayed by the American people over what has been going on. The first signs of outrage I witnessed personally occurred yesterday outside the AIG office in downtown Los Angeles. There was a significant (maybe 100 or so) showing of demonstrators. The numbers themselves were not staggering, but what caught my attention was the support shown to the demonstrators by those passing by. Every single car began honking their horns in support.

Have the American people had enough?

Prior to the crisis, way back during the boom days of say 2005, when you asked an economist if they were worried about the housing market, they would point out what a small portion of GDP housing constituted. When the first two Bear Stearns hedge funds blew up due to losses on subprime CDOs, they would tell you not to worry because subprime mortgages constituted a small fraction of the mortgage business, which was already a small portion of GDP. Then when GDP started showing signs of strain, economists would show graphs of GDP if you excluded housing and point out that things were still fine.

However, one of many things the economists ignored was the social impact of kicking millions of lower income people out of their homes. Apparently, that was still not enough to awaken the sleeping giant. Now that middle and upper income families are beginning to lose their homes, is that enough?

If that were the only problem, i.e. housing, that would not be enough to rile the anger of the American people. But that is not the only problem. We have a demographic issue. Millions of baby boomers are on the verge of retiring just when their retirement saving in the form of 401(k)s and pension funds have lost large percentages of value. Many with plans of retiring shortly are being forced to work longer as a result.

Is that enough to awaken the sleeping giant?

Probably not, which is sad if you think about it.

If the only problems were the housing market and retiring seniors, that will unfortunately still not rile the anger of the American people. We are beginning to see the problems go deeper. Small businesses are suffering severely across the country. The spiraling contraction forces businesses large and small to reduce labor, which causes increasing losses on business loans, personal loans, credit cards, and mortgages, which causes banks to cut back on lending. Rinse wash and repeat.

It is fair to say that every American has now either directly experienced financial pain in the form of loss of jobs, loss of homes, loss of retirement savings or knows someone close to them who have.

Is that enough to awaken the sleeping giant?

Suffering sucks, but as sad as it seems to me, suffering does not seem to be enough to rile the anger of the American people. Perhaps we really have become like those thin-boned grossly obese excuses for humans depicted in the movie Wall-E. Is that true? I don't think this administration would like to find out.

I think the American people are on the verge of "having enough". It is one thing to suffer. When everyone suffers together, it is difficult to attribute blame and to focus anger. However, when everyone suffers except for those on Wall Street, at the Treasury, at the Fed, and in Congress who created this mess. Now we have somewhere to focus our anger.

Like the magnifying glass in the sun. As long is it jostles around randomly, it is unlikely to do much harm. However, once someone thinks to pick it up and focus that beam of sunlight, it can create an inferno.

The American people have found the magnifying glass in the rubble and have picked it up. They haven't quite figured out the damage this thing in their hands can do, but my sense is that it will not be long before the beam of sunlight begins to focus. Continued bail outs of the very institutions (both private, e.g. Wall Street, insurance companies, etc, and public, FDIC, SEC, Fed, Treasury, etc) that got us where we are, will increasingly draw the ire of the American people.

Once you have awoken the sleeping giant, it will be too late.

Granted, my perspective is that of an American. I love my country more than I can express here. I believe we will come out of this stronger than before, but we must stop the damage first. Those in many other countries around the world have already awoken. Riots and protests are picking up steam across the globe. Not to belittle their efforts, I applaud them, but just wait until the sleeping giant awakens and then you will see what the power of the American people can achieve.

The Outrage is Brewing by financialcrisisfinancialcrisis, 17 Mar 2009 17:09


I'm writing to you because I think you are the best of the best and, unfortunately, I have very little faith in the ability of those at either the Fed or the Treasury to find a working solution to the problems that face us. Quite the opposite, I'm afraid they are doing more harm than good.

I think you all provide an invaluable service, which can be witnessed empirically by the sheer number of readers you have. Perhaps I've been unduly influenced by Michael, but I do think we are fast approaching a point of no return in this country. Without a radical change in the current policies, I think things can get very ugly. Ugly as in social unrest and large-scale rioting.

I think that what is required is no less than an intellectual revolution. I think the people who know what is going on, i.e. you, need to get together and present a unified front that cannot be ignored by policy makers. You have hundreds of thousands, if not millions, of people you can directly reach out to and I would almost say that you have a responsibility to come together.

Blogs are one thing. They serve their purpose, but they only skim the surface of what can be done collaboratively in an online environment. Not only you, but your readers are extremely insightful and more than willing to express opinions and provide analysis. I think we need to harvest that.

I've always said that one should refrain from complaining about something unless they are willing to offer a better alternative. My humble primordial attempt to create an alternative is a new online community I just created:

Currently, it consists of little more than a wiki and a discussion forum. I would highly encourage you to check it out if for no other reason than to just have a glimpse of what might be possible. From there, feel free to participate, in which case you could encourage your readers to participate as well, or create your own community on your own site that serves a similar purpose. In any case, I do feel there is a sense of urgency and I am certain that if all of you put your minds together, as well as the minds of your readers, we could create a voice so loud that it would have to be heard by the administration. I'm happy to turn over the reigns of the site to any of you. With a single request on your blog, you could easily find someone tech savvy and willing to improve the look and feel of the site. I'd be happy to hand over the reigns to anyone you recommend for that purpose as well. It doesn't matter as long as it gets done.

In the meantime, I will begin to aggregate ideas you have already expressed and give them a permanent home on the site (with proper references, etc).

Thank you again for the invaluable service you provide on your blogs and please consider helping to find a way to harvest the intellectual power of your communities to create a lasting and powerful solution to the problems that face us.

Best regards

The Innovation Imperative in Manufacturing: How the United States Can Restore Its Edge (pdf)

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