Tag: Financial Crisis

Post-Madoff Palm Beach Blues

The last time he was here, he fell for a $2,000 pair of worsted spun cashmere pants, which the up-scale Worth Avenue boutique Trillion didn’t have in his size, and had to be ordered from Italy.After the slacks arrived, but before Mr. Madoff could come by for a fitting, he was arrested.

“I remember I heard about the arrest and I went directly to the store to charge those pants on his credit card,” recalls Mr. Neff, a fit, gray-haired man in perpetual motion. “But the card had already been canceled.”

So, what happened to the pants?

“They’re in the racks, over there,” Mr. Neff says, nodding toward the trouser section.

via Recession Pain, Even in Palm Beach – NYTimes.com.

Delaying Gratification – the New Frugality

cat_police_dogsThe brain has a limited capacity for self-regulation, so exerting willpower in one area often leads to backsliding in others. The good news, however, is that practice increases willpower capacity, so that in the long run, buying less now may improve our ability to achieve future goals — like losing those 10 pounds we gained when we weren’t out shopping.

No one knows why willpower can grow with practice but it must reflect some biological change in the brain. Perhaps neurons in the frontal cortex, which is responsible for planning behavior, or in the anterior cingulate cortex, which is associated with cognitive control, use blood sugar more efficiently after repeated challenges. Or maybe one of the chemical messengers that neurons use to communicate with one another is produced in larger quantities after it has been used up repeatedly, thereby improving the brain’s willpower capacity.

Whatever the explanation, consistently doing any activity that requires self-control seems to increase willpower — and the ability to resist impulses and delay gratification is highly associated with success in life. Thanks to frugal Maria for this article

via Tighten Your Belt, Strengthen Your Mind – New York Times.

Black Swan-proof World

We love 10 step programs. So here an economic perscription by the author who was a veteran trader, a distinguished professor at New York University’s Polytechnic Institute and the author of The Black Swan: The Impact of the Highly Improbable 1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

via FT.com / Comment / Opinion – Ten principles for a Black Swan-proof world.

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Let’s Put Down the Pitchforks

During a financial crisis, fairness is a luxury we cannot afford. During the 1930s, bankers and financiers lost everything, but the outcome — a decade-long depression — was hardly fair to the ordinary American. The key question is not whether something is fair, but whether it helps get us through this mess faster and at a lower cost.

mob_pitchforks_smallAt the moment, the Treasury is working (and working and working) on ways to entice private capital back into the banking and shadow-banking system by offering government financing and guarantees against losses. Every dollar of private capital that can be attracted back into the system is a dollar that the Treasury won’t have to borrow or the Federal Reserve won’t have to print. And only with the return of private capital will the government be able to get back the rescue money it has committed.

As the financiers see it, there’s a big difference between the government that sets tough terms for participation in its financial rescue programs and a government that is a fickle and unreliable partner, that tries to micromanage their businesses and changes the rules of the game with every zig and zag of public opinion

While it was Wall Street that got rich by peddling new ways for Americans to live beyond their means, the decision to do so was ours. It was we who ran up the credit card bills, we who drew down the equity in our homes and we who refused to tax ourselves for the government services we demanded. Wall Street bankers may have been the pushers, but it was we Americans who became addicted to the easy credit.

via Steven Pearlstein – Let’s Put Down the Pitchforks – washingtonpost.com.

Joe Cassano – The Guy Who Sank AIG

joe_cassanoThat guy — the Patient Zero of the global economic meltdown — was one Joseph Cassano, the head of a tiny, 400-person unit within the company called AIG Financial Products, or AIGFP. Cassano, a pudgy, balding Brooklyn College grad with beady eyes and way too much forehead, cut his teeth in the Eighties working for Mike Milken, the granddaddy of modern Wall Street debt alchemists. Milken, who pioneered the creative use of junk bonds, relied on messianic genius and a whole array of insider schemes to evade detection while wreaking financial disaster. Cassano, by contrast, was just a greedy little turd with a knack for selective accounting who ran his scam right out in the open, thanks to Washington’s deregulation of the Wall Street casino.

via The Big Takeover : Rolling Stone.

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A Decade to Lose

If governments don’t understand and simply try to bring back the “good times” of an asset-based economy, it could result in a decade of stagnation.

Developing economies are already 30 percent of the global economy at current price and nearly half on a purchasing power basis. The export model cannot thrive for shortage of customers. Developing countries have to trade more with each other and develop domestic demand. But this would require painful reforms to their political economies. The key is property rights and income distribution. The two must go hand in hand. Lack of domestic demand tends to result from income concentration, which is due to uneven playing field in opportunities. Many developing countries, like South American and Southeast Asian countries, have stagnated in the past decade due to their inability to reform their political economies.

Bursting of the credit bubble is triggering the biggest recession since the World War II. Repairing the global economy requires complex and difficult reforms. Simple stimulus can’t bring back prosperity. Thanks to Peggy Sadler
Andy Xie was Morgan Stanley’s Chief Economist for Asia Pacific from 1997 to 2006.

via A Decade to Lose.

This Too Shall Pass

We are now in an astonishingly noncommercial moment. Risk is out of favor. The financial world is abashed. Enterprise is suspended. The public culture is dominated by one downbeat story after another as members of the educated class explore and enjoy the humiliation of the capitalist vulgarians.

Washington is temporarily at the center of the nation’s economic gravity and a noncommercial administration holds sway. This is an administration that has many lawyers and academics but almost no businesspeople in it, let alone self-made entrepreneurs. The president speaks passionately about education and health care reform, but he is strangely aloof from the banking crisis and displays no passion when speaking about commercial drive and success.

But if there is one thing we can be sure of, this pause will not last. The cultural DNA of the past 400 years will not be erased. The pendulu

via Op-Ed Columnist – The Commercial Republic – NYTimes.com.

Recession Doesn’t Raise Religion

“As the economy goes downward,” Tony Perkins, the leader of the Family Research Council, has theorized, “I think people are going to be driven to religion.” Wrong again. The latest American Religious Identification Survey, published last week, found that most faiths have lost ground since 1990 and that the fastest-growing religious choice is “None,” up from 8 percent to 15 percent (which makes it larger than all denominations except Roman Catholics and Baptists). Another highly regarded poll, the General Social Survey, had an even more startling finding in its preliminary 2008 data released this month: Twice as many Americans have a “great deal” of confidence in the scientific community as do in organized religion. How the almighty has fallen: organized religion is in a dead heat with banks and financial institutions on the confidence scale.

This, too, is a replay of the Great Depression. History is cyclical, and it would be foolhardy to assume that the culture wars will never return. But after the humiliations of the Scopes trial and the repeal of Prohibition, it did take a good four decades for the religious right to begin its comeback in the 1970s.

via Op-Ed Columnist – The Culture Warriors Get Laid Off – NYTimes.com.

And a rebuttal Who Made Frank Rich God?

A Simple Guide to the Banking Crisis

Proposition 1: The boom in the U.S. was funded almost totally by foreign money.

Proposition 2: Foreign investors preferred to put their money into investments that were perceived as having low risk.

Proposition 3: Today, after everything has gone bad, many of the counterparties on the other side of the toxic assets are foreign investors, directly or indirectly.

Proposition 4: It’s a lot harder for the Federal Reserve and Treasury to resolve a banking crisis where the main counterparties are not American.

Proposition 5: The fact that the counterparties are overseas means that out of the three options: bailout, bankruptcy, or nationalization—none are satisfactory.

The best actual marker of the progress of the financial crisis is not stock or real estate prices, but rather how well international cooperation holds up.

Sometime later this year we will have a massive global conference aimed at simultaneously resolving the banking crises in the major developed countries. The goal will be a political negotiation of the value of the toxic assets, and a clearing of the books.

If the conference succeeds, then it will be possible to fix the financial system relatively easily. But if it fails, then things get dicey.

via A Simple Guide to the Banking Crisis – BusinessWeek.