Sunday, February 01, 2009

Report from Davos

I decided to skip Davos this year so am relying on reports like this one (via Whiskey Fire which has pointers to much more).

Two interesting factoids from this article: One, $25 trillion in market value has evaporated in the current financial crisis. That's a lot! Of course, the right interpretation is not that this much value vanished, but that that's how much fake value was hallucinated by an insane system that is now coming off of some kind of analog of a drug binge.

The other factoid is that you, dear reader, ar just as much to blame for this mess as the more obvious culprits, according to one of the economic luminaries at Davos:
One Davos regular, Washington-based Carlyle Group’s managing director David Rubenstein, said he thinks a key issue at this year’s gathering is “who is at fault.” Yet Rubenstein, who was saying at Davos two years ago that the outlook for leveraged buyouts was “very robust,” says responsibility shouldn’t be tied only to him or his industry.

“There are six billion people on the face of the earth, and probably about five billion participated in what went on,” Rubenstein said in an interview. “Everybody participated in some way or shape or form.”
BTW, if I were inclined to be a conspiracy nut, the Carlyle Group would probably be one of the major nodes in the network graph I maintained in crayon on my apartment walls. Oh wait, the internet is my wall.


Michael said...

Let us just note that people buying residential real estate with little or no down payment - and there were lots of them in the last decade - played a comparable role in the bubble to stock speculators buying shares on margin in the 'twenties, just before the crash of 1929. In both events the subject assts were acquired with excessive leverage. No one thought prices could go anywhere but up. They've been taught a hard lesson.

There is now a vast inventory of unsold houses as a consequence of the bubble's bursting. They will have to sink in price to a market clearing level, and to be sold, before there will be any new construction. And until there is new construction there won't be a revival in the industries that support it, which are mainstays of a healthy economy.

Michael said...

A further note, with respect to the sharing of blame for the bubble and its burst: a good question (one I've not seen answered satisfactorily anywhere) is, how many of the now-nonperforming subprime and Alt-A mortgages (the latter are so-called 'liar loans' in support of which there is incomplete or unverified information about the borrower) were made not to people who intended to live in the houses they bought with them, but to would-be speculators?

Bernard Baruch is said to have sold all his stocks shortly before the Crash of 1929, on the reasoning that when he started to hear stock tips from shoeshine boys, it was time to get out of the securities markets. I suppose a wise man might have drawn the same conclusion about the real estate market based on the burgeoning popularity of webinars and cable TV shows advising how to "flip this house."

The Gods of the Copybook Headings with slaugher and terror return! Taking a flyer with borrowed money is a bad idea! How often do people have to repeat an experience before they learn from it?