Interesting Markets

It's rare that you get financial posting on my blog, because I deal with the minutiae of markets day-in, day-out I can't be bothered to blog about it too. It's also because finance is essentially boring, or at least should be, most of the time. Some people in the markets use volatility as a proxy for risk. This is called the capital asset pricing model, the problem with which is it's total bollocks. Volatility is instead a proxy for how interesting the markets are. On the FTSE we have not yet had an intra-day range of less than 1% in 2008 the markets have been absurdly volatile.

A question people seem to be answering in various articles on the subject of the "sub prime crash" as which this crisis will inevitably go down in the books, is "to which previous financial crisis is this similar?"

A lot of people say 1929, when 3000 banks went bust. I don't think Bernanke is making the mistake of putting insufficient liquidity into the markets, if anything he's risking triggering inflation by ineffectively cutting rates. This would cause something like the Stagflation of the 1970s, which may have been exacerbated by movements in commodities. The reason it led to a decade of unremitting economic shitness however is that Nixon reacted with wage and price controls. Even George Bush couldn't be that stupid. (Gordon Brown on the other hand...) Perhaps more apposite are the financial crises of the 1980's and 1990's which saw the turmoil end with the death of a Wall St. Firm. Continental Illinois, America's Northern Rock which went belly-up in 1984 took a decade to get off the Fed's books. Drexel Burnham Lambert's collapse in 1990 signified the end of the Junk bond bonanza but was brought down by shoddy business practices. Perhaps even more exact is the failure of Long Term Capital Management, which went to the great dealing screen in the sky in 2000 following the failure of its derivative arbritage model to cope with the Russian Debt default of 1998. Apparently one of the central assumptions of the model, designed by Nobel Laureates no less, was "Governments do not default". Extraordinary!

The same assumption was made by people who invested in bonds backed by 120% negative amortization mortgages of the trailer trash who took them out. As a result, one of the firms most laden with this "toxic debt" has gone under. Great. The liability has been unloaded to the fed, but the only people to lose mega bucks are the shareholders of Bear Stearns. That is as it should be. For all the glee on the left who are busy masturbating into their morning stars over news of bankers losing money, this is free market capitalism's creation destruction cycle in action. This is why free market capitalism is better than state control: firms get it right or die. It's the natural process underpinning evolution, and it works. Most of us parasites in the city are comfortable with losing our jobs once in a while*. Shit happens, and if you can't take a joke you shouldn't be in the game.

I leave you with Gordon Gecko's famous speech in Wall Street. Oliver Stone thought he was creating a monster. I think we rather like the cut of Gecko's Jib

*Three times, if you need to know.