Sunday, 9 January 2011

Who's to blame for the crisis, part 2

Exam period report: two down, seven to go!

First days of the new year turned out particularly conducive to various musings about economics. Several questions have been running through my head, but they all have one common denominator…

Did US politicians think increased home ownership ratio would solve social problems and make many poorer US citizen happier?

Did Alan Greenspan think pursuit extremely loose monetary policy that eventually sent property prices soar would bring Americans closer to fulfilling their dreams?

Did mortgage borrowers who could not stand any chance to repay mortgages off their income think they would refinance their loans endlessly thanks to ever-increasing property prices?

Did “financial engineers” think Gauss-Copula would work miracle and turn subprime loans into prime securities?

Did David X. Li. think if one subprime mortgage is a lousy underlying security, two subprime mortgages are two lousy underlying securities, ten subprime mortgages are ten lousy underlying securities, then million subprime mortgages bundled together and packed as Mortgage-Backed-Securities would make up triple-A securities?

Did credit portfolio managers at banks think they could push away the credit risk from their balance sheets through securitisation and did they think it would not return to them?

Did risk analysts at banks think they would always recover principals and interests on subprime loans through foreclosures and selling houses on the market at higher prices?

Did shareholders of those banks think focusing on short-term profit was a sound growth strategy?

Did governments and regulators think greed could, in long run, do more good than harm?

Did market participants think they could reap an extra profit without taking an extra risk?

Did CFOs of Polish companies which speculated on currency options think they had just discovered a gold mine?

Did borrowers who had taken out mortgage loans denominated in foreign currencies when zloty was overvalued think they had stroke a great deal?

Did grannies who bought stocks or invested in equity funds think stock prices could plummet in the coming months?

Did Greeks think living beyond their means would sustain economic growth in their country?

Did Irish home buyers who bought properties despite steep prices think the prices were still reasonable given their growth potential?

Did pension fund managers from all over the world which were buying summer houses on Spanish coast think the demand on them in the coming years would be so high that it would drive prices even higher?

Did Ben Bernanke think keeping interest near zero would kick-start the US economy?

Did analysts at the end of 2007 think stock indices would fall by roughly 50% in 2008?

Did PiS, Samoobrona, LPR and PO think by raising spending and cutting taxes and sickness benefit contribution they would turn around Polish public finances?

Did Polish airlines managers think oil price would rise to 200$ per barrel and hence purchased future contracts at 150$ per barrel (they had to pay so much when prices dropped to 40$)?

I could flog the dead horse and reassert they all took it for granted that nothing could go wrong. Or, alternatively they knew everything was goings to collapse, but they thought they would escape the disaster?

In July I tried to park swiftly in front of my house. I did not manage to manoeuvre properly and smashed into the fence. It ended up with a dented bumper. I did it because I thought would simply make it (today at home we recalled that accident after my father dropped his mobile phone into the toilet bowl). But three months earlier pilots of a plane thought they could, or rather should, or even had to touch down the plane despite thick fog and poor communication with air traffic controllers. They thought they could, somehow, make it. They did not. 96 people died.

I will not dare to pass judgement about the causes of Smolensk disaster, but the dented bumper was a result of nothing but my own thoughtlessness.

The ongoing crisis does not just have one, financial, facet. As outlined above, this is also the crisis of thinking, or a result of years of thoughtlessness.

Almost a year ago I drew a conclusion that the crisis was caused not by greed, but by lack of fear. Now another conclusion – the crisis was also caused by LACK OF FORETHOUGHT

Or maybe... Did they think, or did they believe?


Pan Steeva said...

In crashing your car, didn't you just make a mistake? You might in hindsight consider it thoughtlessness, but did you have any information at the time that should have led you to expect to hit the fence?

student SGH said...

I wouldn't call this minor damage "crashing" and unfortunately not my car. "Mistake" would be an understatement. If I had been reversing, it would be a mistake, but a head-on encounter with the fence (or to be precise its brick foundation).

I should have predicted at the speed of 15 kmph I would not be able to make two swift moves with the steering wheel. Had I swerved a bit more abruptly, the bumper would have stayed intact.