Saturday, February 28, 2009

10th Grade Softball is like the economy: One swing: one strike and you're out!


In the softball unit back in tenth grade gym (1959 for me), we played a “one strike” (or "one swing") rule. You foul off a ball at the plate, you’re out. That rule allowed me to pitch a shutout one Friday morning (it got around the school).

Apparently, the whole subprime mess was predicated on giving ordinary citizens a “one strike and you’re out” rule. That’s the thesis of an article by David von Drehle in the March 9, 2009 issue of Time (p 22, called “House of Cards”). He goes on with some “real life case histories” as lurid as those from a book on HIV. Imagine what we did. We indebted people for twice as much as they could normally qualify for, with balloons or boosting rates in five years or negative amortization (and booked the values of the loans as “real”). We pretended we could create wealth on balance sheets that debtors were responsible for, without creating real wealth (like solar panels, windmills, roads, mass transit, rural broadband).

The next article, by Stephen Gandel, “One Bad Bond”, goes to explain how CDO’s work, and with “CDO-squareds” and “Jupiter High Grade V” created mixed products whose mathematical values would fall rapidly with only a few defaults in the lowest tranches. All of this with only 8% of mortgages in default!

It’s said that Geithner’s Treasury Department won’t be able to even appraise Jupiter (much less appraise the planet!). But, you could set up a hierarchal database on a mainframe computer (IBM’s old IMS-DB database is a good tool), put all the mortgages in Jupiter on it, link them into their tranches, and then walk the hierarchy and calculate the value. A good mainframe programmer can do that (yes, Treasury, call me and hire me, I’ll show you how).

Justin Fox, in “Nationalized Nonsense” goes on to say that we have already practically nationalized the big banks, and Adam Zagorin and Michael Weisskopf go “Inside the Breakdown At the SEC” which surely failed to protect our money.

And now we read that the GDP in 2008 shrank at a shocking 6+ percent (annualized) in the last quarter, and the rate of shrinkage seems to be increasing, again, like a retroviral epidemic.

We did this to ourselves. I wondered why, in quasi-retirement, I got unsolicited phone calls to “manage” offices of people selling mortgages or financial products – when I had no experience doing so. The first of these calls occurred two days after 9/11 (while I was still working in IT). I thought this had something to do with my book and websites – that some people wanted to divert me, or use me to make them “feel good”.

We have gone on a frenzy of greed and self-deception that seems beyond belief. It spread all over the world; Europe seems even worse off than the U.S. now. What do we have, a whole generation that doesn’t know the difference between right and wrong?

“Greed is good”. Gordon Gekko said that right after the 1987 crash!

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