DJ Abs on the GFC

Groovers,

Apologises for my tardiness in updating this blog.


Life just keeps getting in the way although it some cases it not just life - DJ Abs repeatedly drafts blogs only to realise he is making rather obvious (and some would say facile) points and although those of you that know me well may say "well that never stopped him in the past", the new sage and wise DJ Abs doesn't want to waste people's time with facile statements - there is enough of that in the modern media as it is.

Today's topic is the GFC.


DJ Abs has been told by his spies in the blogging community that a few prominent right wingers like Peter Schiff, are gettting a lot of attention lately. In essence, Schiff claims that US government's action to address the GFC will only make the problem worse and could lead to unsustainable levels of public debt and hyperinflation and could be the end of america as a major power.


So as a responsible thinker for the forces of good , DJ Abs needs to respond.

So what exactly caused the GFC (BTW - why are there so many TLAs in this WLD? Is it yet another sign of the imminent collapse of our civilsation??)?

OK this is the DJ Abs take on the GFC:

1. Over the last 10 years or so there has been an explosion in cheap credit and many non -bank lenders have been able to lend to people who were not exactly ideal lending risks ("sub prime"). As much of this lending was to buy property such lending was considered pretty low risk (provided the loan was secured by the value of the property.) Eg. I lend you $90K, house worth $100K, if you default I am pretty sure I'll get my money back.


2. So far so good. Attached to each mortgage is an income stream (eg. my repayments on my home loan) and that is worth something to businesses seeking cash flows. So financiers start putting all these loans together and then cutting them up in various ways and on- selling them to other financial institutions. These "contracts" are often called collatoralised debt obligaitons or CDOs (another f..n TLA) and people got cleverer and cleverer at packaging them up and selling them. And the rating agencies made the CDOs all the more appealing by giving these contracts (or products as financiers like to call them) good credit ratings because they all assumed they were secured by rock solid mortgages.


3. Still so far so good. As the credit explosion caused property pricees to rise and the share market was also rising, everyone seemed happy. There is a well documented school of economic theory that notes strong correlations in consumption whenever assets prices rises. So my share price rises makes me think that I can afford that new plasma even though the share price rise is just a paper gain and has not been realised yet. And this is essentially Schiff's main point, and one I agree with, America (and many other western nations but especially america) was funding its property and share market boom on high and unsustainable levels of debt. Everyone seemed to know high debt was a problem and not sustainable but it just kept going and going and since everyone was making money no one seemed to mind too much.


4. And then reality started to cut in. As the economy started to slow and the property and sharemarket bubble that supported it started to falter, governments rather stupidly maintained high interest rates as they were worried about high inflation. And whilst this happened the sub-prime mortgages started to fail (i.e. the borrowers failed to make payments).
   
5. The problem was, unlike a normal slow down, due to the high levels of rapid exchange of these collatarised debt obligations through the system, a default in one end had a huge rippling effect through the financial sysetem at the other end. And as the defaults got higher it became clear that the entire financial system had become riddled with these CDOs. No one seemed to be able to work out precisely who owned what and to what extent they were exposed. These CDOs are also often called toxic assets because they effectively "pollute" an otherwise sound balance sheet. They do this because the value of and asset cannot easily determine the chain of title back to the original debt and its relative risk is difficult to determine (since they were all packaged up in complex ways and on-sold many times through).
   
   
6. Then things got really bad. Due to these uncertainities, banks and other financial institutions started to not be able to trust each other or have faith in their balance sheets. Credit start to shrink up and highly exposed institutions starting to tank completely. And then the GFC started in earnest.


7. So basically people had borrowed way more than they could afford and the whole system was propped up for years by a property and share bubble. But to make things worse, the complex way these borrowings were allocated within the financial system meant that, when the crash inevitably occured, it's impact went through the entire financial system rather than limited to the orginators of these dodgy mortgages.

That is probably an oversimplication but you get the general idea.

So governments have responded in two basic ways

• Try to unfreeze the credit markets by guaranteeing bank debts


• Pumping money in to the economy to slow the decline and try to stablise consumer spending
  

No one seems to object to the first action.

What Schiff et al object to is the stimulus spending. They argue this is being funded by further debt and it will only worsen the position of excessive consumption.

DJ Abs view on all this is that, whilst one may legitimately query the level of the intervention, doing nothing will mean the free market will dramatically overshoot in its reversal and decline.

Just think if you had a 100 homes all facing foreclosure. Assume these home owners all worked and traded with each other. Because of this interdependence as soon as a few start to default, it impacts all the others under stress and the whole system goes down. But if some local authority stepped in and was able to put some cash into the system to buy time for the owners (or at least some of them) to trade out their way out of their debts or refinance, it is easy to see how a dramatic collapse can be averted. That analogy I think applies to the broader economy.

So DJ Abs thinks Schiff et all are being too extreme to suggest NO stimulus is warranted. But it is a legitimate question to be concerned about the size of that stimulus and for how long it should continue.

The other criticism DJ Abs makes of governments everywhere is their alarmist rhetoric. Economies are nothing more than large groups of people that trade. And people are people and they panic easily. On top of that, economies rely on high levels of trust and confidence to work. So whilst the GFC is serious, talking about a return to the Great Depression, massive unemplyment and hyperinflation and other extremist stuff is stupid at best and dangerous at worst.

In addition, Dj Abs also wants to remind everyone that - as bad as it is - the GFC is not the end of the world.

The Australian Sharemarket has nearly halved in value but that just puts it back to where it was in 2004. And where it was in 2004 was way higher than where it was in 2000, 1990s, etc, etc. Same witih GDP (gross domestic product), even if our economy shrinks 5% or even 10%?15% it will only put us back a few years. The fact remains we have just witnessed the greatest period of economic growth in the history of civilisation. Nations now have unbelievable wealth relative to the past and have abundant resources to provide all the basic necessities of life to their people (I am talking developed economies here). And these economies - the real economy of houses, computers, factories, people - have not disappeared and will not disappear just because some bankers f..ed up big time. So it is important not to overstate the concerns.

No, in DJ Abs' view, the most important economic problem of this world is not the GFC but the problem of the developing world. A world where 30,000 people continue to die of malnutrition every day. It is that economic problem that we should be focussing on.

But that is a topic for another day.

Until next time groovers,

Peace. Love. Respect. Amen.

DJ Abs

10 May 2009

DJ Abs on Revolutionary Road

Groovers,



The blog site http://stuffwhitepeoplelike.com/ - Ouch.





Compulsory read for all white people especially those with apple computers :-). I must throw out my moleskine notebook with my 5 phone numbers and grocery list in it and stop using sea salt.

But I digress.

I know I said I was going to write about saving the world and the global financial meltdown, etc but ROME WAS NOT BUILT IN A DAY and I feel I need to start with the movie Revolutionary Road.

For those that haven't seen it, it stars Kate Winslet and Leonardo Di Caprio and is directed by Sam Mendes. It's about a couple struggling to find meaning and happiness with their middle class suburban American lives in the late 50s.





It's not a great film* but deals with an important theme. One that I think faces many of us bloggy types - how to a get an interesting life and escape "middle class" blandness. A life of of sex, drugs and rock'n'roll, action, excitement, adventure. A life of late night poetry readings and wistful stares over misty sea cliffs.





Well Groovers to save you wasting a good many years of disappointment and restless searching, DJ Abs offers the following revelation that one day came to him (sitting under a tree sprinkling himself with sea salt):

1. For 99.999% of us, work will ever only be a means to an end. Our ancestors hunted animals and spent their spare time painting about hunting animals. So it us with us. Focus your creativity and passion on your ends but don't get them confused with your means. Kate and Leonardo had ample opportunity to enrich their lives without radical change but lack the imagination or vision to do it.



2. I beg your pardon, I never promised you a rose garden. (Ok that's a little random but sort of related).



3. Related to 1. Mediocrity is a state of mind, not a suburb. There are mediocre people in Paris and groovers in Baulkham Hills (ok probably but not many but that is not Baulkham Hill's fault). Creativity abounds in your head and not necessarily in a fishing village in Portugal.



4. Great works of art are inherently valid on their own. Art does not need mass appeal or critical praise to validate it. So go ahead create a great work of Art but don't expect your employer or the taxpayer to subsidise it. See 1.
   


5. Despite the sunshine, there's got to be a little rain sometime. (Again a bit random but related to 2.)



6. And if all else fails, write a blog...
   

Of course, there is also the conventional option of escape through drugs and alcohol or mountain bike riding but trust me that is only a temporary escape -reality catches up with you eventually!

And Thus Spake DJ Abs - On the nineteenth day of the third month in the ninth year of the third millennium.

*RR failed for the same reason most Australian films fail. But the topic for another post (TBW).

Thus Spake DJ Abs

Groovers of the World,

Welcome to my blog site.

This is my first official post and in it I will set out my blogging agenda for 2009.

I should stress that this is an indicative agenda only and is subject to change due to life getting in the way, the moon being in the seventh house, etc, etc.

Anyway, on with the "journey". In 2009, DJ Abs intends to rant/blog to the world about the following:

1. I suppose it's mandatory to have a short blog about the Global Financial Meltdown/GFS/Greatest economic and social challenge since the great depression/etc, etc.
   
   DJ Abs will be ranting about how everyone needs to calm down a bit esp. our politicians, as fear and lack of confidence is the main problem, and it's not as if a whole world economy has suddenly blown up and disappeared into a black hole but yes a few stupid kids and some corrupt managers probably should never have had total control over our pension funds and public companies and also lapse credit standards were a mistake and the DJ Abs will rant a bit about the dangers of overreaction in re-regulating credit markets and introducing protectionism and giving massive hand outs to anyone who asks for it (esp. dodgy American car companies and Australian property developers) and we need to careful not to bankrupt our governments in the process just look at Japan for example (although spending never kick started their recovery) and parallels with the Great Depression are really silly because our economies are a lot wealthier now and anyway why are we so obsessed with growth and the sooner we get over this growth obsession the better but anyway I'd leave it there otherwise I won't have anything more to write about I am starting to think this is a bit of boring topic for a blog anyway as everyone is writing about it and some may be someone even wiser than DJ Abs so may be I'll defer or just say a few wise things about free markets, frederick hayek, adam smith, john maynard keynes, honey smacks, apple sauce and david bowie records (related to an economy I once modelled during my economics degree).
   


2. Why does everyone hate lawyers so much? A topic dear to my heart (DJ Abs is a lawyer and suffers from periodic bouts of professional self loathing).
   


3. How to Save the World with a New World Constitution (Parts I, II and III). This is the main reason for the site and, as long as enough of you read it, DJ Abs will eventually save the world.
   


4. Is there a God? Or is there not a God? And why DJ Abs doesn't like Richard Dawkins.
   


5. But if there is God, what has been doing lately esp. in places like Iraq and Zimbabwe and the Congo and the Sudan?
   


6. Why you should never met your heroes. The sad tale of DJ Abs and David Bowie*
   


7. Being mean about celebrities. OK or not OK? The standard "oh its the price they pay for fame and they love it, feed on it" defence will get a working over from DJ Abs with the conclusion likely to be "Pah".
   


8. Why are there so many successful morons in this world esp. in large corporations? To anyone reading from my company - no I am not talking about you or anyone you know ;-)
   


9. And related to 8. a DJ Abs guide to the world of work for high school graduates. The guide is written out a strong desire to disabuse these poor kids of the notion that if you are smart and you work hard, you'll do well.
   


10. Something about blogging, facebook, life coaches, personal branding and mission statements, journeys, the Internet, Todd Solandz films and the irony of DJ Abs writing a blog site criticising blogging and then may be a little digression on to the circularity of time and how everything both past, present and future has actually already happened and the Greeks looking forward to the past or something like that and then something about Paul Davies and his books and also Keith Ward and God (there he is again) and then perhaps a message to Polarius about how if you can't beat it join it.
    
    

So there you have it. That is at least the starting agenda.

Hope you can join me.

I'll try and post a new blog once a fortnight.

And before I go I should add one important final disclaimer. The views of DJ Abs should not necessarily be relied upon as the complete truth on everything and, occasionally, just occasionally, certain facts or figures cited in support of his arguments may not necessarily be fully 100% accurately researched to a statistically valid level. Of course, DJ Abs always tries to tell the truth as he sees it but I mean who has time to really check out whether the US spends 14 times more money on arms than development aid when the true figure might 14.7 or 13.3. The point is it should be the other way and that is more important than the actual figure so please don't let the facts distract you from the core arguments.

OK, OK - you are probably right. I'll try not to use dodgy facts to support my arguments. Or where a fact is dodgy I will draw attention to its dodginess. And now I never actually met DAvid Bowie but the story as a metaphor for hero worship and our society's obsessions with heroes is well worth the read (in my humble opinion).

Bye for now.

Peace and respect.

DJ Abs