Wednesday, December 1, 2010
A Layman's Account of Global Financial Crisis (GFC)
My qualification is next to nothing. I claim the insight of the child who cried "The Emperor's not wearing any clothes!"
On this note, here's what happened. Before the GFC around 2008, the economists cried wolf: everything - consumer goods, properties, stock prices, essential services etc - had been overpriced. Why did the suppliers charge so much? Greed. They want to have more money, more material wealth because everyone else is having it good. Why should they be any different?
Naturally, most people want to do it the legal way. Thus, the shortcut was to get banks to lend money on expected - and inflated - value of the assets which are pledged to the banks as collateral.
Note: if the banks had simply assessed that the collateral were not worth the loans, the "emperor's new clothes", ie the inflated values, would have been exposed.
Instead, the banks proceeded to support the valuation. Like the emperor's courtiers and fawners, they proceeded to further exaggerate, or inflate these valuations. A particularly wicked part of this was to further package questionable securities such as sub-prime mortgages along with good solid securities such as gold certificates, government bonds etc and demanding that the rating agencies issue an assessment of the "risk rating" (such as AAA, AA+, etc.)of the mixed package of "toxic" assets sandwiched between the good assets. At this point, the ratings agencies should also be responsible for not recognizing that the "toxic" assets had "spoiled the barrel" (my mixing of metaphors is a much lesser offence than that of the financial geniuses in poisoning the pool of wealth).
The rest, as they say, is history. Someone cried out "Ponzi scheme" and the house of cards tumbled.
But, there is yet another chapter. As we resuscitate the financial markets in the hope of refloating the consumer markets, the geniuses who created the toxic assets are chasing their losses. Evidence: the conduct of Goldman Sachs, Citibank etc after the bailouts took on more risks and made back their losses. Smart calls or continued creation of "new clothers"? Watch and see.