Behind the recent bad news lurks a much deeper concern: The world economy is now being driven by a vast, secretive web of investments that might be out of anyone's control.
Lest anyone forget:
The reality is that, despite fears that our children are "pumped full of chemicals" everything is made of chemicals, down to the proteins, hormones and genetic materials in our cells.
1. This thesis seems to run counter to Ben Stein's complaint from yesterday, in which he argues that "market makers" are completely and nefariously in charge of the whole thing, swinging the pendulum at a whim for their own benefit. (To clarify: there is an important distinction between being able to make a particular stock or sector move in one direction or another, and having positive control of "the market.")
2. The author's characterization of the "prevailing assumption" runs counter to the evidence compiled by Eric Janszen, who argues that "The bubble cycle has replaced the business cycle." The author implies that before hedge funds, we understood the mechanisms of the market and were more or less in control of things. How, then, to explain the Asian financial crises of the 90's?
3. Frankly I'm surprised this article appeared in the Globe. Now, the Globe is not NYT or WSJ, or even WaPo or LAT, but this article would have been more at home in the Boston Herald, perhaps printed in Comic Sans. I'm inclined to believe the author is simply plugging his friend's new book. The chattily informal prose is off-putting: "swinging wildly", "slapping together", "booster shot", "building blocks", "sound the alarm", "huge wilderness", "chafe against the restraints", "prying eyes", and so on. I am led to believe those "small-circulation newsletters" he mentions are known elsewhere as "spam." But I have to admit I laughed at the characterization of innovative derivatives as "very sophisticated and chi-chi."
4. The author attempts to explain away Enron as a problem of "nontransparency". Hardly. I suggest he take "The Smartest Guys in the Room" and Gladwell's Open Secrets and revisit this in the morning.
5. He acts as though everything would have been alright if only everyone had been more upfront about all of the dodgy debt they were buying up. Never mind that the risks of issuing adjustable-rate interest-only jumbo loans to the marginally employed were always plainly obvious, even to the most casual observer. He pretends to ignore the fact that speculators built entirely too much new housing, flooding the market.
6. It's like, "Everything is so complicated. We need to simplify these things. Then it will be okay." It's like, what would really kickstart the economy is a healthy dose of Simple Living!
7. He argues, not unreasonably, that SIVs ultimately reduced banks' available cash reserves, which limited their ability to directly cover their losses on mortgage defaults. This has some explanatory value, but it's essentially an argument against excessive liquidity. I'm no expert, but as a prescription going forward it doesn't seem particularly useful simply to insist that banks carry greater cash reserves. I don't think it would have been effective, because there was plenty of capital chasing this bubble, and if it wasn't one bank it would have been another.
8. He gripes about "off the books" financial transactions, seemingly advocating the open publication of all contracts between private parties -- all in the interests of "transparency", of course. Does he want my Wal-Mart receipts, too?
The black box economy