Friday, April 04, 2008

Credit crisis for pedestrians

Here is a 40 minute discussion of the credit crisis on NPR's Fresh Air. The "expert" is a law professor with a tenuous grasp of finance, a love of regulation and an axe to grind against Wall St. and former Senator Phil Gramm. Terri Gross, ordinarily an astute interviewer, can't seem to get beyond concepts like big bets at a big casino by unregulated fat cats. 8-/


gs said...

Greenberger's bio is here. I'm glad I read it before deciding about spending 40 minutes listening to him.

The interview may become relevant if he gets back into government.

Anonymous said...

I heard her intro on this show the other day and the first thing I thought was, "By who? Wow, Steve at infoproc isn't going to like this!"

She should have interviewed you!

Steve Hsu said...

The interview isn't all bad, but far below the usual level at Fresh Air. If Terri can't grasp it and has to resort to ownership of a basketball team as an analogy, we are all in trouble.

This issue is complex enough so that understanding will elude >95 percent of the population. (What is securitization? Why sell derivatives based on an underlying index? What's the difference between betting and insurance?) It's ripe for demagoguery...

I've been a skeptic of credit derivatives and the housing bubble since I started this blog in 2004, but this Greenberger guy is overboard. It's a sign of political things to come, though. :-(

Anonymous said...

gs said "I'm glad i read (Greenberger's bio)_ before deciding about spending 40 minutes listening to him."

mock turtle responds:

unlike gs i both read the bio, listened to the NPR interview and found the presentation compelling and informative.

my minor in college was economics and have have served on two boards of directors of small corporate entities. i would not call myself an expert but i'm not stupid about this either.

here's a part of the bio with which gs was apparently unimpressed:

In 1999, Professor Greenberger began service as Counselor to the United States Attorney General, (snip)

Professor Greenberger assisted the United States Attorney General and Associate Attorney General in supervising the work of the Justice Department’s... (snip) Antitrust, and Tax Divisions.

Prior to entering government service, Professor Greenberger (snip) served as lead litigation counsel before courts of law nationwide, including the United States Supreme Court.

In 1997, Professor Greenberger left private practice to become the Director of the Division of Trading and Markets at the Commodity Futures Trading Commission.

In that capacity, he was responsible for supervising exchange traded futures and derivatives.

He also served on the Steering Committee of the President's Working Group on Financial Markets, and as a member of the International Organization of Securities Commissions' Hedge Fund Task Force.

(he)has appeared on the ABC Evening News, The Jim Lehrer News Hour, and C-Span to discuss financial issues arising out of the Enron, Arthur Anderson, and WorldCom, Refco and Amaranth failures.

Professor Greenberger is a Phi Beta Kappa graduate of Lafayette College and the University of Pennsylvania Law School, where he served as editor-in-chief of the Law Review."

ok gs don't hide behind the vagaries of you previous post and the insinuation...

is this a qualified person to speak on the issue of financial excesses especially with regard to derivatives..or not?

mock turtle

gs said...
This comment has been removed by the author.
gs said...

mock turtle, let's look at other parts of the Greenberger bio:

Professor Greenberger designed and teaches two courses focused on counterterrorism and emergency response...Professor Greenberger also teaches Constitutional Law and a seminar on Futures, Options and Derivatives at the Law School.

Counterterrorism, public health emergencies, constitutional law, and, lastly, finance.

The 'Selected Publications' button on Greenberger's faculty page does not reveal any papers about the securities industry.

Prior to entering government service, Professor Greenberger was a partner for over 20 years in the Washington, D.C. law firm of Shea & Gardner, where he served as lead litigation counsel before courts of law nationwide, including the United States Supreme Court.

No mention here of specialization in securities law, let alone of hands-on experience in trading or banking.

Moreover, expertise as a litigator or administrative experience as a regulator does not constitute expertise as a practitioner. Greenberger does not strike me as an Arthur Levitt let alone a Robert Rubin.

"is this a qualified person to speak on the issue of financial excesses especially with regard to derivatives..or not?"

I'm unengaged by that as an abstract proposition. I choose not to give Greenberger 40 minutes of my time; if others decide differently, I hope they consider the experience worthwhile. If Greenberger is given a responsible position in a future administration, his claim on my attention will increase.

Anonymous said...


i suspect that many of the quants cooking up the failed algorithms that enabled the IBs and hedge funds to create this mess never published papers or met the criteria you hold out as a necessary prerequisite for listening to the Terry Gross- Greenberger interview.

And since you have not listened to the interview you are left with adhominum criticisms rather than being able to engage in a substantive debate on the merits of Greenbergers argument.

suffice it to say that Greenberger, like W. Buffett understands the proliferation of exotic and compound-complex derivatives which now stand at a notional value in excess of 500 trillion dollars are the weapons of financial mass destruction.

due to counterparty risk and the enormity of the problem the Federal Reserve has one choice and one choice only, flood the system with liquidity and national (socialize) all the bad debt. this of course will create a dollar crisis.

however, i suspect the Fed is too late and we are in for the worst recession of the past 75 years.

(i hang out at calculated risk but i am not the blog host...visit sometime and you will be amazed at the wealth of econ info)

Anonymous said...

Mr. Hsu,

you wrote, "...Why sell derivatives based on an underlying index? What's the difference between betting and insurance? It's ripe for demagoguery..."

i respectfully disagree with the implication...if i understand the drift...of your question about betting and insurance.

the point that mr Greenberger made in the interview, and that others like Nouriel Roubini have made repetedly, is that credit default swaps (CDS) are bets on an outcome, offered as insurance.

Unlike house insurance or life insurance which requires that one have, what the law terms "an insurable interest"... (ie one cant take out a life insurance policy on a person who is not family or an employee or someone with whom i have a clear economic interest and/ or inter-dependency)... CDSs do not require such an interest...they ARE bets.

Further more. IBs have packaged, sliced and securitied these "bets" and gotten ratings agencies to tag a triple A on related derrivatives and then listed the CDSs or their derrivatives as mark to model assetts.

Over at a web site named Naked Capitalism, today, the blogger has quotes from an x fed governor who has seen the Bear Sterns balance sheet since the fed guaranteed buyout of BS by JP Morgan Chase, and said point blank that the BS holdings are worth NET about 10 cents on the dollar.

For years wall street and the Investment Bank types have decried government regulation as interfering with inovation. So over three decades the politicians have dismembered the regulatory machine that arose out of the great depression and which created firewalls to protect our financial system.

So now..we are all going over the falls, the savers and the prudent with the gamblers and hucksters.

It wont be the end of the world...but there will be a lot of pain. Count on it.

mock turtle

gs said...

Paul Volcker's views always merit respectful attention.

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