Sunday, October 05, 2008

Mortgage finance in pictures

This graphic is from TheDeal.com (via Paul Kedrosky). Note they give the notional to net ratio for CDS as $62 to $2 trillion, or 30 to 1. That ratio is a good proxy for the complexity of the network of contracts and how difficult it will be to disentangle.

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5 comments:

  1. Anonymous10:40 AM

    Steve,

    If I understand all this correctly, the key point in this whole mess is lack of perfect information, not regulation. Unlike regulation, which has ideological overtones, perfect information is feasible, uncontroversial and ideology-free and should be mandated in the future. Of course, regulation would have reduced chance of loss, but it would still not have been as bad as it is now had perfect information been available (as you noted).

    Anyway, abs. loved your previous post--- Simple question, complex answer and Notional vs net: complexity is our enemy. It clarified for me the situation far more than the many, many posts/articles ("wonkish" or not) I have read. If someone just uses that material and adds some numbers and shows the chain from mortages to CDS etc, an excellent article will result. I also think then people will appreciate the need for the "bailout", and why it has a good chance of working.

    Sorry, but the economists' writing has been terrible on the subject, in my opinion---missing the central points, and focussing on peripheral and/or ideological matters.

    MFA

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  2. Steve Hsu12:12 PM

    Better information would help immeasurably with the clean up. Regulation (i.e., a central CDS exchange, max leverage requirements on i-banks) would have helped quite a bit in lessening the crisis.

    Very few academic economists are familiar with the CDS market since it is very new. They tend to ignore it in the story they tell, whereas I think it is central to the systemic risk part of the story. This has been emphasized by people like Buffet among others and in the coverage I posted of Lehman and AIG.

    I thought the figure above good because it does suggest how intertwined everything is.

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  3. Dave Bacon2:17 PM

    CDS clearinghouse in the works:

    http://www.bloomberg.com/apps/news?pid=20601087&sid=a4ocj24uCB6c&refer=home

    Sounds like they've been reading your blog :)

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  4. Steve Hsu9:56 PM

    Dave: I hope it's not too late!

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  5. Unknown12:18 PM

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    ReplyDelete