Comments on: Stiglitz: On the Fallen Standing of the US High Finance http://www.nakedcapitalism.com/2008/02/stiglitz-on-fallen-standing-of-us-high.html Sun, 22 Nov 2009 11:45:14 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Tom http://www.nakedcapitalism.com/2008/02/stiglitz-on-fallen-standing-of-us-high.html#comment-3710 Tom Tue, 05 Feb 2008 09:51:00 +0000 http://www.nakedcapitalism.com/2008/02/stiglitz-on-the-fallen-standing-of-the-us-high-finance/#comment-3710 "If we know the price of cream and the price of skim milk, we can figure out the price of milk with 1% cream, 2% cream, or 4% cream."<br/><br/>That's a bit of misdirection - the point with securitisation is that you should get all the cream if you buy the AAA's, so you buy, say, 70% of the milk but get 100% of the cream. 4% cream in a carton becomes 5.7% of the tranche, which (following his own logic) we can all value... Still, if the milk goes sour... “If we know the price of cream and the price of skim milk, we can figure out the price of milk with 1% cream, 2% cream, or 4% cream.”

That’s a bit of misdirection – the point with securitisation is that you should get all the cream if you buy the AAA’s, so you buy, say, 70% of the milk but get 100% of the cream. 4% cream in a carton becomes 5.7% of the tranche, which (following his own logic) we can all value… Still, if the milk goes sour…

]]> By: 'nothermous http://www.nakedcapitalism.com/2008/02/stiglitz-on-fallen-standing-of-us-high.html#comment-3689 'nothermous Mon, 04 Feb 2008 10:51:00 +0000 http://www.nakedcapitalism.com/2008/02/stiglitz-on-the-fallen-standing-of-the-us-high-finance/#comment-3689 <i>Cognitive bias? What?</i><br/><br/>Toward <i>see-ing</i>. Cognitive bias? What?

Toward see-ing.

]]> By: 'nothermous http://www.nakedcapitalism.com/2008/02/stiglitz-on-fallen-standing-of-us-high.html#comment-12147 'nothermous Mon, 04 Feb 2008 10:51:00 +0000 http://www.nakedcapitalism.com/2008/02/stiglitz-on-the-fallen-standing-of-the-us-high-finance/#comment-12147 <i>Cognitive bias? What?</i><br/><br/>Toward <i>see-ing</i>. Cognitive bias? What?

Toward see-ing.

]]> By: 'nothermous http://www.nakedcapitalism.com/2008/02/stiglitz-on-fallen-standing-of-us-high.html#comment-53867 'nothermous Mon, 04 Feb 2008 10:51:00 +0000 http://www.nakedcapitalism.com/2008/02/stiglitz-on-the-fallen-standing-of-the-us-high-finance/#comment-53867 <i>Cognitive bias? What?</i><br/><br/>Toward <i>see-ing</i>. Cognitive bias? What?

Toward see-ing.

]]> By: s http://www.nakedcapitalism.com/2008/02/stiglitz-on-fallen-standing-of-us-high.html#comment-3681 s Mon, 04 Feb 2008 04:11:00 +0000 http://www.nakedcapitalism.com/2008/02/stiglitz-on-the-fallen-standing-of-the-us-high-finance/#comment-3681 Cognitive bias? What? The wealth creation over the past decade plus has been on the back of a system that has grown more corrupt by the year. It is a parasytic system that is rotten to the core and feeding off the real economy, empowered by the bankrupt foreign economic policy that has essentially given away our competitive advantages and gutted out industrial base. Who said American's aren't generous? Cognitive bias? What? The wealth creation over the past decade plus has been on the back of a system that has grown more corrupt by the year. It is a parasytic system that is rotten to the core and feeding off the real economy, empowered by the bankrupt foreign economic policy that has essentially given away our competitive advantages and gutted out industrial base. Who said American’s aren’t generous?

]]> By: eh http://www.nakedcapitalism.com/2008/02/stiglitz-on-fallen-standing-of-us-high.html#comment-3676 eh Sun, 03 Feb 2008 23:23:00 +0000 http://www.nakedcapitalism.com/2008/02/stiglitz-on-the-fallen-standing-of-the-us-high-finance/#comment-3676 <i>cognitive biases</i><br/><br/>Those definitely exist, especially among traders (bulls, bears) -- it is based on more than fundamental analysis, and recognizing and controlling it is a major problem for many of them.<br/><br/>Still I don't think it is 'cognitive bias' to point out the varied failings of modern 'financial engineering' and the regulatory milieu around it, since by this point they are more than obvious. Nor is it 'cognitive bias' to suggest that what appears to be prosperity here in the US is actually, to a significant degree, über-consumption <a HREF="http://network.nationalpost.com/np/blogs/fpposted/archive/2008/02/01/u-s-debt-service-load-higher-now-than-bad-old-days-of-double-digit-interest-rates-ml.aspx" REL="nofollow">financed by debt and debt driven asset inflation</a>:<br/><br/><i>Mr. Rosenberg, calculates the debt-service-to-income-ratio — interest and principal payments siphoned from after-tax earnings — has now soared to a near-record of 14.3%. That means 14.3¢ of every after-tax dollar of income earned goes to debt service.<br/><br/>The aggregate household debt-to-income ratio soared to 138% in the third quarter of 2007 from 101% at the end of 2001, an increase equal to all of the last 40 years combined. <br/><br/>“We have taken out so much debt as a society to finance a consumption boom and asset boom...that total interest payments are a bigger drag today than they were 25 years ago when the prime and conventional mortgage rate were both north of 16%,” Mr. Rosenberg said in a research note. “This is rather unbelievable.”</i> cognitive biases

Those definitely exist, especially among traders (bulls, bears) — it is based on more than fundamental analysis, and recognizing and controlling it is a major problem for many of them.

Still I don’t think it is ‘cognitive bias’ to point out the varied failings of modern ‘financial engineering’ and the regulatory milieu around it, since by this point they are more than obvious. Nor is it ‘cognitive bias’ to suggest that what appears to be prosperity here in the US is actually, to a significant degree, über-consumption financed by debt and debt driven asset inflation:

Mr. Rosenberg, calculates the debt-service-to-income-ratio — interest and principal payments siphoned from after-tax earnings — has now soared to a near-record of 14.3%. That means 14.3¢ of every after-tax dollar of income earned goes to debt service.

The aggregate household debt-to-income ratio soared to 138% in the third quarter of 2007 from 101% at the end of 2001, an increase equal to all of the last 40 years combined.

“We have taken out so much debt as a society to finance a consumption boom and asset boom…that total interest payments are a bigger drag today than they were 25 years ago when the prime and conventional mortgage rate were both north of 16%,” Mr. Rosenberg said in a research note. “This is rather unbelievable.”

]]> By: Anonymous http://www.nakedcapitalism.com/2008/02/stiglitz-on-fallen-standing-of-us-high.html#comment-3675 Anonymous Sun, 03 Feb 2008 19:41:00 +0000 http://www.nakedcapitalism.com/2008/02/stiglitz-on-the-fallen-standing-of-the-us-high-finance/#comment-3675 "The standard of living across the globe has improved materially."<br/><br/>Well in the USA what has improved materially is the lot of the top 1%. For example, wages of men in their 30's have declined 12% since the '70's. For most, family income has stagnated rather than declined only because women have gone to work.<br/><br/>Argue for predatory deregulated American style capitalism if you like, but you aren't entitled to your own facts. “The standard of living across the globe has improved materially.”

Well in the USA what has improved materially is the lot of the top 1%. For example, wages of men in their 30’s have declined 12% since the ’70’s. For most, family income has stagnated rather than declined only because women have gone to work.

Argue for predatory deregulated American style capitalism if you like, but you aren’t entitled to your own facts.

]]> By: Anonymous http://www.nakedcapitalism.com/2008/02/stiglitz-on-fallen-standing-of-us-high.html#comment-3674 Anonymous Sun, 03 Feb 2008 19:05:00 +0000 http://www.nakedcapitalism.com/2008/02/stiglitz-on-the-fallen-standing-of-the-us-high-finance/#comment-3674 The issue with respect to bonuses for senior Wall Street executives is that they were all based on the last several years of earnings, which were largely generated by structured financial products. Now that we know that these profit numbers were nothing more than fabrications (no one knows for sure when execs realized this), shareholders deserve to get the bonuses back. The problem is that boards never structure employment agreements with a claw back. The argument for excessive executive pay was twofold (1) the firms were generating outstanding returns, and (2) companies would loose top talent. Well, looking back, the excess returns have been vaporized and most shareholders would likely agree that loosing this "talent" wouldn't have necessarily been a bad thing as newcomers could have hardly done worse. The issue with respect to bonuses for senior Wall Street executives is that they were all based on the last several years of earnings, which were largely generated by structured financial products. Now that we know that these profit numbers were nothing more than fabrications (no one knows for sure when execs realized this), shareholders deserve to get the bonuses back. The problem is that boards never structure employment agreements with a claw back. The argument for excessive executive pay was twofold (1) the firms were generating outstanding returns, and (2) companies would loose top talent. Well, looking back, the excess returns have been vaporized and most shareholders would likely agree that loosing this “talent” wouldn’t have necessarily been a bad thing as newcomers could have hardly done worse.

]]> By: Anonymous http://www.nakedcapitalism.com/2008/02/stiglitz-on-fallen-standing-of-us-high.html#comment-3670 Anonymous Sun, 03 Feb 2008 18:21:00 +0000 http://www.nakedcapitalism.com/2008/02/stiglitz-on-the-fallen-standing-of-the-us-high-finance/#comment-3670 "They thought that financial innovations could somehow turn bad mortgages into good securities, meriting AAA ratings."<br/><br/>Global collusion and financial engineering gurus fused together packages of localized loan pools into globalized loan pools in hopes that the default rates would be insignificant and thus any impairment or dilution would be diluted to zero risk.<br/><br/>The result of what these gurus engineered is a global systemic financial failure resulting in denial on their part, no accountability on their part and defaults on a global scale never before seen. These gurus will return to Davos with new derivatives and be held in high regard, versus being placed into global prison cells! “They thought that financial innovations could somehow turn bad mortgages into good securities, meriting AAA ratings.”

Global collusion and financial engineering gurus fused together packages of localized loan pools into globalized loan pools in hopes that the default rates would be insignificant and thus any impairment or dilution would be diluted to zero risk.

The result of what these gurus engineered is a global systemic financial failure resulting in denial on their part, no accountability on their part and defaults on a global scale never before seen. These gurus will return to Davos with new derivatives and be held in high regard, versus being placed into global prison cells!

]]> By: Anonymous http://www.nakedcapitalism.com/2008/02/stiglitz-on-fallen-standing-of-us-high.html#comment-3667 Anonymous Sun, 03 Feb 2008 17:16:00 +0000 http://www.nakedcapitalism.com/2008/02/stiglitz-on-the-fallen-standing-of-the-us-high-finance/#comment-3667 Stiglitz is a fine economist but like all humans is prone to cognitive biases. While I agree that we have had three major market corrections over the past twenty years, it has also been a time of unprecedented economic growth across the globe. The standard of living across the globe has improved materially. Stiglitz is simply wrong in asserting that we have a major problem. He is correct that we need to better understand the dynamics we are experiencing. To summarize it is a common cognitive bias to focus on the losses and not the entire economic situation. Stiglitz is a fine economist but like all humans is prone to cognitive biases. While I agree that we have had three major market corrections over the past twenty years, it has also been a time of unprecedented economic growth across the globe. The standard of living across the globe has improved materially. Stiglitz is simply wrong in asserting that we have a major problem. He is correct that we need to better understand the dynamics we are experiencing. To summarize it is a common cognitive bias to focus on the losses and not the entire economic situation.

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