naked capitalism

Toby says:

Is that link to Mr Dudley’s speech a dud because of the author’s name, or is something more sinister afoot here?

joebek says:

“Low short-term interests rates for an extended period of time which allowed for high risk-adjusted return on both leveraged positions and maturity mismatches.” Might it be said that persistent low short-term interest rates cause over-leveraged, maturity mismatches in a competitive, capitalist economy? Can it not also be said that a rational expectation is that this condition will cause panic at some point?

Siggy says:

I just read Mr Dudley’s presentation. I see it as an apoligia for the course of action that the Fed took.

As to point 4, the best course of action is to have a method of resolution in place for those occassions when the insolvent institution is sytemically significant; or, a ‘primary dealer’ bank.

Mr. Dudley is an economist given to seeing what is. He is also an expatriot of Goldman Sachs. He may be a friendly acquaintance of Mr. Geithner; however, I suspect that he knows Mr. Paulson much better.

The missing lesson has not yet been apprehended. The lesson not taken is that this balance sheet crisis derives from a fiat currency, a fractional reserve banking system, the abrogation of regulatory responsibility and a moral failure of epic proportion. All the other stuff is dross!

Doug Terpstra says:

So, to summarize, the crisis was caused by interest-free Fed money to crony members and inadequate regulation by caputured regulators and legislators. A breakthrough revelation: cheap money and deregulation. Glad we’re fixing that; we wouldn’t want to repeat those mistakesl

These again are just symptoms It seems Dudley Do-right might have taken just one step farther back and said something about real root causes: public bribery and legally sanctioned fraud. They really take us for fools.

kevin says:

****“..this crisis was caused by the rapid growth of the so-called shadow banking system over the past few decades and its remarkable collapse over the past two years.” The speech goes on to document the shadow banking systems propensity to engage in maturity mismatches and reliance on short-term funding. The financial crisis is then explained in terms of the sometimes precipitous decline of funding, first from the shadow banking system and then more broadly.****

How is this possible as an explanation?

The crisis was caused by a rapid inflation of asset “pricing” that was not supported by the asset “value”.

Everything else is simply an explanation of how the mechanism that allowed that to happen failed.

craazyman says:

In contemplating Mr. Dudley’s remarks and general point of view, I am drawn in recollection to another encounter between an apostle of “commerce” and his interlocutor, the Marlow of Joseph Conrad’s Heart of Darkness.

Yes, Marlow himself would no doubt find a metaphoric resonance in the methods of the Company of the 1890s Congo Ivory trade and the no-less violent (albeit less bloody) financial trade of our day. I see Mr. Dudley as a well-meaning strategist at Company headquarters, abstractly analyzing the body count and the methods employed by the trade to accomplish its business objectives, and lecturing an assembly of ivory trade senior management, in a genial and genteel way, on ways to reduce the collateral damage and gain efficiencies in the process — in short to improve “the method”.

Kurtz himself, of course, is too high a bar for our time. None of the psychopaths who’ve been tossed onto our mind-screens by the GFC would seem to be even remotely capable of grasping Mr. Kurtz’s deeply existential and almost eschatological view of homo natura, or his capacity for trenchent metaphor. This might be something done to consciousness by the immersion through work in fleshless abstractions — such as “money” — instead of things that tap a sort of primal kinesthetic sensibility, like digging ivory and bringing it a thousand miles through a hot hell.

Our proto-Kurtzes would be playing golf somewhere, or tanning themselves before getting a massage. Perhaps this is a form of progress, for which we should be grateful. Althought I’m inclined to think it’s merely a brief epiphenomenon of our enlightened “civilization”, which may be rendered as a form of nostalgia if this madness is unrestrained and runs its natural course.

* * *

But there is no disguising the fact, Mr. Kurtz has done more harm than good to the Company. He did not see the time was not ripe for vigorous action. Cautiously, cautiously — that’s my principle. We must be cautious yet. The district is closed to us for a time. Deplorable! Upon the whole, the trade will suffer. I don’t deny there is a remarkable quantity of ivory — mostly fossil. We must save it, at all events — but look how precarious the position is — and why? Because the method is unsound.’

‘Do you,’ said I, looking at the shore, ‘call it “unsound method?”

‘ ‘Without doubt,’ he exclaimed hotly. ‘Don’t you?’ . . .

‘No method at all,’ I murmured after a while.”

-Joseph Conrad, Heart of Darkness

michael says:

I actually find Dudley’s first main factor LACK OF TRANSPARENCY much more important than the liquidity crisis.

And you just got to love his recursive logic in:

“The uncertainty stemmed, in part, from the lack of transparency about what prices these assets could be sold for, which, in turn stemmed from the difficulty of valuing these extremely complex and heterogeneous securities.”

Hugh says:

“Dudley correctly identified the causes of the crisis as the excessive use of leverage and maturity mismatches embedded in financial activities carried out off the balance sheets of the traditional banking system”

Am I the only one (besides Siggy) to see the humor in this from the man who was Goldman’s chief economist while all this was going on? Or how laying off the exotic instruments and de-regulation is a way to direct attention away from Goldman and Dudley’s role in the crash?

DownSouth pretty much nails it. All of this seems like going the long way round to say there was a bubble and surprise, it burst. But why this is the shadow banking system’s fault and not the bubble makers is unclear to me. Rather like saying so we had access to all this money so of course we had to go out and blow it on something really stupid.