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Bloggingheads
05-04-2008, 05:52 PM

JAShapiro
05-04-2008, 06:26 PM
Charles Morris certainly sounds very knowledgeable about this technical topic, but I'm wondering what his credentials are. Does anyone know what his background in economics is?

otto
05-04-2008, 06:28 PM
Will W has gone for a sort of washed-out look today.

brucds
05-04-2008, 06:55 PM
Consider that you might be quibbling. To quote one celebrated "adult" seeking to be in charge - indeed, the voice of "Experience" who "knows how the sytem works": "I'm not going to put my lot in with economists!"

brucds
05-04-2008, 07:16 PM
"A lot of people who used to talk to me, don't now."

Works for me...

bjkeefe
05-04-2008, 08:02 PM
Charles Morris certainly sounds very knowledgeable about this technical topic, but I'm wondering what his credentials are. Does anyone know what his background in economics is?

Partial answer:

Charles R. Morris has written ten books, including The Cost of Good Intentions, one of the New York Times’ Best Books of 1980, The Coming Global Boom, a New York Times Notable Book of 1990, and The Tycoons, a Barrons’ Best Book of 2005. A lawyer and former investment banker, Mr. Morris’s articles and reviews have appeared in many publications including The Atlantic Monthly, the New York Times, and the Wall Street Journal

(source (http://www.huffingtonpost.com/charles-r-morris/#blogger_bio))

bjkeefe
05-04-2008, 08:03 PM
A grim and scary diavlog, but nonetheless, very instructive, at least for me. Great interview and interviewee.

McShugana
05-04-2008, 10:31 PM
The Washington Independent has been running regular columns by Mr. Morris for the last two months -- all archived at:

http://washingtonindependent.com/person/13391

Tao Jones
05-05-2008, 01:24 AM
Will's trying out for the Blue Man Group.

Wonderment
05-05-2008, 05:24 AM
Was Charles Wright the first person ever to do an hour on BHeads without cracking a smile or laughing at any of his interlocutor's jokes? If so, what does such sobriety of mien bode for the global markets?

otto
05-05-2008, 05:45 AM
Charles Wright?

Wonderment, you have Wright on the brain.

Bloggin' Noggin
05-05-2008, 11:38 AM
A grim and scary diavlog, but nonetheless, very instructive, at least for me. Great interview and interviewee.

I agree: very helpful. The explanation of how these financial instruments worked, what their point was, and how they were initially very helpful in bringing down the cost of mortgages was especially enlightening.

Anyuser
05-05-2008, 02:27 PM
I read Charles Morris's book and I highly recommend it. Maybe he is a bit halting and dry in this discussion, but his book is sleek, credible, witty, and very informative.

A fundamental I don't understand is how credit derivatives turbocharged the subprime mortgage problem into an astronomical threat. According to the NY Times in February, the value of the US treasuries market is 4.4TT, the value of the US mortgage securities market is 7.1TT, the value of the US stock market is 21.9TT, and the value of the credit default swap market is 45.5 trillion. Morris said 60+. So the value of the credit default swap market is 3-4 time greater than the US GDP. How the hell can that be? Does the buyer of a swap have to have any insurable interest in the obligation being insured? Do the regulators of a regulated buyer of a swap allow the buyer to move the guaranteed obligation off its books regardless of the creditworthiness of the seller of a swap? What is the economic incentive, or the market dynamic, for redundantly hedging these things a zillion times over?

In Morris's book he mentions synthetic CDOs, which are ginned up from credit default swaps corresponding to the obligations that make up an actual CDO. What percentage of the CDO market is made up of synthetic CDOs? Do these things have any business purpose whatsoever? Is it possible to explain in lay terms, given the universe of potential investments, why the hell anybody would choose to invest in a synthetic CDO?

Come on down to the comment section, Charlie.

hans gruber
05-05-2008, 03:23 PM
A lot of the arcana displayed here is interesting. But isn't the current mess fundamentally about the housing bubble? Yes, there was a lot of irresponsible and downright stupid behavior on the part of borrowers and lenders. But if housing prices weren't so inflated a lot of these mistakes wouldn't matter so much. If you take a bad ARM deal and can't afford your payment when the rate jumps, you could always sell your house and make make a little bit or maybe lose a little bit. And the bank gets its money. But because of the bubble, you're now upside down! You can't sell it for what you owe and the bank's out of luck for the difference. People are reluctant to sell for a loss, so the supply of homes on the market steadily increases, which further drops housing prices.

Now people who probably can afford their house begin to walk away from their homes because they are so upside down (for example, paying a loan for 600,000 on a house worth 450,000). Be responsible or let the bank eat it and take the credit hit? Lots of people are opting for the latter. Most of the shennigans now coming to light are problems in themselves and their unraveling obviously effects housing prices (inflates during good times, deflates during bad, so they are part of the bubble problem). But isn't the fundamental problem here one of the huge asset bubble caused by years of low interest rates and "let the good times roll" speculation stupidity, which is just now bursting before our eyes? Anybody who looked at the real price of housing since 1997 (50% increase) knew something was seriously wrong. The single biggest factor in this bubble was the Fed. So why does Morris think the answer is more regulation?

bjkeefe
05-05-2008, 04:14 PM
Hans:

... why does Morris think the answer is more regulation?

It seems to me, as one who is anything but expert on this, that what Charles was saying is that part of the problem that caused the bubble was irresponsible lending practices (in addition to irresponsible borrowing). His idea, loosely, was that a lot of loans were made that shouldn't have been made, that the loans depended on house prices continuing to rise forever, and that the riskiness associated with these loans was masked by the way they were bundled and repackaged as other investment instruments. These practices had the aim, or at least effect, of subverting the notion that a lending institution should have adequate reserves on hand for when things turn sour, the way banks are currently explicitly required to. The effect was, then, that a house of cards could get built, and we know what happens to those sooner or later.

So, I think Charles was saying that we need a way to require that every lender, in effect, has to adhere to the same sort of controls that that the minimum reserve requirements place on banks.

artoad
05-05-2008, 09:21 PM
Compliments to Will should be extended for not being a free market ideologue. His recognition of the fragility of the situation and Charles' admonition about not rushing into ad hoc ill considered reforms are to be commended. Like it or not the economy is an abstract community in which we all share through the exchange of currency. If we debase the currency, participate in bubbles with irrational exuberance or drown ourselves in credit card debt we have the capacity to destroy not only ourselves but everyone. I don't think we have to go back to Puritanism but the present crisis is some sort of moral wake-up call to get back to the basics of productivity, savings and some appreciation of economic virtue.

Namazu
05-05-2008, 11:17 PM
I believe the following is a quote from Morris' book: “The current conservative, free-market cycle, [think flawed guru Milton Friedman], that commenced with the Reagan presidency [1981-89]...seems to have long since foundered in the oily seas of ‘gross excess.’ If nothing else, a restoration of reasonable financial regulation is imperative.”

Either way, the current financial crisis seems to have activated the reptilian brains of countless armchair economists and junk scholars to reach the same faulty conclusions. While there has clearly been mis-regulation of the brokerages and of consumer lending, the root problem has been excess liquidity from the Federal Reserve. On this point, Milton Friedman is clear: he famously said that the Fed should be replaced by a computer which gradually increases the money supply. He is unfortunately dead and unable to defend himself against this contemptible nonsense. Anyone who sees this as a morality play about the excesses of the unfettered free market should think about how our tax code encourages debt (especially mortgage), how subsidization of infrastructure has created suburban sprawl, and how high taxes and bad services (esp. schools) have chased people out of the cities. Yes, Virginia, government is still the problem.

Flaw
05-06-2008, 06:12 PM
Wow Will,

I was stunned to hear you talk about defaulting people into savings programs and the need to protect the poor from the credit card companies though regulation. It did not sound like something a member of Cato would consider. To me it sounds a bit like a nanny state.

bjkeefe
05-06-2008, 07:18 PM
Wow Will,

I was stunned to hear you talk about defaulting people into savings programs and the need to protect the poor from the credit card companies though regulation. It did not sound like something a member of Cato would consider. To me it sounds a bit like a nanny state.

That's an interesting point, but I bet I can guess Will's answer to at least one of those: you're not forcing people into a savings program -- they're perfectly free to opt out.

I'm not sure how about the libertarian response to the second, but I maybe it would have something to do the CC companies being less than straightforward in their dealings with individuals, or that they have too much clout and collude too much to permit a true free market.

One of the reasons I like Will is his lack of ideological purity, in any case.