Saturday, August 18, 2007

Econorama - mortgage crisis

The Wall Street Journal published an article by financial markets sage Henry Kaufman on Wednesday Aug 15, 2007. Kaufman has a hard-earned reputation for understanding money, money supply, credit, etc., on a global scale that few others can claim.



Even though he has been retired from his chief economist position at the old Solomon Brothers for years, he still has a firm grasp on economic data. His view is insightful - that many companies traded confidence in financial strength from holding cash and liquid assets for confidence in access to liquidity of lending markets. And, when a credit crunch occurs, they simply have no access to cash, leading not to a downward spiral, but a kamakazee dive.



It has been widely reported that hedge funds and others have had to sell what they could to raise cash, not what they wanted to sell. And, equally widely reported that the hedgies, mutual funds, quant funds and the like ended up owning too many similar assets, meaning that they were all dumping the same assets at the same time....crashing prices.



Since most of these guys went to the same schools and studied under the same professors it wouldn't be surprising to learn that the models they program ending up producing very similar buy, sell, hold, short, straddle etc. recommendations. The appropriate remedy for this is more difficult to divine.



And us small investors watch the Dow swing hundreds of points in a half hour, and have to ask what this has to do with investing or the real economy....

Fortunately, steady hands at the Fed prevailed, possibly saving the jobs of hundreds of thousands, and maybe even millions, of bricklayers, electricians, tile layers, carpenters, roofers, real estate agents, loan officers, landscapers, cabinet makers, HVAC installers, insulation makers, workers at plywood factories, workers at bath and sink plants and so on who would be out of work if even the highly paid, low credit risk can't get mortgages. I'm not worried about quants or hedge fund guys - if they've been making seven figures for the last few years and haven't put some away for a rainy day - shame on them. I am worried about the guy who works every day at a job site....

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