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Letter Re: UCLA's Eye-Opening Colloquium on the Worldwide Financial and Economic Crisis
Hi,
Yesterday [Friday. November 14, 2008] I attended the Marschak Colloquium on
Mathematics in the Behavioral Sciences at UCLA {University of California, Los
Angeles] . This thing is attended by lots of UCLA
and
USC [University of Southern California]
economics professors, including many retired faculty members and other local
luminaries. (Two seats to my right was author Alvin Toffler of "Future
Shock" fame.)
The main speakers presented for an hour, and then the whole group asked questions
and discussed the topic. Here is the brief abstract that announced the
talk: "The current worldwide financial and economic crisis is the greatest
economic challenge we have faced since the Great Depression. The two speakers
will treat
the crisis in the light of historical experience, will identify some of its
causes, and will consider possible policy initiatives at the national and international
level to treat it."
The topic was "The Current Worldwide Financial and Economic Crisis." I
expected it to be an interesting, balanced, reasoned and academic view of the
current bumps in the road, with some modest suggestions for improving matters.
Wow! It was all very reasoned, and there was even a little bit of mathematical
modeling, but these people are very very concerned! The immense
set of interlocking derivative bets made by the big banks is now acknowledged
as a complete house
of cards, and one that is currently collapsing! (The second speaker made suggestions
about policy moves that could be taken "if officials somehow miraculously
stop the process in mid-collapse.")
The whole two hours was fascinating, but here are a few of the ideas and comments
that I came away with:
•
This is the first global crisis of the globalized world. Likely every country
will be affected and all at about the same time. (Very different from [the
economic crisis of] 1929-1937.)
•
The causes were many: lax regulation, lax credit reviews by rating agencies,
securitization of mortgages, insane(!) investment leverage, pressure for continuously
increasing financial profits, herd behavior, deregulation, ....
• Many financial institutions would be immediately bankrupt if
the were forced to value assets at current market prices. (Instead, everyone
has agreed to
claim that "certain markets are frozen." The regulators wink.)
•
Deleveraging is essential to the survival of these institutions. But most deleveraging
actions actually lower all institutions' capital bases. So it's a self-reinforcing
positive feedback cycle. Serious deflation is a genuinely possible outcome.
For the first time in our lives, money could become more valuable over time,
rather than less.
•
On the other hand, most Latin American currency crises began as fiscal crises.
Government frantically created money to prevent deflation, and eventually they
got hyperinflation. This, too, could happen here.
•
A former vice president of Citicorp was in the audience. He said that
the explosion in derivative instruments ran far ahead of infrastructure (markets
for trading
them, etc.) and far ahead of legal frameworks. He said we haven't even seen
the beginning of the counterparty problem.
•
An economist from USC in the audience said that we will soon have huge, massive
unemployment in the U.S.
•
What will happen next (even what could happen next) is unknown.
A Swedish economist in attendance said: "Dispense with the illusion that
you understand what is happening."
It was a very interesting couple of hours. - M.D.I. (by way of SurvivalBlog readers
Bill and Charley.)
