History of Commercial Paper

Some Nice Radio Journalism on Finance

I recommend:

Rene Gutel's radio blogs

and

This American Life's Another Frightening Show About the Economy, October 3, 2008

Keating 5 and the S&L Debacle

On the Efficiency of Finance

From Michael Perelman:

Capitalism is the most efficient system known to mankind. Central to this efficiency is the ability of markets to channel capital where it is most effective. The current financial crisis might be expected to throw some doubts on this dogma, but I do not expect that to be the case.

For example, in 2001, in the wake of dot.com bubble, 2, the New York Times reported on one of the many excesses of the period:

"In the last two years, 100 million miles of optical fiber -- more than enough to reach the sun -- were laid around the world as companies spent $35 billion to build Internet-inspired communications networks. But after a string of corporate bankruptcies, fears are spreading that it will be many years before these grandiose systems are ever fully used."

The response was not to rethink the system, but to double down lowering interest rates to reignite the stock market. Investors, the government, and even ordinary people applauded the decision Federal Reserve Chairman Greenspan, who appeared to be the wisest man in the universe at the time.

Greenspan's manipulation of the interest rate appeared to be so beneficial, because it occurred without any direct effect on the proverbial taxpayer. Peripherally, why is it that this taxpayer ranks so much higher in our concern relative to the workers who make everything possible?

In retrospect, Greenspan's policy provided the fuel that helped to make the crisis possible, if for no other reason that falling interest rates reduce the payment on mortgages. So, for the same payments, people can afford to buy more expensive housing. Once housing prices begin to rise, housing becomes an investment as well as the source of shelter. In addition, people who suffered losses during the dot.com bust, saw housing is a safer investment than the stock market.

Just as the solution to the dot.com crisis produce the current crisis, the present bailout, if it works at all, will create the preconditions for the next one. The purpose of the bailout is to create confidence. Back in the 19th-century, the governor of Illinois gave an excellent analysis of the way confidence worked in financial markets. He said that confidence "could only exist when the bulk of the people were under a delusion. According to their views, if the banks owed five times as much as they were able to pay and yet if the whole people could be persuaded to believe this incredible falsehood that all were able to pay, this was 'confidence'."

His words may perhaps be the most succinct analysis of fictitious capital that I have read.

Derivatives

I learned about Derivatives way, way back in 1989 when I worked at the Chicago Board of Trade. Although at first I was a bit overwhelmed at their very existence and seemingly unfathomable potential for complexity, I took it that they were well understood by the mainstream business class. So, it still seems bizarre to me these days when financial reporters seem to have to instruct the audience about them. Anway, I like how Warren Buffet put it:

"The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen)."

Back in 1989, these class of investments seemed to just simply be called Derivatives (ocassionally Shorts, Forwards, etc), but perhaps nowadays the jargon has expanded. They served a useful purpose for commodities markets, protecting the farmer (I posess no objective lens on this, I was exposed to the CBOT just out of High School) from the vagaries of weather. I'm supposing now that the real problem that eventually sprung up was the application of these hedge strategies to inappropriate lengths... insuring against nature is one thing, but insuring against man-made calamities is another.

Anyway, be sure you understand Derivatives.

Your Wikipedia Reading for Today

List of Notable Business Failures

Wow, 2008 has so many they had to be included in their own separate section.

On the Bailout, or Your Wikipedia Assignment

I still have conflicting opinions on the bailout (not, however, on the Paulson bailout plan, which is clearly reckless). I think it behooves anyone hoping to formulate an opinion to brush up on the following:

Federal Reserve

Federal Reserve Act (I think the resulting compromise legislation effectively debunks conspiracy theories propounded by Libertarians)

Shadow Banking System

Extra credit:
Commercial Paper

Money Fund

In any case, I think opinions necessarily have to fall into the Practical and the Ideal, so keep that in mind when you hear people talk about the bailout.