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| V V: How bubbles burst | |
| BOOKMARK | | V V / New Delhi January 10, 2009, 0:14 IST | |
Ponzi Scheme: Named after Charles Ponzi (1882-1949), it is one of the classic frauds by which depositors are kept happy with interest paid on their own capital in the belief that the capital is still intact and earning profit.
Money, banking and finance, the cornerstone of all business studies is a jargon-ridden theoretical construct from which you learn precious little of the real world of high finance. Financial panic and corporate swindles like the $10 billion BCCI fraud and the collapse of Barings, Britain’s oldest and most aristocratic merchant bank with debts of over £869 million, both in the 1990s, tell you more of the strangely knotted financial arrangements and financial launderings. Everything in retrospect looks simple but obviously we have learned nothing and forgotten nothing if you go by the sub-prime crisis, the current melt-down and, above all, the rip off by Bernard Madoff, the New York financier who has allegedly confessed to running a pyramid scheme that destroyed up to $50 billion of his clients’ money. As J K Galbraith said in Money: Whence it Came, Where it Went (1975), “In the financial world everything depends on confidence. One can better argue the importance of unremitting suspicion.” Or, the need for regulations, of checks and balances.
So, what went wrong this time round? Michael Lewis’ Panic: The Story of Modern Financial Insanity (Penguin India, Special Indian Price, Rs 250) is a collection of articles, mostly written by him and a few finance professionals that include two Nobel Laureates, Joseph Stiglitz and Paul Krugman. It tells us the inside stories of boom and bust, or how bubbles burst. Lewis who had written the bestseller, Liar’s Poker, which could be described (to use his own words) as an account of ‘Inside Wall Street’s Black Hole’ now provides a blow-by-blow account of the current crises.
To guide us through the thickets of high finance, Lewis has divided the book into four parts with numerous articles and an introduction to each part that he provides himself. These are: “A Brand-New Kind of Crash”, “Foreigners Gone Wild”, “The New Panic”, and “The People’s Panic”. Essentially, these are news stories that taken together provide an analysis of the four main panics of the last 21 years: the stock market crash of 1987; the Asian crisis of 1997-98; the collapse of the dotcom bubble after 2000 and the current housing and banking bust.
Each of these crises was prefaced by a doomsday forecast which makes Lewis remark: “How many times does the end of the world as we know it need to arrive before we realize that it’s not the end of the world as we know it?” In other words, bad as the crisis may have been it’s never the end: crash is followed by boom before it crashes again in a four-part pattern: euphoria followed by panic because of ignorance and greed.
Begin with the 1987 crash that opens the book. We are given an overview of the pre-crash scenario with the cover story from Time dated July 27, 1987 by Stephen Koepp, “Riding the Wild Bull”. This is then followed by the other side of the picture with an article from the Wall Street Journal dated October 20, of the same year, “The Crash of ’87: Chicago’s ‘Shadow Markets’ Led Free Fall in a Plunge that began Right at Opening”, which tells us why share prices had gone into free fall the previous day. The two articles are supplemented by further studies which provide an object lesson on how much business analysts really know of the inner dynamics of market behaviour: they go as much by hunch as the small investors.
Much the same pattern can be seen in the other crashes; people blundered because they little understood how financial instruments, all the technical mumbo-jumbo, credit regulators worked—they blundered on which made the crash worse. But it is last two sections, the follies of the dotcom valuations and the subprime loans, that would really interest us because they were a ripoff.
To take just one example. A couple secured a loan for $1.5m (with no collateral whatsoever), bought a house for $1.16m, refurnished it for $333,000, lived happily in it for three years and then coolly walked off! Nobel laureate Paul Krugman’s “After the Money’s Gone” tells it all.
You can use any cliché to describe the Panic and its aftermath: lax lending, the lure of cheap money, greed or whatever. But the one that is really spot on about business specialists is Saul Bellow’s remark that “a great deal of intelligence can be invested in ignorance when the need for illusion is deep.”
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Discussion Board
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| iyengarka7@vsnl.net |
January 11 , 2009 ,18:19 IST |
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| This book is a must to our netas and many IN the wrld of Finance, who unknowingly talk and babble about the Crashes.
Simply put it is the artificial inflation of values like a Bubble, wnichj had to bubble as this cannot withstand the pressures of reality in real estate prices. And complicated financial instruments, being passed on the this to various Financial Institutions who were indeed greedy. |
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| Jitendra |
January 10 , 2009 ,03:27 IST |
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| Absolutely wonderful to note happenings in other parts of the World. We love to show, but, we forget that it all catches up when we blow, and that will happen not by chance but because of the Romance of SHOW.
Love you,,,,,,,Jitendra Singh |
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