Sunday, March 16, 2008

Dunno what this means

I have nothing intelligent to add about Bear Stearns, but I sort of feel like I should have been paying more attention to whatever the hell is going on in the market over the last few months. I mean, here's a generations-old investment firm that lost 95% of its value in about 48 hours.


I think, of all the life experiences my grandparents would have liked to share with me, living through a stock market collapse wouldn't have been one of them.

1 comment:

Adam said...

If you want a good look at the "worst case" side of things, (coouple of former Oil Drum Canadian writers) provides a good one.

What has happened to the markets? The stock markets (and banking systems, it turns out), as has been clear for most of my lifetime, as basically a place where if everyone bets on teh same thing, it's considered to be worth more. It's gambling with a cooperation bonus built in. The dot-com bubble showed that in spades, but also showed the downside - when people finally realize something isn't worth that much, they start betting the other end of the market, and because values aren't based on real assets in many cases, this is enough to collapse the prices.

The current (just beginning) finance collapse is similar. The criminally over-leveraged banking/investment system became overly dependent on ever-increasing values (if you're leveraged 30:1, values better go up, or you're screwed) of real-estate, among other things. The market and the US Fed bank have been frantically throwing lendable money and low interest rates at the problem, which is all they can do of course But as I've seen quoted a lot lately, the probelm isn't liquidity (which the lendable money and low interest rates can solve), it's solvency (people actually having things of worth aside from other people's debt).

A quick example: if you had a million dollars, there's no way you would lend that to me, because I couldn't pay it back. If someone came along and gave you an extra milion, there's still no way you'll lend it to me. The basic problem: I'm not worth that much, no matter how much money you have.