June 13, 2009
Where Did All the Dollars Go, Long Time Passing?
I knew of course, like most of us, that the current economic collapse was caused by a bunch of horse thieves making shit up. In this case, money.
But I never understood the actual mechanics until I read this analysis on Of Two Minds by Zeus Yiamouyiannis. It sounds right to me, but what do I know? I was an English major. Read it and tell me what you think.
Posted by Jerome Doolittle at June 13, 2009 04:19 PM
Seems pretty right on the money.
Seems to me it's about right also. I've heard 27 to one and 30 to one leverage on asset to loan value on the unregulated banks, which then sold the debt to the repackagers who then figured out a way to again mark that up as assets, so you had double leverage going on, by how much is anyone's guess. But am I wrong if I conclude based on 30 to one twice that you ultimately had loan to value of 30x30 or 900 to 1 which is just a rough guesstimate but is as good a guess and maybe just as close as anyone else's guess.
Or am I making an error by these calculations? In the case of AIG and their London unit, there was essentially no equity to stand on - the sky was the limit with them.
Krugman's complaint with Geithner and the Obama team is that he thinks they just want to restart the engine on the whole shenanigans, which will just lead to a much bigger calamity later on down the road, maybe not for another 30 years. But eventually the house of cards will fall.
I would note that banks have always loaned more than they had in hard assets (like cash deposits), but I think they were dealing with much lower mark to market of something like five or ten (but I'm not really sure what the number is) and the loans usually had real equity behind them. That's why the S&L's and credit unions aren't the ones in trouble this time, they stuck with the old methods.
Somebody critique my calculations. I may be way, way off the mark on the numbers, but that's the way I understand what happened when it's boiled down to the simplest way of explaining it as possible. Or is that explanation too simple?