Monday, September 29, 2008

'We were the cool guys'

Just to continue (briefly this time) the thoughts I expressed a couple of days ago about the international financial crisis (and there were a few more signs yesterday and today -- in Britain, Iceland and Germany for example -- about just how international this is becoming): An article at the New York Times led me to an excellent episode of 'This American Life', a radio programme produced by Chicago public radio.

'The Giant Pool of Money' was broadcast back in May, but it offers one of the few clear explanations that I've seen of the various factors that came together over the last several years to give us all the wonderful spectacle of the shit hitting the financial fan.

(The original broadcast can be downloaded for a small fee, but -- perhaps for the more credit-crunched among you -- a free transcript is also available. That is the source of the quotes that follow.)

One of the strengths of the show is that it is largely based on interviews with actual people at all levels in the long chain of financial relationships that led to this crisis.

We meet, for instance, Clarence, who received a $540,000 loan against his house:

Alex Blumberg: And you basically borrowed that from the bank and they didn’t check your income?

Clarence Nathan: Right. It’s a no-income verification loan. They don't do that. It's almost like you pass a guy in the street and say: lend me 540,000 dollars? He says, what do you do? Hey, I got a job. OK. It seems that casual even though there are a lot of papers that get filled out and stuff flies all over with the faxed and emails. Essentially, that's ... that the process.

Alex Blumberg: Would you have loaned you the money?

Clarence Nathan: I wouldn't have loaned me the money. And nobody that I know would have loaned me the money. I know guys who are criminals who wouldn't loan me that and they break your knee-caps. I don’t know why the bank did it. I’m serious ... 540 thousand dollars to a person with bad credit.

The show also introduces us to an enormous pile of money -- about $70 trillion worldwide -- that was desperately looking for something to do and was bored with piddling returns on US Treasury bonds.

Now, how this incomprehensible sum of money led to Clarence getting a loan he had no business being anywhere near is a long story and involves meeting a few other people.

Like Glen, for example, who -- fresh out of college -- was making about $75-100,000 a month buying and selling these toxic mortgages.

And, apparently, spending it as fast as he could make it:

We ordered 3, 4 bottles of Cristal at $1000 per bottle. They bring it out, you know hey're walking through the crowd, they're holding the bottles over their heads. There's fire crackers , sparklers. You know, the little cocktail waitresses. You know so you order 3 or 4 bottles of those and they’re walking through the crowd and everyone’s like: Whoa, who's the cool guys? We were the cool guys.

Oh yes, absolutely. Very cool. Can I eat lunch at the cool kids table too, Glen? Oh, I'm sorry, you're not allowed to sit there yourself any more, are you?

Alex Blumberg: So give me your situation now. Can you pay all your bills now?

Glen Pizzolorusso: Not really. I borrowed some money from friends...from dad. Living in my house right now, we’re working with the bank to try to avoid foreclosure. At this point I’m dealing with an attorney. Trying to figure out if it just makes sense for me to walk away from the house.

Alex Blumberg: And have you made mortgage payments?

Glen Pizzolorusso: No. No.

That's right: after making millions dealing in mortgages of questionable value, Glen can't pay his own mortgage any more.

Anyway, Clarence and Glen obviously lived in different worlds, and they never met each other.

But the show's makers deserve a great deal of credit for managing to explain how people like them -- at different points in a long chain of responsibility -- made it extremely likely that the world economy is going to become a chilly place for at least the medium-term future.

How chilly?

In summing up, Blumberg downplays the more horrifying visions of a return to a 1930s-style depression:
That talk seems to have faded and there's more talk that the next few years will feel like the 1970s. There are lots of technical differences between this crisis and Jimmy Carter's malaise. But for the average person, it could feel the same. It's not an out-and-out depression. Everything's just kind of crappy. And not just in housing or banking but for the economy as a whole. It’s barely growing. There aren't a lot of new businesses, new jobs. Unemployment keeps creeping up. We're just sort of stuck, in neutral, for a while.

Anyone under, say, 45 probably doesn't remember that 1970's malaise too well. Anyone under 30 has barely known a US economy that wasn't growing. Now there's a decent chance we'll all get to see what life felt like in the '70s. Which isn't great. It's pretty bad, actually. Unless you're comparing it to the 1930’s.

And it maybe tells you a lot about the situation (or maybe just something about me) that 'everything's just kind of crappy' sounds somehow encouraging.

Till you remember that the report was completed back in May.

And things seem to have gotten worse since then.


Anonymous said...

Some more 'early' and good, yet depressing reporting on all of it: BBC, Debt Threat: Credit Monster

KB Player said...

Good article. I understand now how I could get a loan from Northern Rock by filling out a form on the internet.