- In Kyle Bass’s opinion, the financial crisis wasn’t over. It was simply being smothered by the full faith and credit of rich Western governments.
- They were no longer talking about the collapse of a few bonds. They were talking about the collapse of entire countries.
- And they had a shiny new investment thesis. It ran, roughly, as follows. From 2002 there had been something like a false boom in much of the rich, developed world. What appeared to be economic growth was activity fueled by people borrowing money they probably couldn’t afford to repay: by their rough count, worldwide debts, public and private, had more than doubled since 2002, from $84 trillion to $195 trillion. “We’ve never had this kind of accumulation of debt in world history,” said Bass. Critically, the big banks that had extended much of this credit were no longer treated as private enterprises but as extensions of their local governments, sure to be bailed out in a crisis. The public debt of rich countries already stood at what appeared to be dangerously high levels and, in response to the crisis, was rapidly growing. But the public debt of these countries was no longer the official public debt. As a practical matter it included the debts inside each country’s banking system, which, in another crisis, would be transferred to the government. “The first thing we tried to figure out,” said Bass, “was how big these banking systems were, especially in relation to government revenues. We took about four months to gather the data. No one had it.”
- Kenneth Rogoff,
- Thus his new investment thesis: the subprime mortgage crisis was more symptom than cause. The deeper social and economic problems that gave rise to it remained. The moment that investors woke up to this reality, they would cease to think of big Western governments as essentially risk-free and demand higher rates of interest to lend to them. When the interest rates on their borrowing rose, these governments would plunge further into debt, leading to further rises in the interest rates they were charged to borrow. In a few especially alarming cases—Greece, Ireland, Japan—it wouldn’t take much of a rise in interest rates for budgets to be consumed entirely by interest payments on debt.
- But I didn’t go looking for this position. I was trying to understand the way the world was working, and this came to me.”
- “What do you tell your mother when she asks you where to put her money?” I asked. “Guns and gold,” he said simply.
- That’s my biggest fear. That I’m wrong about the chronology of events. But I’m convinced what the ultimate outcome is.”
- “I just bought a million dollars’ worth of them,” he said, and then, perhaps sensing I couldn’t do the math: “twenty million nickels.” “You bought twenty million nickels?” “Uh-huh.”
- “Iceland is no longer a country. It is a hedge fund.”
- “They created fake capital by trading assets amongst themselves at inflated values,” says a London hedge fund manager. “This was how the banks and investment companies grew and grew.
- One of the hidden causes of the current global financial crisis is that the people who saw it coming had more to gain from it by taking short positions than they did by trying to publicize the problem.
- Back in April 2006, however, an emeritus professor of economics at the University of Chicago named Bob Aliber took an interest in Iceland.
- The fish had not only been privatized, they had been securitized.
- Back away from the Icelandic economy and you can’t help but notice something really strange about it: the people have cultivated themselves to the point where they are unsuited for the work available to them. All these exquisitely schooled, sophisticated people, each and every one of whom feels special, are presented with two mainly horrible ways to earn a living: trawler fishing and aluminum smelting.
- The credit wasn’t just money, it was temptation. It offered entire societies the chance to reveal aspects of their characters they could not normally afford to indulge.
- Entire countries were told, “The lights are out, you can do whatever you want to do and no one will ever know.” What they wanted to do with money in the dark varied. Americans wanted to own homes far larger than they could afford, and to allow the strong to exploit the weak. Icelanders wanted to stop fishing and become investment bankers, and to allow their alpha males to reveal a theretofore suppressed megalomania. The Germans wanted to be even more German; the Irish wanted to stop being Irish. All these different societies were touched by the same event, but each responded to it in its own peculiar way. No response was as peculiar as the Greeks’, however: anyone who had spent even a few days talking to people in charge of the place could see that. But to see just how peculiar it was, you had to come to this monastery.
- In Greece the banks didn’t sink the country. The country sank the banks.
- “If the law was enforced,” the tax collector said, “every doctor in Greece would be in jail.” I laughed, and he gave me a stare. “I am completely serious.”
- Vatopaidi
- real estate bubbles never end with soft landings. A bubble is inflated by nothing firmer than people’s expectations. The moment people cease to believe that house prices will rise forever, they will notice what a terrible long-term investment real estate has become, and flee the market, and the market will crash.
- “There is an iron law of house prices,” he wrote. “The more house prices rise relative to income and rents, the more they will subsequently fall.”
- A banking system is an act of faith: it survives only for as long as people believe it will.
- Ireland’s banks had not been managed to withstand doubt; they had been managed to exploit blind faith.
- “What happened was that everyone in Ireland had the idea that somewhere in Ireland there was a little wise old man who was in charge of the money, and this was the first time they’d ever seen this little man,” says McCarthy. “And then they saw him and said, Who the fuck was that??? Is that the fucking guy who is in charge of the money??? That’s when everyone panicked.”
- The Irish banks, like the big American banks, managed to persuade a lot of people that they were so intertwined with their economy that their failure would bring down a lot of other things, too. But they weren’t, at least not all of them.
- TWO THINGS STRIKE every Irish person when he comes to America, Irish friends tell me: the vastness of the country, and the seemingly endless desire of its people to talk about their personal problems. Two things strike an American when he comes to Ireland: how small it is, and how tight-lipped.
- The bigger problem with a Greek default is that it might well force other European countries and their banks themselves into default. At the very least it would create panic and confusion in the market for both sovereign and bank debt, at a time when a lot of banks and at least two big European debt-ridden countries, Italy and Spain, cannot afford panic and confusion.
- The Germans were the exception. Given the chance to take something for nothing, the German people simply ignored the offer. “There was no credit boom in Germany,” says Asmussen. “Real estate prices were completely flat. There was no borrowing for consumption. Because this behavior is totally unacceptable in Germany. This is what the German people are. This is deeply in German genes. It is perhaps a leftover of the collective memory of the Great Depression and the hyperinflation of the 1920s.”
- The guilt is being so loudly expressed precisely because it is no longer personal and searing. Hardly anyone still alive is responsible for what happened here: everyone is. But when everyone is guilty, no one is.
- The global financial system may exist to bring borrowers and lenders together, but, over the past few decades, it has become something else, too: a tool for maximizing the number of encounters between the strong and the weak, so that the one might exploit the other.
- The point of Meredith Whitney’s investigation, in her mind, was not to predict defaults in the municipal bond market. It was to compare the states to each other so that they might be ranked. She wanted to get a sense of who in America was likely to play the role of the Greeks, and who the Germans. Of who was strong, and who weak. In the process she had, in effect, unearthed America’s scariest financial places. “So what’s the scariest state?” I asked her. She only had to think for about two seconds. “California.”
- Everywhere you turned, the long-term future of the state was being sacrificed.
- After seven years of trying and mostly failing to run California, Schwarzenegger is persuasively not depressed. “You have to realize the thing was so much fun!” he says. “We had a great time! There were times of frustration. There were times of disappointment. But if you want to live rather than just exist, you want the drama.”
- “It’s not that we’re insolvent and can’t pay our bills,” says Reed. “It’s about willingness.”
- THE ROAD OUT of Vallejo passes directly through the office of Dr. Peter Whybrow, a British neuroscientist at UCLA with a theory about American life. He thinks the dysfunction in America’s society is a by-product of America’s success. In academic papers and a popular book, American Mania, Whybrow argues, in effect, that human beings are neurologically ill-designed to be modern Americans. The human brain evolved over hundreds of thousands of years in an environment defined by scarcity. It was not designed, at least originally, for an environment of extreme abundance.
- Everywhere you turn you see Americans sacrifice their long-term interests for a short-term reward.
- “If we refuse to regulate ourselves, the only regulators are our environment,” says Whybrow, “and the way that environment deprives us.” For meaningful change to occur, in other words, we need the environment to administer the necessary level of pain.
What I got out of it
- Really interesting and fun read on the aftermath of the financial crisis and how different countries responded
