The story of the US credit binge (it’s shorter than you think)

Came across this very good analysis by Jeffrey Grundlach, Chief Investment Officer from TCW, on Barry Ritholz’s blog The Big Picture .

The analysis is written for people reasonably unfamiliar with finance. There’s just a lot of common sense lines in the story. If we ran our own finances like the US govt, we’d be in debt for our lifetime and a generation more perhaps, and still borrowing. The govt debt is at 350% GDP right now and growing. I don’t even want to know how many multiples it might be of US revenue (such as taxes). From reading the possibilities of US monetization of debt and the resultant inflation, one understands why the emerging countries are beginning to clamour for a new global currency standard.

What some of us may not realize is that the debt burden of the country, and the individual, really began from the 80s with Reagan’s administration. So the story is a lot shorter than you think. Jeffrey’s theory is that the US credit story is a tragedy in 3 acts. And we’re just beginning Act 3.

No, it’s not over yet.

Letter from Jeffrey Grundlach


The credit crisis – A programmer’s two bits

With all the different takes on the crisis, it wasn’t going to be long before a programmer stood up and summarized his overall contribution to the debacle we find ourselves in today.

Michael Osinski, once a programmer on Wall St, now an oyster farmer in Long Island, gives us his story in the New York Magazine. Working in Salomon Brothers, Lehman and Kidder Peabody, he wrote a lot of the code used in the software to trade bond securities. He traces the evolution of securities and software from simple mortgage backed securities (MBS) to the now complex CDS and CDOs.

It’s a good read. Especially on the train to those oyster farms in Long Island.

My Manhattan Project


Lessons lessons lessons

Another article on lessons learnt, this time by Fareed Zakaria in Newsweek. In his usual balanced way, he articulates how this crisis may actually force Americans to kick the debt laden habits of old and get back to the basic economics of living: do not consume more than you can earn. And there is no free lunch. You pay now, or you’re in debt.
Zakaria: A More Disciplined America

Which brings me to a very interesting point that Volcker made on the Charlie Rose show on PBS last week. I’ll post that in a separate blog.

Credit crisis – The Blame game

McCain’s playing “pin the donkey”, Obama’s playing “it’s elephantiasis, stupid”, and the rest of the establishment is searching for a sitting duck. Wall Street execs, Fannie and Freddie, dishonest mortgage brokers, the Fed, Greenspan, derivatives, AIG, deregulation, CRA, short selling, rumors – all of these have been blamed so far. And we’re not done yet.

In the meantime, Victor Davis Hansel writes an article on Real Clear Politics about lessons to be learnt from the crisis. The last paragraph is worth noting. It takes us back to the basic core values that seem to have gotten lost in the midst of the boom.

Pretty simple, really.