From the frozen lands of Norway’s Arctic Circle to the hot sands of the Middle East and the booming metropolis of Shanghai the losses from America’s subprime crisis are popping up around the world like angry whac-a-moles. The losses are large and appear larger by being found in the most unexpected of places. Today the focus is on these world-wide losses but I think future historians will focus on how the crisis demonstrated to everyone the power of integrated capital markets to diversify risk.
The losses, of course, are regrettable and the desire to find and apportion blame for the crisis among investors, home buyers, mortgage brokers, credit analysts and regulators is understandable. We should and will learn lessons. And yet, despite problems with transparency one of those lessons ought to be that the crisis would have been worse if the losses had been more concentrated.
From this perspective, world-wide losses are perhaps the best losses of all.
Perhaps the alternative way of looking at this is that globalization allows Wall Street to sell to a larger number of rubes. Without that internationalization, perhaps leveraging couldn’t have been so ridiculous, and perhaps losses would have been much smaller. And smaller losses might well be better.
I can only agree.
…or maybe it was just all those stupid unwashed masses getting newly wealthy due to their increased access to capital and some of them overextending themselves. We should just disallow everyone unintelligent access to the market, so they can’t make mistakes/stupid decisions, eh?
You are only “newly wealthy” if your net worth climbs. What we’ve had too often in this country, is “newly indebted.”
The savings rate and home equity ratios show this pretty clearly.
Andrew, if people ( in the Middle East, Norway or Bear Stearns) bought subprime loans for more than they were worth, how is that not a loss for them?
I suppose in the short term world-wide distributed losses are indeed good from an American point of view, since they basically mean the rest of the world has paid for American houses. Why the rest of the world should consider this a good thing is beyond me.
Unfortunately, the message that the world is getting is that investing in America will produce losses. It’s not just subprime: thanks to exchange rates, the S&P 500 has fallen more than 50% from its peak earlier this decade when measured in euros rather than dollars. And yet the US still has a voracious need for foreign capital, to the tune of two billion dollars a day. Brad Setser’s careful work has demonstrated that nearly all of this is now coming from foreign central banks rather than from private investors. You are being much too sanguine about the possibility of all this ending rather badly.
Well, if they bought at the top and the prices were really high, and they don’t recover to those highs before they have to sell, then yes, that is a loss for them, but a gain for the other side.
They mispriced the asset. When you play that game, you just might lose.
But, I don’t think those are the kinds of losses we need policy to address.
I think a sustained net loss is what we should be concerned about, not just transient losses or zero sum losses.
But what other kinds of losses are there?
One kind I can see is that, in many areas, houses have been built that are much too big (i.e. expensive) for the population, because they could (for a while) find buyers. This is a real loss, resources have been poured into the ground, and will not be recovered. But I don’t see any policy which could address this.
Rather the policies are trying to address the risk of recession, and all the bad things that go with that. Even if every individual in a collapsing pyramid scheme is getting what he had coming, if the scheme is big enough it’ll hurt the rest of us, and this is what policies might try to avoid.
What would be better was if America paid for its own mistakes, instead of the rest of the world having to suffer the rotten fruits of American Capitalist greed…
Mike, odograph and Spencer are right. It’s hard to imagine that we would be in the same situation if lenders weren’t able to spread the risk so widely – the ability to mitigate the immediate risk may have spread the losses, but it also enabled them.
caveat emptor,
Anne, the world in general, and UBS shareholders, has had extrodinary returns on “American capitalist Greed”, some losses every now and then are part of the lesson. World Capitalist Greed is developing it’s stride, with a little wobble here and there.
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