Mind Over Market

By Yusuke Horiguchi October 7, 2014 1. In a systemic financial crisis, strong forces of contagion--a virulent form of negative externality--put even the solidest financial firms with no faults of their own at serious risk, because of other firms' plight. This is a notorious example of market failure, providing a justification for public intervention aimed at preventing the financial system's collapse, typically involving taxpayer money. This is a standard economic analysis, widely accepted, at least at this level of generality, and with a straightforward prescription on the general direction of policy to be followed when coping with severe system-wide financial stresses.  It needs emphasis, however, that the prescription is applicable only to systemic crisis situations.  2. The situation of September 2008 and the ensuing few months was none other than that of an epochal systemic crisis. It in fact was the epitome of "unusual and exigent circumstances", in w...

Even after five years, there has been little acknowledgement of how the Lehman bankruptcy could have been avoided on September 15, 2008. A deal to spin off Lehman's bad assets to a Maiden Lane special purpose vehicle had been forged by Wall Street firms willing to lend the funds to make it possible. However, the sale of Lehman's good assets to Barclays Bank failed for lack of a temporary Fed guarantee of Lehman’s trading book. It may go done as the biggest mistake in the history of the Fed. By Robert Stowe England The Federal Reserve could have prevented the bankruptcy of Lehman Brothers in September 2008 by briefly guaranteeing the trades on Lehman’s good assets. The Fed guarantee was needed for only about 30 to 60 days to allow time for a vote by Barclay’s board of directors on Barclay management’s decision to acquire Lehman’s good assets. By Saturday, September 13, a deal had been put together under direction of Treasury Secretary Hank Paulson and ...

Marc Faber, publisher of the Gloom, Boom & Doom report, talks on September 14, 2012, about Federal Reserve policy and his investment strategy. Faber, speaking with Betty Liu on Bloomberg Television's "In the Loop," also discusses gold prices and the property market. (Source: Bloomberg) Selected Quotes: "Even if Romeny wins the election, the next Fed chairman will be a money printer. And so it will go on. The Europeans will print money. The Chinese will print money. Everybody will print money and the purchasing power of paper money will go down. And I don't like bonds. I don't particularly like equities, but I think equities are a better space to be in than bonds.” ** "I own corporate bonds. I bought some bonds from Kazakhstan because Kazakhstan economically is a much sounder country than the United States or any European country." ** "The fallacy in the United States is to think that this will go to the man on the street. It wo...

Marc Faber is interviewed on CNBC at 5:30 am on September 14, 2012

Lecture to Ethics Class Carey School of Business, Johns Hopkins University Legg-Mason Building, Baltimore East Harbor Campus Inner Harbor, Baltimore, Maryland August 27, 2012 By Robert Stowe England It’s nearly four years since the advent of financial crisis. Yet, for most Americans, a thick fog still shrouds its origins Finding the answer to what went wrong is what compelled me to write Black Box Casino. In the end, it was a detective story where even a list of important actors could run into the hundreds. At the center of origins of the crisis is a single industry – the mortgage industry. As senior writer for Mortgage Banking magazine since 1988, I have reported on the vast changes sweeping through the industry for more than two decades. The mortgage industry in 2008 was nothing like it was when I started covering it. Twenty years ago the mortgage industry was disciplined by the free market. It was flexible and innovative. New loan products would appear and...

The Federal Reserve could have prevented the bankruptcy of Lehman Brothers in September 2008 by simply guaranteeing Lehman's trades briefly, long enough for the deal to sell the good assets of the company to Barclays Bank in the United Kingdom to gain board approval at Barlcays. That observation was made New Year's Day during comments by Robert Stowe England on MoneyTalk with Bob Brinker in a discussion of his new book, Black Box Casino: How Wall Street's Risky Shadow Banking Crashed Global Finance . MoneyTalk with Bob Brinker is heard on 300 radio stations on Sundays. An archive of the broadcast can be heard here , beginning at 2:33 minutes "I would tend to agree with Allan Meltzer on this point . . . that the failure of the Fed to help rescue Lehman was the worst mistake in the Fed’s history," England said on the radio show. The entire deal was about to go through except for one hitch, England explained. "The regulatory authorities in the U.K. would not all...