Calling it Right: Excerpts from Niall Ferguson’s Pre-Crisis Journalism

REASONS TO WORRY (NEW YORK TIMES MAGAZINE)
“According to calculations published by Barron's in February, over the next two years the monthly payments on about $600 billion of mortgages taken out by borrowers in the so-called subprime market (those with checkered or nonexistent credit histories) will increase by as much as 50 percent. This is because many A.R.M.'s have two-year teaser periods to entice borrowers. After that, the meaning of ‘adjustable’ suddenly becomes (in this case, painfully) apparent. The dinosaurs, we conjecture, succumbed to global climate change. The American beast — call it debtlodocus — faces a comparable economic challenge. The global economic climate seems to be changing. We hear no more talk of deflation; we hear a lot about rising rates. For America's giant, dinosaurlike economy — with its small, wealthy head; its big, fat middle; and its long low-income tail — there is a tried-and-tested response to a change in the weather. Dollar depreciation and inflation have saved the debtlodocus before. The assumption seems to be that they will do the trick again. Yet this time may be different. For sinking like a velociraptor's fangs into the tail of the debtlodocus are interest-rate hikes that may outpace and check any increase in inflation. And no one knows when and how violently the leviathan may react to this slowly discernible pain.”
June 11, 2006
http://www.nytimes.com/2006/06/11/magazine/11national.html?pagewanted=print&_r=0

THE “BANKIES” AND THE “HEDGIES” GO TO WAR - BUT WHICH IS RIGHT? (SUNDAY TELEGRAPH)
“Growing U.S. household debt has been the single biggest driver of global growth in the past five years. When Americans do finally stop borrowing and start saving, the effects could be bigger than the bankies anticipate. (Fact: 29 per cent of borrowers who took out mortgages in the U.S. last year have no equity in their homes or owe more than their house is worth.) My guess is that belts are already being tightened. Certainly, consumer confidence has fallen to levels we’ve seen only twice in the past ten years.
“‘Magnitude in affairs is a valid defence for certain irregularities’: I often think of Melmotte’s motto when I walk through the West End, where the hedgies hang out. The way we live now is, of course, different in many ways from the way Trollope’s contemporaries lived. (They didn’t have Big Brother or the World Cup.) But certain things remain the same. ‘All the world knew that just at the present moment money was very “tight” in the City,’ is Melmotte’s reply when his creditors press him for payment. Thanks to the bankies and their inflation targets, money is tight again today, and getting tighter. How long before the first big hedgie is pushed over the edge? Or will the bankies blink first?”
June 16, 2006
http://www.telegraph.co.uk/comment/personal-view/3625793/The-bankies-and-the-hedgies-go-to-war-but-which-is-right.html

THE WORLD ISN’T FLAT: POLITICAL RISK AND GLOBAL LIQUIDITY (MORGAN STANLEY)
Is this global moral hazard?
•Fed stands ready to pump liquidity if any asset prices fall too fast
•Asian CBs stand ready to absorb vast quantities of dollars as reserves
•Risks?
–Reigniting inflation
–Encouraging speculative behavior: everyone is too big to fail
Rest of developed world likely to follow Japan into deflationary, low growth pattern.
November 10, 2006

FRIEDMAN IS DEAD, MONETARISM IS DEAD, BUT WHAT ABOUT INFLATION? (SUNDAY TELEGRAPH)
“… monetary expansion in our time does not translate into significantly higher prices in shopping malls. We don't expect it to. Rather, it translates into significantly higher prices for capital assets, particularly real estate and equities. The people who find it easiest to borrow money these days are hedge funds and private equity firms. Through leveraged buy outs, the latter can easily acquire companies and, by improving their cashflow, boost their valuations. These guys then buy houses in Chelsea with the millions they make.”
November 19, 2006
http://www.telegraph.co.uk/comment/personal-view/3634398/Friedman-is-dead-monetarism-is-dead-but-what-about-inflation.html

WHEN A BLACK SWAN LANDS ON LAKE LIQUIDITY (DROBNY ASSOCIATES)
“… It is perfectly possible to imagine a liquidity crisis too big for the monetary authorities to handle alone. As in 1914, governments would need to step in. … Federal bail-outs for the likes of Goldman Sachs may seem unimaginable to us now.  But financial history reminds us that ten-sigma events do happen. And, when they do, liquidity can ebb much more quickly than it previously flowed.”
January 2007
https://www.dropbox.com/s/zw1df3211mp38r4/When%20a%20Black%20Swan%20Lands%20for%20Drobny%2C%20Jan.%202007.pdf?dl=0

THE NEXT MELTDOWN (TIME)
“The best explanation for the good times is liquidity. Thanks to global integration and financial innovation, higher short-term interest rates have not translated into monetary tightening. On the contrary, the world economy has been swimming in credit of every conceivable kind. Money-supply figures for the U.S. understate the phenomenon because billions of dollars flow abroad every month to finance the American trade deficit. The world's central banks control about $5 trillion of reserves. This in turn has raised monetary growth rates. The total value of commercial-bank assets worldwide is close to $56 trillion, and bank loans are only one of the many forms credit now takes.
“The key question is whether something could happen in 2007 to drain away this liquidity. For most investors and policymakers, the nightmare scenario remains that of the post-1929 Depression, when a stock-market crash was followed by a spectacular wave of bank failures and a massive monetary meltdown. However, by blaming the Hungry Thirties on blunders by the Federal Reserve, we reassure ourselves that history couldn't repeat itself. Today's central bankers are smarter. But history provides an example of another liquidity crisis that went far beyond what central banks could cope with. …
“A stock-market shutdown in 2007? History warns us not to rule it out.”
January 5, 2007
http://content.time.com/time/magazine/article/0,9171,1574140,00.html

CHIMERICAL? THINK AGAIN (WALL STREET JOURNAL)
“East Chimericans generate massive trade surpluses which they immediately lend back to West Chimerica. By channeling all these surpluses through government hands into government paper, East Chimerica depresses the key long-term interest rate in West Chimerica. And thanks to artificially low interest rates, financial and real assets in West Chimerica and its satellites are booming.”
February 5, 2007
http://online.wsj.com/article/SB117063838651997830.html

MAYBE OWNING A HOME IS NOT FOR EVERYONE (SUNDAY TELEGRAPH)
“Maybe, just maybe, not everyone is cut out to be a property owner. Maybe, just maybe, we should not be bribing and cajoling people at the margin into taking out mortgages and buying houses. And maybe, just maybe, a day of reckoning is approaching, when the costs of this policy will have to be borne not just by a minority of over-burdened households, but by everyone. … the problems in the subprime mortgage market are not confined to the borrowers alone. On the contrary, the current explosion of defaults and foreclosures threatens to set off a chain reaction extending right through the global financial system. It's not just that big banks have allowed their subsidiaries to make bad loans, though you can see some big names (among them Deutsche Bank) in the Memphis foreclosure notices. Much more serious is the way that subprime mortgage defaults can now have an impact on seemingly unconnected financial markets. The key is the way that subprime mortgage-backed bonds have been used as the underlying collateral for fancy instruments called Collateralised Debt Obligations (CDOs), which are divided into various slices or "tranches", with different credit qualities.  This is financial alchemy: using subprime mortgages to produce a top tranche of triple-A-rated securities is the equivalent of turning lead into gold.
July 15, 2007
http://www.telegraph.co.uk/comment/personal-view/3641299/Maybe-owning-a-home-is-not-for-everyone.html

THIS CRISIS WILL NOT DISAPPEAR OVERNIGHT (SUNDAY TELEGRAPH)
“… the really big crises in history unfolded over months and years, not mere days. In these protracted sequences of events, there were many gloomy nights, but also many false dawns. Because hope springs eternal, people tended to attach more importance to the latter than the former, mistaking them for real dawns and blinding themselves to the underlying downward drift. I think we are in one of these protracted crises now. … The combination of tighter borrowing conditions, job losses in finance and housing, and a growing mood of pessimism among consumers could prove to be a more toxic cocktail than many investors still want to believe. … Volatility is back with a vengeance, with the market up one day and down the next. But the swing downwards will be bigger still if people start to believe that a US recession is around the corner. Nor will the pain be confined to North America. Despite all hopeful talk about the economic ‘decoupling’ of Asia from the United States, the coming year and a half may yet expose the Orient's continued reliance on exports to the Occidental consumer. If Uncle Sam has to tighten his belt, the whole world will have to breathe in.”
September 2, 2007
http://www.telegraph.co.uk/comment/personal-view/3642391/This-crisis-will-not-disappear-overnight.html

BANKING CRISIS: DON’T BLAME THE CENTRAL BANKS (SUNDAY TELEGRAPH)
“The central banks are no more to be blamed for this crisis than the fire brigade is to be blamed for a blazing house. In each case, they are struggling to perform their proper role as lenders of last resort – as defined over a century ago by Walter Bagehot in his classic Lombard Street. But they are doubly constrained: first by the increasingly complicated legislation that governs their actions and, secondly, by the vast scale and complexity of global capital markets.”
September 23, 2007
http://www.telegraph.co.uk/comment/personal-view/3642888/Banking-crisis-Dont-blame-the-central-banks.html

MEMO TO MARKET DINOSAURS (FT)
“The big question for our time is: are we on the brink of a ‘great dying’ - one of those mass extinctions of species that have occurred periodically in the history of life on earth, such as the Cretaceous-Tertiary crisis that killed off the dinosaurs? It is a scenario that many biologists have reason to fear, as man-made climate change wreaks havoc with natural habitats around the globe. A great dying is also a scenario that financial analysts should worry about, as another man-made disaster - the subprime mortgage crisis - works its way through the global financial system.”
December 14, 2007
https://www.ft.com/content/e23f8260-a9af-11dc-aa8b-0000779fd2ac

HOW A LOCAL SQUALL MIGHT BECOME A GLOBAL TEMPEST (FT)
“… What began as a US crisis is fast becoming a world crisis. Small wonder only a handful of global equity markets are in positive territory relative to August 2007, while more than half have declined by between 10 and 40 per cent. The US slowdown will also affect many emerging markets more reliant on exports than China. At the same time, the global slowdown is about to kick away the last prop keeping the US recession at bay. No, this is not the Great Depression 2.0; the Fed and the Treasury are seeing to that. But, as in the 1930s, the critical phase is not the US phase. It is when the crisis goes global that the term ‘credit crunch’ will no longer suffice.”
August 7, 2008
http://www.ft.com/cms/s/0/2056a192-649e-11dd-af61-0000779fd18c.html#axzz2hpKZXOER

A LONG SHADOW (FT)
“Cheap money and deficit finance were the techniques recommended by Keynes and others in the 1930s as solutions to the problem of the Depression. They were used and abused in the 1960s and 1970s when there was no depression, with ultimately disastrous inflationary results. But can these techniques work now? So far, what they have achieved is what might be called a Great Repression. They have in effect repressed, but not cured, a depression. The question is whether, as some psychological theories would suggest, repression is a sustainable strategy or whether, at some point, the patient will come out of denial, break down and admit the terrible truth.”
September 22, 2008
https://www.ft.com/content/aeb88d8a-8800-11dd-b114-0000779fd18c

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