When Planet Finance fell to earth


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Vanity Fair carries a lengthy, but absorbing article on the present economic storm, by Niall Ferguson, Laurence A. Tisch Professor of History at Harvard University and a Senior Fellow of the Hoover Institution at Stanford, and the author of The War of the World: Twentieth-Century Conflict and the Descent of the West. The article is entitled Wall Street Lays Another Egg.

The author discusses the collapse of Planet Finance and the return to the real world of Planet Earth. Along the way he points out that bubbles and crashes have been with us since time immemorial. He writes with a historian’s perspective. The article points up various aspects of governance.

Take a look. I found it well worth the read.

He looks at the sub-prime mortgages noting :-

As a business model, subprime lending worked beautifully—as long, that is, as interest rates stayed low, people kept their jobs, and real-estate prices continued to rise.

My emphasis.

Ferguson concludes his excellent article with these final remarks:-

It remains unclear whether this crisis will have economic and social effects as disastrous as those of the Great Depression, or whether the monetary and fiscal authorities will succeed in achieving a Great Repression, averting a 1930s-style “great contraction” of credit and output by transferring the as yet unquantifiable losses from banks to taxpayers.

Either way, Planet Finance has now returned to Planet Earth with a bang. The key figures of the Age of Leverage—the lax central bankers, the reckless investment bankers, the hubristic quants—are now feeling the full force of this planet’s gravity.

But what about the rest of us, the rank-and-file members of the deluded crowd? Well, we shall now have to question some of our most deeply rooted assumptions—not only about the benefits of paper money but also about the rationale of the property-owning democracy itself.

On Planet Finance it may have made sense to borrow billions of dollars to finance a massive speculation on the future prices of American houses, and then to erect on the back of this trade a vast inverted pyramid of incomprehensible securities and derivatives.

But back here on Planet Earth it suddenly seems like an extraordinary popular delusion.

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