Niall Ferguson on 'Planet Finance'

Great new Niall Ferguson article over at Vanity Fair (!) on the rise and fall of what he calls "Planet Finance", where everyone's ten CDOs tall, and the transactions outnumber the people. It is lucid, lengthy, provocative and historically grounded, as you might expect from Ferguson.

This year we have lived through something more than a financial crisis. We have witnessed the death of a planet. Call it Planet Finance. Two years ago, in 2006, the measured economic output of the entire world was worth around $48.6 trillion. The total market capitalization of the world’s stock markets was $50.6 trillion, 4 percent larger. The total value of domestic and international bonds was $67.9 trillion, 40 percent larger. Planet Finance was beginning to dwarf Planet Earth.

Planet Finance seemed to spin faster, too. Every day $3.1 trillion changed hands on foreign-exchange markets. Every month $5.8 trillion changed hands on global stock markets. And all the time new financial life-forms were evolving. The total annual issuance of mortgage-backed securities, including fancy new “collateralized debt obligations” (C.D.O.’s), rose to more than $1 trillion. The volume of “derivatives”—contracts such as options and swaps—grew even faster, so that by the end of 2006 their notional value was just over $400 trillion. Before the 1980s, such things were virtually unknown. In the space of a few years their populations exploded. On Planet Finance, the securities outnumbered the people; the transactions outnumbered the relationships.

New institutions also proliferated. In 1990 there were just 610 hedge funds, with $38.9 billion under management. At the end of 2006 there were 9,462, with $1.5 trillion under management. Private-equity partnerships also went forth and multiplied. Banks, meanwhile, set up a host of “conduits” and “structured investment vehicles” (sivs—surely the most apt acronym in financial history) to keep potentially risky assets off their balance sheets. It was as if an entire shadow banking system had come into being.

Then, beginning in the summer of 2007, Planet Finance began to self-destruct in what the International Monetary Fund soon acknowledged to be “the largest financial shock since the Great Depression.” Did the crisis of 2007-8 happen because American companies had gotten worse at designing new products? Had the pace of technological innovation or productivity growth suddenly slackened? No. The proximate cause of the economic uncertainty of 2008 was financial: to be precise, a crunch in the credit markets triggered by mounting defaults on a hitherto obscure species of housing loan known euphemistically as “subprime mortgages.”

I may post some more comments about it later, but just go read it now here.

Comments

[speculari:]

Paul,
I am astonished that neither you nor Niall fail to offer a solution to this current financial dilemma! It's quite simple really:
We trade Barney Franks for Alistair Darling!
I know that on the surface it would appear odd - after all, one would think that we should trade the U.S. Secretary of the Treasury (Paulson) for the British Chancellor of the Exchequer (Darling). But, I believe that would be incorrect - clearly a Franks/Darling swap is the answer to all our prayers!
I'll call Gordon Brown if you will call Ms. Pelosi.

2008 Nov 07 10:35 AM

[speculari:]

Paul,
Simply following up on my end of the deal. Minister Brown seems amenable to the swap - he appears to be insistent, however, on two points:
1) Wants this arrangement to be called the "Darling/Franks Swap".
2) He has some crazy idea that we should also "monetize" the swap as some form of financial derivative.
I'm not sure about this latter point Paul, you're the expert in this arena. The guy just went on and on and on - you know, "credit default", "carbon caps", "LIBOR", etc. - something about wrapping all of this stuff together in a "spot" rate and then 1, 2, & 3 month horizon! What do you think?
Did you call Nancy yet?

2008 Nov 10 08:44 AM

[speculari:]

Paul,
So sorry to be such a bother on this subject but, I've now decided to bow out entirely from this little suggestion. Last evening, I saw Gordon at Guildhall (the service people were absolutely appalling by the way - when will they learn that one must always serve from the left & take from the right, wether it be wine, fish, fowl or, a lectern! Disgraceful! Not withstanding those ugly oversized chairs!) In any event, this little tidbit came after the Lord Mayor's speech & the P.M.'s speech as well (it was'nt half-bad, a couple of decent jokes.) ; to cut to the quick - Minister now wants to prevail on the President elect to name Alistair Darling as the new U.S. Secretary of the Treasury and he, in turn, would offer Barney Franks name as the Chancellor of the Exchequer! My apologies Paul, I had no idea he would go to this end. Yes, of course I know he's a Scot! I tremble for the Republic and, of course, for The Court of Saint James. Please do not call Pelosi, there is just no telling where she might go with this!

2008 Nov 11 11:25 AM