This Uncertainty Is Unacceptable

As the world listens to Messrs. Paulson and Bernanke argue for support of their three-page $700 billion manifesto, I wish to focus your attention on a central aspect of the credit crisis – the scale and scope of the credit derivatives octopus.

To illustrate, consider this: If scientists can “identify all the approximately 20,000-25,000 genes in human DNA”, and “determine the sequences of the 3 billion chemical base pairs that make up human DNA,” then why can’t the financial scientists identify the extent of the credit derivatives market?

This is a national, if not global, emergency. In such an emergency, is it acceptable to say, “We don’t know what we don’t know?” Or, “It’s too hard to figure out.” Nonsense. If this emergency were a war, would it be acceptable to say, “We can’t build that tank or missile because we don’t know where the steel is”? Of course not. So, why is it acceptable to say we don’t know the extent of the credit derivatives octopus?

Perhaps certain US government officials do know but they are just not saying so. Perhaps those certain US government officials reside in the US Treasury and Federal Reserve Bank. If so, then their actions these past anxiety-riddled months are about as inept as could be possible as a more comprehensive plan of action should have been constructed (from such knowledge) rather than the firemen Hank and Ben put out the latest financial wildfire this weekend, right now routine we have been treated to.

Investment Strategy Implications

Along with the insane decisions to implement FAS 157 and eliminate the uptick rule, the outrageous neglect on the part of those charged with oversight of the entire financial services industry, and the fundamental rationale supporting each (efficient markets and laissez-faire), you can add the unacceptable argument that it’s just too hard to figure out the credit derivatives octopus.

In the process, the world’s markets and economies are now forced to experience a disorderly unwinding of the credit bubble – a disorderly unwinding that could have been mitigated had certain action steps, and the rationales supporting them, been avoided.

Sadly, today’s testimony will almost certainly contain a lot of shoulder shrugging “we don’t know what we don’t know, it’s too hard to figure out” statements. Unacceptable.

Comments

[SW Richmond:]

The only reason is that they are all hoping for taxpayer largesse. Why come clean when you can claim disaster and get free money?

2008 Sep 23 11:58 AM

[puddytat:]

I am a Canadian and I am beside myself with how rough shod the US has treated its citizens. Not only do thousands of people lose their life savings and houses, go bankrupt and must live below poverty without the hope of a job BUT then these gentlemen have the audacity to ask for public money to bail out private companies. I am utterly excited that Americans are waking up to this ridiculous solution put forward by Ben and Hank, the 21 st century Fannie and Freddie... money goes in does not come out. Tens of thousands of you should be outside the whitehouse screaming at how these elite few will put you and your children in debt FOREVER without any hope of repayment. What a scam indeed, Mr Catalano is 100% correct when he writes "how could they not be able to figure this out" . He is correct when he argues that this all could have been mitigated a long time ago, certainly at least a year ago. Please be aware where Paulson came from, Goldmann Sacchs, who have magically dodged the bullet and on the weekend are now a bank not an investment bank. Does this not make Americans wonder. It makes the rest of us wonder.
Please write or phone your representatives to save yourself from a century of financial servitude from the likes of Bernanke and Paulson.
Sorry .... if it smells like a skunk IT IS A SKUNK.
A sham indeed.

2008 Sep 23 12:08 PM

[Jason Rines...:]

I believe you correct SWR. Also, for those to tally and release the real figures shows either gross incompetence (should be fired) or knowingly abetting outright theft (jail). The real truth will not be known for some years but I would say that the American public will decide justice for some no matter how ironclad in writing a legal document is. Look at the Constitution for example. How ironclad is that? Not much at all it appears.

2008 Sep 23 12:13 PM

[Michael Shu...:]

Your parallel to DNA is perfect -- the supposed "mapping of DNA" that says it is "complete" covers about 3% of genetic material. The other 97% is called "junk DNA" and scientists are decades a way from understanding its role. Ditto for many factors in financial markets.

2008 Sep 23 12:15 PM

[MarvinMBA:]

Let the junk bond holders rework the real estate and assets they acquired like everyone else that holds secure paper. Why bail them out? This is a raid that will squeeze our very lives and existance and Congress is destroying the US if this giveaway deal to the holders of this paper proceeds. The cost is budget busting and inflation will skyrocket and were all going to be in bread lines if this insane giveaway happens. This administration has destroyed this country already and the financial meltdown is the final destroying conflagration.

2008 Sep 23 12:26 PM

[DougM:]

You're missing something - economics is a "social" science, not a "hard" science. It has the trappings of science with numbers, formulas, etc., but at bottom a lot of it boils down to human behaviour and emotion, which is much harder to quantify.

2008 Sep 23 01:06 PM

[Robe:]

You can argue all day that the ship might have a hole in it, the ship does have a hole in it, the ship shouldn't have a hole in it, but the real need of the moment is to grab a bucket and bail. Bernanke and Paulsen are saying - pull it into port, refit the ship, and let's not focus on bailing, let's focus on getting the goods across the water where they'll continue to stimulate the economy. That's the real mission. They are absolutely correct. They did not create the problem, they inherited it, and we're fortunate that they - unlike their predecessors - are willing to address it head on.

Blaming the mess on the current administration is pure, 100% ignorance. Where were you when the liberal messmakers were pressuring everyone in the realty and banking sectors that all Americans were "entitled" to a home? That bubble was created by a social agenda that had no place buckling the banking and realty sectors, and it knowingly created illicit opportunities for unqualified homeowners, private profits for Fannie and Freddie with public funding, and led us straight to the mess we have today, pure and simple. Thank God that Paulsen and Bernanke are in place. Greenspan and Clinton were so concerned with being popular they held interest rates below GNP for years. Always a sure bet for financial calamity. Why haven't we heard from Rubin on this? Because he was complicit in it then, and is an officer on Wall Street now. A stark contrast to what Paulsen is standing for now - character in service to his country.

2008 Sep 23 01:32 PM

[JohnKing:]

The banks won't say what they are holding. They are just playing chicken with Congress.

Paulson is complicit in the creation of these financial puffballs, he should be under indictment, not in charge.

There is groundswell developing for his impeachment.

Stay tuned, Main Street might not know much but you don't need to be a rocket surgeon to know when you are getting gouged.

2008 Sep 23 01:39 PM

[markg:]

Robe, what freakin planet are you from? Bernanke was the moron who said we were not in a housing bubble, and you want to hand these idiots $700 billion? And it was on Bernanke's watch that most of the liar loans were made.

One other little tidbit for you, the top of the bubble of ALtA and prime loans is just starting to melt.

2008 Sep 23 01:57 PM

[MarvinMBA:]

Paulson, Bernanke created this problem in the first place with the hopes of keeping the country going until the administration changed hands...well it backfired prematurely and now we have the same team giving us a solution that once again helps the investors and does nothing for average joe on the street that pays taxes and does not benefit one cent and probably never will. In fact it will only cost him. You can see how much good its going to do for our dollar already as well as energy prices. The average Joe is priced out of a decent living standard before this problem(seems all of a sudden) developed..who created it and why? To bleed the public some more is my immediate thought. Lets see 5/6 buck gas and 5 buck milk and 15 buck ground meat is what is just aroung the corner if this fake payoff takes place...good luck.....MarvinMBA

2008 Sep 23 02:22 PM

[MarvinMBA:]

Paulson, Bernanke and Bush are duping the American People again and again and again and this is going to be the last kiss-off. This administration should have been recalled a long time ago.

2008 Sep 23 02:27 PM

[MarvinMBA:]

I will now tell you what I think. No matter what happens were going into big DEPRESSION like something out of the 30's but perhaps worst.....MarvinMBA

2008 Sep 23 02:33 PM

[Smarty_Pants:]

"America is a nation without a distinct criminal class, with the possible exception of Congress." Mark Twain

2008 Sep 23 03:30 PM

[whidbey:]

It is obvious that we have misunderstood the post. It means that we never knew anything and now we know that, but have not the faints idea what to do about it. So that case, anything will do, even if its wrong. which brings us to the new policies of the Treasury. You see it does not matter what we do. Marvin MBA, bless his little insightful soul, has it right. It is depression time. Now , get over it and get on with life because we never know what we don't.......you know the rest.

2008 Sep 23 04:38 PM