Signs of the Economic Apocalypse, 8-20-07

From Signs of the Times:

Gold closed at 666.80 dollars an ounce Friday, down 2.2% from $681.60 at the close of the previous Friday. The dollar closed at 0.7420 euros Friday, up 1.6% from 0.7301 at the previous week’s close. That put the euro at 1.3477 dollars compared to 1.3696 the Friday before. Gold in euros would be 494.77 euros an ounce, down 0.6% from 497.66. Oil closed at 71.98 dollars a barrel Friday, up 0.7% from $71.47 at the close of the week before. Oil in euros would be 53.41, up 2.4% from 52.18 for the week. The gold/oil ratio closed at 9.26, down 3.0% from 9.54 at the end of the previous week. In U.S. stocks the Dow closed at 13,079.08, down 1.2% from 13,239.54 for the week. The NASDAQ closed at 2,505.03, down 1.6% from 2,544.89 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.66%, down 14 basis points from 4.80 for the week.

It was a wild week in world markets, as the words “panic” and “fear” were bandied about—never a good thing for financial markets that need to be faith and confidence for their functioning. World stock markets plunged for most of the week, leading the U.S. Federal Reserve Board to lower interest rates just a week after they said there was no reason to. That move raised stock prices at the end of Friday, allowing the markets to post a modest weekly drop of less than two percent. That removed the panic temporarily but not the fear and uncertainty.

What caused the Fed to reverse course was growing fear that turmoil in financial makets would affect the “real” economy. Several CEO’s of large consumer corporations sounded the warning, including Bob Lutz of General Motors.

Fed Cuts Discount Rate, Acknowledging Need for Action

By Scott Lanman

Aug. 17 (Bloomberg) -- The Federal Reserve lowered the interest rate it charges banks and acknowledged for the first time today that an extraordinary policy shift is needed to contain the subprime-mortgage collapse that began roiling the world’s financial markets two months ago.

The Fed, in a surprise announcement in Washington, cut the so-called discount rate by 0.5 percentage point, to 5.75 percent. Policy makers dropped language indicating their bias toward fighting inflation, and instead highlighted a rising threat to economic growth. That suggests officials will reduce their benchmark rate when they meet Sept. 18, economists said.

“This telegraphs their intention to cut rates at the next meeting,” said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “This discount rate cut calms the market and helps financing.”

This is the first reduction in borrowing costs between scheduled meetings since 2001, and Ben S. Bernanke’s first as Fed chairman. Officials kept the benchmark federal funds rate target for overnight loans between banks at 5.25 percent. Policy makers next meet to set the rate on Sept. 18. Futures indicate traders anticipate at least a quarter-point cut.

Stocks Rally

The Fed’s decision ignited a rally in stocks from Europe to the U.S. The Dow Jones Industrial Average rose 180.13 points to 13,025.91 at 2:53 p.m. in New York after advancing as much as 321.9 points earlier. The Dow Stoxx 600 Index of European shares added 2.1 percent to close at 359.65.

FOMC members held a 6 p.m. conference call yesterday, spokeswoman Michelle Smith said in Washington. The Board of Governors met after to accept requests by the New York and San Francisco Fed banks to cut the discount rate. St. Louis Fed President William Poole skipped the FOMC call to keep a dinner
appointment and avoid tipping the Fed’s hand, spokesman Joseph Elstner said.

Meanwhile, Treasury Secretary Henry Paulson spoke with President George W. Bush to update him on market developments, White House spokesman Gordon Johndroe told reporters in Crawford, Texas.

The Fed said while recent reports indicate economic growth continues at a “moderate pace,” risks to the expansion have risen “appreciably.” The statement is a marked change from just 10 days ago, when officials kept rates unchanged a ninth straight time and reiterated inflation was their “predominant” concern.

‘Prepared to Act’

“Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth,” the Federal Open Market Committee said today. “The committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects.”

Once a key barometer of Fed policy, the discount rate has faded in relevance since 1994, when the FOMC began discussing its federal funds rate stance. This is the first time since then that policy makers changed the discount rate alone. Four years ago, the Fed altered the structure so that the discount rate is now above, rather than below, the benchmark rate.

The discount window can still serve a major role. The day after the Sept. 11 terrorist attacks, the Fed lent banks $46 billion, more than 200 times the daily average over the prior month. It was like opening the “floodgates of a great dam,” then-Vice Chairman Roger Ferguson said.

Officials today also extended so-called discount window borrowing, allowing 30-day financing instead of a standard overnight loan. The Fed’s board sets the discount rate while the FOMC, which includes the governors and heads of five of the 12 district banks, determines the federal funds target rate.

Among the New York Fed’s directors are JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon, Lehman Brothers Inc. CEO Richard Fuld and General Electric Co. chief Jeffrey Immelt.

Strategy Failed

The Fed acted today after its injections of cash into the federal-funds market in the past week failed to ease companies’ access to capital. While there were enough funds to drive the effective federal funds rate below the 5.25 percent, credit in other markets was scarce.

The amount of commercial paper outstanding, a key financing tool, fell the most in the week to Aug. 15 since the 2001 terror attacks. Countrywide Financial Corp., the biggest U.S. mortgage lender, tapped an entire $11.5 billion bank line yesterday to get funds.

“This is an attempt to wake the world up,” said John Roberts, managing director and head of government bond trading at Barclays Capital Inc. “The system is flush in overnight money. Where the system is stacked up is in term funding.”

Housing Recession

The Fed’s action reflects alarm that more restrictive lending conditions and market volatility in will deepen the housing recession and weaken employment. As recently as the Aug. 7 meeting, the FOMC said inflation was still the biggest danger to the economy. Today’s statement, approved unanimously by 10 Fed governors and presidents, didn’t mention inflation.

Bernanke and his colleagues changed tack as losses mounted on subprime securities and concern spread that major lenders would be harmed.

Merrill Lynch & Co. analysts raised the risk in an Aug. 15 report that Countrywide could go bankrupt. JPMorgan, the biggest lender in the leveraged buyout market, may forfeit about $1.4 billion of second-half profit because of loans it can’t sell, according to Keith Horowitz, an analyst at Citigroup Inc.

At the same time, there are signs that inflation, the Fed’s preoccupation up to now, is receding. The Fed’s preferred gauge, which excludes food and energy costs, rose 1.9 percent in the 12 months to June, the lowest rate in three years.

Inflation Expectations

Investors’ expectations for inflation have also stayed contained. A measure derived from differences in yields on five- year Treasury inflation-protected securities and regular notes fell to 2.43 percent today, little changed from 2.37 percent at the start of the year.

Meanwhile, there are some signs consumers will suffer the impact of falling real-estate prices and dwindling ability to tap home equity. Consumer confidence fell to the lowest level in a year this month, a private report showed today. The Reuters/ University of Michigan preliminary index fell to 83.3 from 90.4.

“You’re getting a contagion effect on Main Street and any rational person would be downgrading their forecast” for growth, said Paul McCulley, a money manager in Newport Beach, California, at Pacific Investment Management Co., which runs the world’s biggest fixed-income fund. “All the pieces are coming into place for the beginning of an easing” in the Fed’s benchmark rate.

The subprime rout is the biggest challenge for Bernanke, 53, since he took office in February 2006. Under predecessor Alan Greenspan, the Fed in 1998 cut interest rates three times as currency crises in emerging markets roiled Wall Street.

Global Effort

In the past week, the Fed and central banks in Europe, Japan, Canada and Australia have been compelled to add money to the banking system. The collapse in demand for securities backed by subprime mortgages has forced at least 90 lenders out of business.

The European Central Bank began adding liquidity on Aug. 9 after BNP Paribas SA, France’s biggest bank, was forced to halt withdrawals from three of its investment funds. The Fed followed, along with counterparts from Sydney to Oslo.

Mortgage defaults by Americans with poor credit histories prompted the collapse in June of two hedge funds managed by Bear Stearns Cos. and triggered a worldwide rout in the debt markets. Companies such as London-based Cadbury Schweppes Plc have delayed asset sales, and banks including JPMorgan Chase & Co. and Deutsche Bank AG have been left on the hook for as much as $300 billion of debt they’ve agreed to provide.

Economists and policy makers anticipate a slower expansion in the second half. For the year, Fed governors and presidents expect growth, on average, of about 2.25 percent to 2.5 percent, Bernanke told Congress last month. The projections are about a quarter-point below the last round in February, mainly on weakness in homebuilding.

Why all the fear if the world’s central banks are willing to dump trillions of dollars into the system to keep it going? Because no one knows how deep the hole is into which they are throwing money. Andrew Leonard of Salon broke it down last week:

Panic on Wall Street

By Andrew Leonard

Aug. 17, 2007 -- From New York to Hong Kong and everywhere in between, alarm bells are ringing. Central bankers are on 24/7 alert, ready to perform life support on catatonic markets. Stock traders are panicking -- the Dow's wild ride on Wednesday, down 350 points and then almost all the way back, is just the latest declaration of confusion and fear.

If you had been paying only casual attention to the financial markets as summer rolled along, you could be excused for glancing at the headlines and wondering, what the hell is going on? By many measures the global economy is growing faster than it has for decades. But in our globalized world, anxiety is everywhere. Soon after the markets close in New York, Asia's traders start running for cover. By the time they're exhausted, Europe is picking up the relay. And then back to the United States it comes.

People who devote their entire lives to studying the intricacies of high finance are confused right now. But the basic storyline isn't that complicated once you break it down into simple building blocks. And that's what Salon is going to do. Here are some simple questions and, we hope, some simple answers.

How did this happen? How did we get here? What does it all mean?

There is a standard explanation included as a paragraph in almost every story attempting to explain the current turmoil. It goes like this: Anxious to goose the U.S. economy out of its dot-com-bust doldrums, Alan Greenspan and the Federal Reserve Bank lowered interest rates to rock bottom in 2001. The resulting flood of cheap money encouraged an orgy of borrowing at every level of the U.S. and world economies. Whether you wanted to buy a house or a multibillion-dollar conglomerate, lenders were your best friends, falling over themselves to offer you whatever amount of capital you desired -- and charging low, low rates of interest. Cheap money led to a growing complacency about risk. If you ran into trouble, you could just refinance your house, or borrow a few billion more dollars today to pay off the billions you might owe tomorrow.

Greenspan's policies are being blamed for inciting the greatest housing bubble in U.S. history. The collapse of that bubble set off a wave of defaults by homeowners no longer able to make the payments on their mortgages. Mortgage lenders were the next link of the chain to break, followed by the investors who were trading in bonds and securities whose value was tied to these loans. Suddenly, risk was back!

So that's that? It's Greenspan's fault?

Partially, but interest rate tinkering is not the whole story. It may not even be the most important part of the story. There's another reason so many homeowners are in trouble and stock markets are imploding: Wall Street rigged the system so something like this was inevitable.

One could make a case that the biggest economic story of the last 10 years -- bigger than the dot-com or housing booms, bigger than their busts, perhaps even bigger than the extraordinary growth of the Chinese and Indian economies -- has been the astonishing growth of what is obscurely referred to as "structured finance," a crazy quilt of arcane derivatives and other "financial instruments" that have become the lifeblood of markets everywhere.

Whoa. Stop right there. What is a derivative?

Strictly speaking, a derivative is a financial doohickey whose value derives from some underlying asset. A mortgage loan is an asset. A pool of mortgage loans grouped together into a security that can be traded on markets is a derivative.

We often hear about the "real economy," that place where real people buy and sell real things, or go to work at real jobs where they make real stuff or deliver real services. Derivatives belong to what should be called -- but never is -- the unreal economy, a place where speculators make bets about what will happen in the real economy. Derivatives are vehicles for making such bets. If you think the borrowers whose loans are pooled together are going to make their payments, then buying a share in a group of such investments might be a good idea. That would be your bet.

A metaphor might be useful here. The real economy is like the Super Bowl. Real men on a real field push each other around and play with a real ball for a set period of time, and the team with the most points at the end wins. But while all this is going on, millions of outsiders who are not physically involved in the game bet on its outcome. Only they don't bet just on the outcome. They also bet on the spread -- how badly one team might beat the other. Or they can get more creative and bet on what the combined score of the teams might be, or which team's quarterback will be the first to be injured. There's absolutely no limit to the things that you can bet on, as long as you can find someone to take your bet.

The betting economy is the unreal economy. All those sports bets, no matter how kooky, are financial exercises whose value and meaning are derived from what happens on the field. Theoretically speaking, the betting economy exists in a separate dimension from the actual game, but we all know that's not true. There's so much money involved in gambling that the temptation to fix the results becomes irresistible. Players and referees, for instance, can be bribed.

We can call a bribed NBA official an example of "spillover" from the betting economy into the sports economy. The very same thing happens in the real and unreal economies. So much money is riding on all the derivative bets connected to the housing sector that Wall Street speculators essentially rigged the housing sector to make their bets pay off.

To understand exactly what happened, we must take a closer look at a particular kind of derivative: the infamous "collateralized debt obligation," or CDO.

Say what? Collateralized who which how?

Don't worry about the name. Call it an extra-special funky doohickey if you like. It's not important. What is important is its function, which is to make things that should be considered risky take on the appearance of less riskiness.

After a mortgage lender makes a loan to a homebuyer, that loan is packaged up with a bunch of other loans into a security -- a financial instrument that can be traded. Securities are rated by rating agencies according to the chances that the underlying assets will be defaulted upon. U.S. Treasury bonds, for example, get stellar AAA+ ratings because the U.S. government is considered likely to meet its obligations.

A security based on a pool of subprime mortgage loans would normally not deserve an AAA+ rating. Subprime, by definition, means "not so good." Subprime loans are made to people who can't put together a down payment or have bad credit, or can't prove they have a job. Subprime loans are risky!

Many investors -- particularly in pension funds and municipalities -- are prohibited from investing in securities that are not high-rated. Let the hedge funds and the investment banks play around with the risky BBB stuff, the "junk." The rest of us should be more prudent.

But investment bankers are clever fellows. In cahoots with the ratings agencies, they came up with a way to magically transform a low-rated security to a high-rated security. (The culpability of the ratings agencies -- Fitch, Standard & Poor's, Moody's -- should be not underestimated. It might be helpful to think of them as the bribed referees in this game.)

Enter the collateralized debt obligation. The CDO takes a pool of risky mortgage loans and divides it into slices. (Wall Street calls these slices "tranches," but that seems to be a word that makes the brains of normal people freeze up, so we'll ignore it.) For simplicity's sake, let's say that a mortgage-backed security gets divided into two slices when it is transformed into a CDO -- a senior slice and a junior slice. Let's say that the senior slice gets rated AAA+ and the junior slice gets rated BBB-. But if anything goes wrong -- if the homeowners whose loans are part of this security start missing their payments -- the investors in the junior slice have to lose all of their money before the investors in the senior slice start feeling any pain. That's the beauty of the scheme. You take a bunch of bad loans and turn some of them into high-rated gold and some into lower-rated bronze. You sell the gold to the cautious and the bronze to the bold. If a few loans go kaput, the bronze investors suffer. If all the loans go kaput, everybody gets hurt. Unless there's a total financial meltdown, everyone is happily making money.

We keep hearing in the financial news about risk being "sliced and diced." Is that what you're talking about?

Yes. After the transformation, we now have an instrument that satisfies the desires of both conservative investors, who can just buy the AAA+ rated slice, and investors who have a taste for risk, who can buy the BBB- slice. It's a brilliant work of alchemy.

And very popular. CDOs tied to subprime mortgages became hot commodities, snapped up with gusto by traders all over the world -- even the riskiest, most likely to self-immolate, lowest-rated slices of those CDOs. Especially those slices.

Why? Why was there such an appetite for risk?

No risk, no reward. In the securities world, financial vehicles whose underlying assets are risky yield higher rates of return. Subprime loans ultimately charge higher rates of interest than prime loans. That means that as long as homeowners don't take advantage of introductory low rates and pay off their loans early, pools of such loans will throw off a higher stream of income than pools of less risky loans. Traders who want to get a piece of that higher stream of income will take the chance of default.

This is where we approach the crucial turning point. Many different parties have been blamed for the housing mess. Homeowners are told that they should have read the fine print on their loans and should have avoided taking on financial obligations that they couldn't meet. Mortgage lenders are blamed for pushing the risky loans in the first place. And of course, there's the maestro, Alan Greenspan. But these attributions of guilt all miss the mark. The incentive for everyone to behave this way came from Wall Street, where the demand for subprime CDOs simply couldn't be satisfied. Wall Street was begging the mortgage industry to reach out to the riskiest borrowers it could find, because it thought it had figured out a way to make any level of risk palatable.

So Wall Street wanted mortgage lenders to make bad loans?

Let's return to our Super Bowl metaphor. The gamblers aren't satisfied with their odds of winning, so they bribe a player to fumble at the one-yard line and alter their bets accordingly. Wall Street traders, hungry for more risk, fixed the real economy to deliver more risk, by essentially bribing the mortgage originators and ratings agencies to fumble the ball or make bad loans on purpose. That supplied CDO speculators the raw material they needed for their bets, but as a consequence threw the integrity of the whole housing sector into question.

But hang on. Isn't the total amount of subprime loans outstanding just a fraction of the overall home-lending market? And isn't the U.S. economy still growing? Why has just one small sector of one country's economy caused so much trouble?

Two main reasons: a lack of transparency and an overabundance of leverage.

What's been described here so far is just the simplest possible model of how things work. The truth of what is really going is far more complex. So complex that no one has a good handle on exactly what will happen if things go awry. Not regulators, not traders, not even pessimistic journalists. Try reading an SEC filing from a New York investment bank -- it is one of the most difficult-to-comprehend documents ever created by the human mind.

It is not, in a word, transparent. It serves the opposite purpose: It is an instrument of obfuscation. Because of failures of regulatory oversight, we have very little idea who owns what, or what risks hedge funds and pension funds and municipalities and mutual funds are really exposed to. This is all fine and dandy if your goal is to prevent your competitors from understanding what kinds of bets you are making. But it becomes a much more severe problem when you're trying to figure what is going wrong when the trains start derailing.

(By the way, if you're looking for something that government could do that might address this problem, calling for greater transparency carries the double whammy of being both the right thing to do, and rhetorically speaking, something that free markets are supposed to depend on for their proper functioning.)

Next up: leverage. Archimedes told us that if he had a lever long enough and a place to put it, he could move the world. Speculators in the world's financial markets also like leverage; but they don't use crowbars to move objects -- they use borrowed money to make bigger bets. This is fine as long as your bets pay off. But when your bets go bad, the people whose money you borrowed want it back.

Right now, a great many people want their money back.

The people who say that subprime is just a small part of the economy are correct. What they fail to note, however, is that the same games that Wall Street played with subprime are likely being played in every sector of the economy. It's not just a Super Bowl whose results can be fixed. The NBA, and Major League Baseball, and the Tour de France and the Olympics are all under the same pressures.

Subprime ripped a window open into the way business as usual is being conducted.

Now everyone wonders, what's next?

Nouriel Roubini explains it in terms of the difference between risk and uncertainty.

Current Market Turmoil: Non-Priceable Knightian “Uncertainty” Rather Than Priceable Market “Risk”

Nouriel Roubini

Aug 15, 2007

Economists distinguish between “Risk” and “Uncertainty”: the former can be priced by financial markets while the latter cannot. The distinction between the two was made by the famous economist Frank H. Knight in his seminal book, Risk, Uncertainty, and Profit (1921). In brief, “Risk is present when future events occur with measurable probability” while “Uncertainty is present when the likelihood of future events is indefinite or incalculable”.

This distinction between risk and uncertainty helps to explain the recent market panic and turmoil. Today, the FT cites a market economist at Lehman who said: “We are in a minefield. No one knows where the mines are planted and we are just trying to stumble through it”. A few days ago another market participant put it this way: “It is not the corpses at the surface that are scary; it is the unknown corpses below the surface that may pop up unexpectedly”.

Unknown minefield; unexpected corpses: this is “uncertainty” rather than “risk”. Risk can be measured and priced because it depends on know distributions of events to which investors can assign probabilities. Uncertainty cannot be priced by markets because it relates to “fat tail” distributions and extreme events that cannot be easily predicted or measured. A few days ago the CFO of Goldman Sachs justified the massive – 30% plus - losses of the two Goldman Sachs hedge funds by arguing that these were unpredictable “25 standard deviation events” that should occur only once in a million years. The same thing was said by the LTCM “masters of the universe” when their highly leveraged hedge fund went belly up in 1998.

Too bad that these fat tail events do occur more often than once in a million years: the real estate bubble and bust and S&L crisis of the late 1980s; the boom and bust of the tech stocks in 2000-2001; the 1987 stock market crash; the 1998 LTCM debacle; the variety of asset bubbles that ended up into busts from Japan (1980s) to East Asia (1997-98).

Indeed, for many reasons the current market panic has to do with unpriceable uncertainty rather than measurable risk.

First, we have no idea of what the subprime and other mortgage losses will be: $50 billion, $100 billion, $200 billion? They could be as large as $500 billion if the US enters in a recession and we have a systemic banking and financial crisis. The uncertainty about these losses depends on the fact that we have no idea of how deep and protracted the housing recession will be and how much will home prices will fall. If home prices were to fall – as my research suggests as likely – more than 10% in the next year or so, the subprime carnage will massively expand to near prime mortgages and prime mortgages. There is already plenty of evidence that the delinquencies are not limited to subprime mortgages as a number of near prime and prime lenders are now bankrupt or in trouble (AHM, Countrywide just to cite two examples). The worse the housing recession will be the worse these now uncertain losses.

Second, we have no idea of where the mines and the corpses are. Every day the turmoil is popping out in unexpected institutions and places: by now hedge funds, banks and asset managers in US, France, Germany, UK, Asia, Australia have gone belly up. And every day a different financial market gets into a liquidity crunch and credit crunch: first subprime; then near prime, prime, CDOs, CLOs, LBOs, ABCPs, corporate credit spreads, overnite interbank loans, money market funds, mutual funds. Every day we get a different surprise that adds to the market’s uncertainty and investors’ nervousness.

This increased financial uncertainty is in part due to the increased opacity and lack of transparency in financial markets…

But it is not just credit derivatives that create market opacity. This increased lack of transparency in financial markets is much broader: thousands of hedge funds that not only are unregulated but whose activities are opaque and not measured by any supervisor; shift of the corporate system from a public to a private one via LBOs and private equity transactions; increased size of unregulated over-the-counter trading in derivative instruments rather than on regulated exchanges; development of complex financial instruments whose correct pricing and rating is increasingly difficult; mis-rating of these new instruments by credit rating agencies saddled with severe conflict of interest as a large part of their revenues come from rating these new structured finance instruments; a laissez faire attitude among US supervisors and regulators that allowed reckless lending to foster.

Here are two examples of how uncertainty and opacity has vastly increased in financial markets.

First, you take a bunch of shaky and risky subprime mortgages and repackage them into residential mortgage backed securities (RMBS); then you repackage these RMBS in different (equity, mezzanine, senior) tranches of cash CDOs that receive a misleading investment grade rating by the credit rating agencies; then you create synthetic CDOs out of the same underlying RMBS; then you create CDOs of CDOs (or squared CDOs) out of these CDOs; and then you create CDOs of CDOs of CDOs (or cubed CDOs) out of the same murky securities; then you stuff some of these RMBS and CDO tranches into SIV (structured investment vehicles) or into ABCP (Asset Backed Commercial Paper) or into money market funds. Then no wonder that eventually people panic and run - as they did yesterday – on an apparently “safe” money market fund such as Sentinel. That “toxic waste” of unpriceable and uncertain junk and zombie corpses is now emerging in the most unlikely places in the financial markets.

Second example: today any wealthy individual can take $1 million and go to a prime broker and leverage this amount three times; then the resulting $4 million ($1 equity and $3 debt) can be invested in a fund of funds that will in turn leverage these $4 millions three or four times and invest them in a hedge fund; then the hedge fund will take these funds and leverage them three or four times and buy some very junior tranche of a CDO that is itself levered nine or ten times. At the end of this credit chain, the initial $1 million of equity becomes a $100 million investment out of which $99 million is debt (leverage) and only $1 million is equity. So we got an overall leverage ratio of 100 to 1. Then, even a small 1% fall in the price of the final investment (CDO) wipes out the initial capital and creates a chain of margin calls that unravel this debt house of cards. This unraveling of a Minskian Ponzi credit scheme is exactly what is happening right now in financial markets.

So combine an opaque and unregulated global financial system where moderate levels of leverage by individual investors pile up into leverage ratios of 100 plus; and add to this toxic mix investments in the most uncertain, obscure, misrated, mispriced, complex, esoteric credit derivatives (CDOs of CDOs of CDOs and the entire other alphabet of credit instruments) that no investor can properly price; then you have created a financial monster that eventually leads to uncertainty, panic, market seizure, liquidity crunch, credit crunch, systemic risk and economic hard landing. The last two asset and credit bubbles in the US – the S&L real estate bubble and bust of the late 1980s and the tech stock bubble of the late 1990s – ended up in painful recessions. The latest credit and asset bubble was much bigger: housing, mortgages, credit, private equity and LBOs, credit derivatives, corporate re-leveraging. So, the current bust and de-leveraging of the financial system is likely to lead to another painful economic hard landing.