Wednesday, September 03, 2014

The crisis of the new order

By Richard K. Barry

I am currently reading Arthur M. Schlesinger's 1957 book The Crisis of the Old Order: 1919-1933. It's not really important why. I just am.

On page 68 of the Houghton Mifflin edition I came across this commentary on factors that led to the stock market crash of 1929:
In time it would appear that even the leaders of business could not decipher the intricate financial structures they were erecting. But for the moment everyone understood that there was an endless source of money and power, a roulette wheel at which no one lost. More and more the nation's passions centred on the feverish trading in the narrow streets at the lower tip of Manhattan Island.

Unless one is particularly dense, it's difficult not to think of 2008 and the subprime mortgage crisis, derivatives, etc.

Closer to today, however, I recall reading a piece in Forbes Magazine back in April which discussed Warren Buffett's current thinking. 

Robert Lenzner wrote:
Warren Buffett is well known for his famous warning about derivatives as “weapons of mass destruction.” Well, recently he went much further with Forbes Magazine, flatly prognosticating someday (he doesn’t known when) a massive financial “discontinuity,” which the dictionary refers to as an “ending, expiration, halt, lapse, a shutdown, a stoppage,” that could very well be worse than 2008. What terribly worries him is that he simply doesn’t understand the massive derivatives position on the balance sheet of J.P. MorganChase .” Like many other financial experts Buffett can’t really figure out the financial health of JPM’s derivatives. It is impossible for anyone to divine the extent that JPM is profiting or losing money or the risks entailed in the identity of counterparties, the quality of the collateral used, and the amount of leverage employed.

Yes, well...

(Cross-posted at Culturolio.)

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