Wednesday Oct 01, 2008

Historical perspective on the 2008 crash

Dr Martin

In July 2006, Dr David Martin gave a talk: "Asymmetric Collateral Damage, Basel II, the Mortgage House of Cards, and the Coming Economic Crisis" (with audio) where he gives a historical perpective on the 2008 crash he predicts with remarkable accuracy. He starts his story the Battle of Waterloo that made the fortunes of Baron Nathan Von Rothschild, in a little known speculative episode at the end of the war. Moving on to the coming introduction of the Basel II banking reform, and describing quickly what we now know the be the very dubious lending practices of many institutions, he goes on to predict the coming of a spectacular clash in 2008.

His talk is very lively and entertaining:

Now, I'm not going to point fingers at, you know, Treasury secretaries or anybody in that kind of environment. Seriously, I'm not pointing fingers. I'm just saying we did a very interesting thing. We decided that we had a very dynamic need in 2001 to get our economy back on track. And so, what we did was, we poured a significant amount of capital into what market? What market in 2001 wound up contributing to the majority of the growth of the GDP in 2001? What market?


Housing. Ninety percent of the growth of the GDP in 2001 to 2002 was in the housing market… 90 percent. Did we all get, like, castles? Are we Europe? I mean, did we all, like, move into castles in 2001? This is bigger than 86 percent, isn't it? Did we do that? What did we do with that alleged housing market money?

A little further on he ties this to the current election.

Something happened last year. I don't know if any of you were watching, but something happened last year for the first time since 1933. Does anybody know what significant financial function happened last year?

(Comment from audience.)

Not only inverted growth but for the first time since 1933, and that's true. For the first time since 1933 something very interesting happened. We actually went negative in savings. Negative in savings. We had a four percent… in one calendar year, a four percent reduction in savings.

...David Ferren and I were very interested in looking at historical default rates. And we were looking at different types of credit and different types of defaults. And one of the things we were looking for is whether or not default rates happen in normal curves. Whether you're as likely to default Month one as Month 12 as Month 24, as Month 36, as Month… and you know what? It's not very linear. Debt actually looks like it works really well for about 14 months. And if you look past 14 months and you go out a little further and you go to about 17 months, you actually find out that debt starts feeling a little squirrelly.

That's when you start not making your payments. That's where you get into things like technical defaults and these kinds of little bumps in the road. You try to make a payment. You can't make a payment. You can't this, you can't that, and so on. But somewhere between the 17th month and the 24th month, all of a sudden, the fecal matter hits the rotary oscillator and it's bad. Everything that looked like a good credit starts to look like a bad credit.

So let’s see… Christmas of 2005, January of 2006 is, kind of, when we over extended our credit. So let's see, 17 to 24 months would put us in January 2008, wouldn't it? The day that banks have to report their capital adequacy happens to be that magical day when a new president gets sworn in. Oh, hold on a second. That actually was kind of funny, wasn't it? Ladies and gentlemen…

Having predicted the coming crisis he explains how the US should be prepared to have to go begging for money in the countries where there is a lot of cash. As a large number of these countries have lending policies linked to Shari'ah law, linking lending to moral precepts - not necessarily those of the US - this was going to lead, he claimed, to some pretty difficult times.

I had found this talk on Nova Spivack's blog. Dr Martin certainly had the event and the time right. Is the explanation also correct? The current debate one finds on TV on these issues seems very superficial.

The Economist has also been going on about the mortgage crisis for a long time. Some people clearly were not listening... Another case of SEP?




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