Crashed: How a Decade of Financial Crises Changed the World

[maizefolk]

I'm getting starting on this book this evening so will post my thoughts as I go along. The book opens on Tuesday September 16th, 2008 "the day after Lehman" and I can already tell it's going to be an interesting and different perspective. In the fall of 2008 I has just moved from the New York to California and started graduate school. As a result of being poor and busy, but with a stable income, I spent much of the great recession in a bubble pierced only occasionally by events like California universities having to pay their employees in IOUs when the state's budget wouldn't balance, or the west coast bank I'd opened a checking account in when I moved to the state going under and then being acquired.

Will post thoughts on this book as I go along. (Getting some nice ominous rolling thunder where I live tonight which seems an appropriate ambiance for this subject matter.)

Edit: so far about 100 pages in (the ebook looks to be about 700 pages total) and I'm just now getting to the end of material covered in The Big Short. However the author definitely has a talent for memorable turns of phrase:

"It would be akin to noting that two elephants on either end of a circus seesaw leave a net balance of zero. It would be true but would not be a very adequate description of the forces at play."

[hadabeardonce]

I'm interested in the thoughts surrounding "How a Decade of Financial Crises Changed the World," so keep posting.

I've read "A Random Walk Down Wall Street," which has a pretty good history of market crashes and I've seen some documentaries on the 2008 recession.

Recently I've been learning about the connection between recessions and immigration policy, specifically nativism. Seems like the US is repeating a cycle/pattern:
https://www.npr.org/sections/itsallpolitics/2015/09/04/437443401/populist-movement-reflected-in-campaigns-of-sanders-and-trump
https://www.nationalgeographic.com/archaeology-and-history/magazine/2017/07-08/know-nothings-and-nativism/

I should do more reading on the personal finance habits of various generations. Like those who lived through the Great Depression during formative years. 2001 & 2008 market crashes seem to have generated a large group of individuals who are skeptical of investing. Many also lost jobs and/or accumulated debt, so that could be contributing to slowing investment among the public. The psychology of why no one discusses money in depth or pursues more information regarding economics is also pretty wild. Books on behavioral economics are interesting to read.

The financial therapy field is another response to anxious recession survivors: https://www.cnbc.com/2019/08/15/what-is-financial-therapy.html

[maizefolk]

Getting ready to call it a night at about page 200. The first part of this book is a pretty clear review of the mortgage backed securities market. Lots of the concepts will be familiar to folks who already watched The Big Short. I learned two new significant things from this portion of the book.

1) I'd heard for years that a big portion of the crises was the result of mortgage backed securities losing value, but had not realized that one of the reasons this became such a big problem so fast was that many big investment banks were borrowing money short term (on as short as daily terms) at lower interest rates to cover the cost of owning many of their assets. So once people starting questioning the liquidity and solvency of a given bank, they could get in big trouble in only a day or two when when they couldn't get new super short term loans to pay back the old super short term loans which were coming due, and couldn't sell the mortgage securities they'd bought with that money to pay back the loans either.

2) European banks were hugely invested in US financial markets, borrowing in dollars with the same short term rates and then using those short term loans to buy bonds and mortgage securities. Because they were both borrowing from the US and then reinvesting in the US, the net capital flows were small (the topic of that elephant quote in my first post).

Because of a divergence in banking regulation, many european banks had an advantage in this business because they were able to get up to 40x leverage (and hence achieve higher returns, all things being equal), while US based banks generally maxed out around 20x leverage. We haven't gotten to this part yet, but I'm assuming that difference is part of why US banks were able to bounce back more effectively than european ones after the crises.

I also learned at least two less important things:

1) I think I finally understand the motivation for creating CDOs/CDO-squareds: it allowed even bigger percentages of the total values of big sets of mortgages to achieve the desired AAA rating than was possible with only standard mortgage backed securities. In The Big Short both CDOs and CDO-squareds are mentioned, but mostly in the context of the marked being a complicated mess that no one really understood.

2) Back in 2007 Jay Z filmed a music video for a song (Blue Magic) where he was driving around NYC with a suitcase of euros rather than dollars and it was widely reported on at the time as a sign of how confidence in the dollar was collapsing.

Based on my 2/7th sample of the book to date, as books about economics and investing go it is so far proving reasonably engaging.