Courtesy of a link on Jesse’s blog, I’d like to link you to a blog post on Scientific American, of all places, that puts the Great Financial Crisis in a mathematical and human perspective. While I would have chosen a title that reflects that ultimately the collapse came from greed more than an equation, here is a LINK to “The Real, and Simple, Equation That Killed Wall Street”.
It puts, among other points, the importance of low volatility to booms fueled by cheap central bank credit in a helpful context.
It’s brief. Please consider reading it and then coming back here.
In one sense, nothing much has changed, just the names and the asset classes, between then and now. Headline asset prices keep ramping higher. No one knows where the top is. All you know is that cash is trash.
NINJA home loans turned into NINJA student loans, as last night’s updated WSJ article made clear (LINK):
Repaying debt has become more difficult in part because loan balances have grown and the interest rates on federal loans have increased as a result of a shift from variable-rate to fixed-rate loans. Most federal loans now carry interest rates of 6.8% or 7.9%, versus a rate of 2.875% on federal Stafford loans in May 2005, said Mark Kantrowitz, publisher of the financial-aid website FinAid.org…
Stafford loans, which account for more than three-fourths of federal student loans, impose no credit standards and are capped at a total of $57,500 for undergraduates. Ruben Medrano, a 52-year-old undergraduate studying business management at Texas A&M University-San Antonio, said taking out about $26,000 in federal student loans was much easier than taking out an auto loan or a mortgage. “The last vehicle we purchased, we spent four to five hours in the dealership,” Mr. Medrano said. “The student-loan process took me 30 to 45 minutes and I never had to leave my home.”
Then there are the distressing numbers that are just like the subprime mortgage numbers that TPTB told sheeple not to worry about pre-Lehman, then ran pictures of Depression-era soup lines to flush the last weak holders out of their stock positions:
In the five years through last March, the portion of all student loans that were 90 days or more delinquent rose to 11.4% from 8.8%, while the average student- loan balance per borrower increased 30% to $23,829, TransUnion found…
Another study, released Tuesday by credit-score provider Fair Isaac Corp., found that roughly 26 million consumers had two or more open student loans on their credit report in October 2012, up from about 12 million in 2005.
These student loans emanate almost exclusively from the Federal government. They represent money out the door but are excluded from the budget. Thus the “adjusted” deficit is a good deal larger than stated, assuming that a reasonable proportion of the student loans are going to either default completely or have the principal and/or interest rate modified lower. Thus, the Fed has also been funding a part of these educational loans as well its share of Social Security, Defense Department, etc. expenditures.
As the Scientific American article ends, with a quote from Richard Fisher of the Dallas Fed, the more things change, the more they remain the same.
Something’s got to give.
But who knows how and when?