The credit crunch explained

Here’s my online “kiosk” explaining the credit crunch:

Three exquisitely complementary articles pull back the curtain on how this crisis happened and why it will take years before we’re on solid ground again.

Links and brief excerpts below the fold.

In The Quiet Coup, former IMF Chief Economist Simon Johnson delivers a powerful critique of the nature and scale of our challenge – equating the mess to emerging-market crises of the past:

But there’s a deeper and more disturbing similarity: elite business interests — financiers, in the case of the U.S. — played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive.

In Sigh… the biggest problem is not (toxic) bank assets, blogger Jerome a Paris unpacks the credit default swap (CDS) nightmare:

…only 12 AAA-rated companies in the world, and 64,000 mortgage-backed securities with that same rating?…the total bill might be in tens of trillions, rather than mere trillions…

Finally, Wired Magazine investigates The Formula That Killed Wall Street:

…Li’s Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees….The CDS and CDO markets grew together, feeding on each other. At the end of 2001, there was $920 billion in credit default swaps outstanding. By the end of 2007, that number had skyrocketed to more than $62 trillion. The CDO market, which stood at $275 billion in 2000, grew to $4.7 trillion by 2006..

Extra credit: The Economist profiles one winner among the many losers:

John Paulson made a fortune betting against mortgages. Now he spies opportunities in the wreckage

As I read these articles, the reliance on absurd leveraging and underwriting tricks to make profits seemed insane and laughable if the human consequences weren’t so painful. We went down a very wrong track for a long time. The backing up is painful. The right track to growth — the historic track for individual enterprises and economies – is through increased productivity. If ever there was a time when customers are looking for ways to be more productive – to do more with less – it’s right now. For my money, investing in productivity is the best bet.

Topics: Economy, Opportunity, Productivity