Saturday, December 20, 2008

Breaking it Down

Two good articles from The New York Times this week on the intricacies within the world's financial crisis; how they all worked indirectly, some more malicious and ill-advised than others, but all interwoven, unable to escape this globalized economic downturn:

The first is from Paul Krugman , equating what happened in the Madoff scheme to what happened in the financial services sector as a whole. Money quote:

Consider the hypothetical example of a money manager who leverages up his clients' money with lots of debt, then invests the bulked-up total in high-yielding but risky assets, such as dubious mortgage-backed securities. For a while — say, as long as a housing bubble continues to inflate — he (it's almost always a he) will make big profits and receive big bonuses. Then, when the bubble bursts and his investments turn into toxic waste, his investors will lose big — but he'll keep those bonuses. O.K., maybe my example wasn't hypothetical after all. So, how different is what Wall Street in general did from the Madoff affair?

The second is from Tom Friedman on U.S. China trade and how the downturn in the U.S. housing sector is effecting China exports related to new home-buying. Money quote:

This division of labor not only nourished our respective economies, but also shaped our politics. It enabled China's ruling Communist Party to say to its people: "We will guarantee you ever-higher standards of living and in return you will stay out of politics and let us rule." So China's leaders could enjoy double-digit growth without political reform. And it enabled successive U.S. administrations, particularly the current one, to tell Americans: "You can have guns and butter — subprime mortgages with nothing down and nothing to pay for two years, ever-higher consumption and two wars, without tax increases!" It all worked — until it didn't.