Centerfield

Financial Crisis Update

In my last article, I was just guessing about reasons why it's extended, truthfully, because I haven't seen any better reasons. Modeling risk changes IS probably a big part of the mix for the slow part of the crisis. But now we have, at long last, a bigger problem coming out.

The Economist this week published an article suggesting that serious overleverage is afoot. Leverage is the ratio of loans to capital at hand. If it's too big, it's hard to resist financial trouble. The article's freely available to nonsubscribers, so far. They give numbers that suggest Merrill is 50:1, and Goldman is 28:1. Note, an earlier Econ article had the now-deceased Bear-Sterns at roughly 30:1. This article talks about some of Bear's problems in some detail.

Here in Austin, you might be interested to hear that home prices haven't dipped atall. That's presumably because we're way off the national home price curve. Our low point came after the 2000 tech bubble burst, because computers and software are where most of Austin's money are. But the home sale rate has certainly taken a dive.

The Economist's suggesting bringing the Glass-Steagal sepation between banking and other services back. I remember banks were having trouble making money in that environment. My inclination is to raise reserve requirements instead. Your thoughts?