The financial crisis
Maree and I have both been working in the banking industry for over a decade now and so we've naturally been following the unfolding financial drama closely - both in US and internationally. Back in April and May when we were considering a move to Saudi Arabia, one of the background considerations that we discussed was the likelihood of a downturn in the Australian economy - partly related to the flow-on effects of the US credit crunch and recession.
It has been remarkable to read and watch the news of the escalating crisis over the last few weeks, which has culminated in the take-over/failure of Lehmans, Merrill Lynch and HBOS - and then in the enormous financial package that has finally been organised by the US Treasury and Federal Reserve. Here in Saudi Arabia we are often so close to the political crises of the world, but we are remarkably isolated from the financial crisis. The financial industy in the area seems to be much less mature than in many western countries, and this is perhaps why it is less dependent on the credit markets and investment banks that are currently so shaky.
I've recently read a series of (quite technical) essays by Donald MacKenzie in the London Review of Books, that look at some of the market mechanisms that have been at the centre of the crisis. His May article End-of-the-World Trade is a fairly detailed explanation of the CDO market and how it has evolved over time - and then discusses how a bubble in one fairly small sector (the infamous US sub-prime mortgage market) was able to contaminate and then almost completely shutdown the whole credit market.
His most recent article What's in a Number? is an explanation of the Libor (London Interbank Offered Rate) - the processes behind how it is calculated, and the significance of these numbers on the world credit markets, and the historic accidents that led to Libor being so significant. Of course Libor rates have had a lot of attention during the last year - the essay has an interesting discussion of some of the criticism and possible flaws in Libor, as well as the strengths and weaknesses of alternative benchmarks.
My favourite of the articles has been Fear in the Markets, which was written in April 2000 and is about the failure of Long-Term Capital Management in 1998. Again there is some basic technical discussion of the derivatives used by LTCM, however it is a particularly good discussion of the importance of belief as a fundamental underpinning of all social institutions. When one of these beliefs starts to unravel, an otherwise sound institution can quickly become doomed in a fearful rush.
It has been remarkable to read and watch the news of the escalating crisis over the last few weeks, which has culminated in the take-over/failure of Lehmans, Merrill Lynch and HBOS - and then in the enormous financial package that has finally been organised by the US Treasury and Federal Reserve. Here in Saudi Arabia we are often so close to the political crises of the world, but we are remarkably isolated from the financial crisis. The financial industy in the area seems to be much less mature than in many western countries, and this is perhaps why it is less dependent on the credit markets and investment banks that are currently so shaky.
I've recently read a series of (quite technical) essays by Donald MacKenzie in the London Review of Books, that look at some of the market mechanisms that have been at the centre of the crisis. His May article End-of-the-World Trade is a fairly detailed explanation of the CDO market and how it has evolved over time - and then discusses how a bubble in one fairly small sector (the infamous US sub-prime mortgage market) was able to contaminate and then almost completely shutdown the whole credit market.
His most recent article What's in a Number? is an explanation of the Libor (London Interbank Offered Rate) - the processes behind how it is calculated, and the significance of these numbers on the world credit markets, and the historic accidents that led to Libor being so significant. Of course Libor rates have had a lot of attention during the last year - the essay has an interesting discussion of some of the criticism and possible flaws in Libor, as well as the strengths and weaknesses of alternative benchmarks.
My favourite of the articles has been Fear in the Markets, which was written in April 2000 and is about the failure of Long-Term Capital Management in 1998. Again there is some basic technical discussion of the derivatives used by LTCM, however it is a particularly good discussion of the importance of belief as a fundamental underpinning of all social institutions. When one of these beliefs starts to unravel, an otherwise sound institution can quickly become doomed in a fearful rush.
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