Saturday 20 February 2010

Matt Taibbi on the reinflated bubble

Rolling Stone journalist Matt Taibbi reexamines the world of Wall Street in his latest article of 3 days ago. He finds that the US government, aiming to rid the market of toxic mortgage-related investments, has provided cash for buyers and so inadvertently created a market for the rubbish it's trying to clear. In the third quarter of last year, reports Taibbi, Goldman Sachs, Morgan Stanley, Citigroup and Bank of America bought $3.36 billion of such bad assets, presumably expecting to sell them on at a profit in a government-underwritten buying environment.

Slashing interest rates to get us through the emergency has made ordinary savings accounts unproductive and forced money into investments instead, even when analysis says stay out:

"One trader, who asked not to be identified, recounts a story of what happened with his hedge fund this past fall. His firm wanted to short — that is, bet against — all the cr*p toxic bonds that were suddenly in vogue again. The fund's analysts had examined the fundamentals of these instruments and concluded that they were absolutely not good investments.

"So they took a short position. One month passed, and they lost money. Another month passed — same thing. Finally, the trader just shrugged and decided to change course and buy.

""I said, '**** it, let's make some money,'" he recalls. "I absolutely did not believe in the fundamentals of any of this stuff. However, I can get on the bandwagon, just so long as I know when to jump out of the car before it goes off the damn cliff!"

"This is the very definition of bubble economics — betting on crowd behavior instead of on fundamentals. It's old investors betting on the arrival of new ones, with the value of the underlying thing itself being irrelevant. And this behavior is being driven, no surprise, by the biggest firms on Wall Street."

It takes nerve to stay out of the market when it's rising and when you think you may lose value on your cash held at bank. But unless you're confident that you'll be able to "jump out of the car before it goes off the cliff" (and remember, you don't have access to instant dealing like the City pros), maybe sitting on your hands is the thing to do.

And if price inflation worries you, don't forget, both the US and UK governments still sell guaranteed inflation-proofed investments of their own.

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