I've been listening to NPR's Planet Money podcast and a recurring theme is people asking the question "where did all the money go"? It is of course an almost meaningless question when you look into it, but nobody was ever asking "where is all this money coming from?" while the bubble was inflating. A housing price crash of 20% is only as much of an anomaly as 20% growth.

I was pretty isolated from the housing market and the stock market, but luyer pointed out that our stock market "boom" was probably nothing but a devaluation of the US dollar. And the tech industry seemed to have largely returned to the stupidity of the first bubble - in style if not in substance. A stupid idea could trivially raise 100k, not 100M. Why didn't we see it coming? Are we all terrible optimists?

One of the things about following the news fairly closely in several countries is that it becomes pretty obvious when trends don't line up. For the past few years interest rates have been one such discrepancy. I've watched Australian interest rates being raised to slow the economy and prevent inflation while American interest rates have been lowered to encourage more growth. I assumed that this basically meant that the US was probably heading for some heavy inflation.

In retrospect it looks like the Federal Reserve was turning the one knob they had to keep the housing bubble growing. As explained in the Giant Pool Of Money This American Life podcast much of the banking system depended on maintaining growth. As the pool of good borrowers thinned they had to lower interest rates to keep the loans flowing. And then we saw what happened. For a pretty picture I overlaid some Euro Area and US Interest rates graphs from the Federal Reserve of New York to give:


What we see here is from the middle of 2006 or so a shift in US fiscal policy to try to make more capital available. I know the intentions were good. Nobody foresaw what would happen when the bubble burst, but in retrospect it feels like we'd all be a lot better off if the economy had slowed in 2006 rather than exploding in 2008.

Of course, I'm pretty uninformed and very unqualified. I'm out of wine, the wife and the cat are sleeping, time for me to join them.

So I was listening to This American Life on podcast this evening and for the first time I feel like I have some idea what's been happening in American (and international) financial markets over the past few weeks. It's the most clarity I've felt since their last financial show where they explained a lot of the mortgage crisis. You should all listen to it.

This most recent program explains what's happened with the commercial paper market and credit default swaps. I'd heard of these before, but now I feel like I've got some kind of idea of what they are and what's happened with them to cause problems. Not a huge amount, but enough to at least see why a few people not paying their mortgage basically put the world's largest insurance company out of business. Finally they talked a bit about the bailout package, alternative packages, why what's been proposed by Paulson is bad for taxpayers, good for banks, and being lobbied for by banks, and interesting details about what might have slipped into the bailout bill without anyone noticing.

Oh, and speaking of huge fucking bills, apparently the legislation to prevent the regulation of credit default swaps was apparently put into an eleven thousand page appropriations bill the day before Christmas, 2000. There's something very very wrong with the way that Congress makes laws.


There were a couple of things I took away from the program. First I've believed for a while that people with boring jobs make them interesting, and as a result they do their jobs worse. In the open source software world the canonical example for me is the GNU libc and Ulrich Drepper. This should be the most boring job in the world. It's a libc that targets about two platforms (Linux and Hurd), it's functionality was basically defined by the mid 80s, and there's no need for it to change, ever. In fact any change is bad. Ulrich Drepper is a smart guy and a talented programmer, so he adds interesting features to libc. The result is that shit breaks - and the features he added were generally unnececarry. In the financial markets credit default swaps should be one of the simplest, safest, most boring commodities to trade. So the traders found ways to make them exciting - and confusing - and dangerous. Their simplicity was one of the reasons that they were never regulated and their complexity is one of the reasons that they're bringing down the finance sector.

Secondly at some point in the program Alex Bloomberg was interrogating some economist or trader or something asking "why should we be asked to bear the cost of Wall Street traders' risk taking". It's a fundamentally important question, but to me an important part of the answer (which was never given in the program) is that we shared in the benefits. Okay, so I haven't had any six-figure bonuses lately (and I'm not likely to now with the state of the economy), but we've all benefited. The financial wizardry has largely been around hiding debt so that people can borrow more. It's been easy for us to secure credit for houses and cars and random crap. It's been easy for the companies I've worked for to raise money for me to hack on Free Software. Fundamentally, we've all been part of this economic miracle boombubble thing. It's Sunday morning, the party's over, we all helped make the mess, it's fair that we all chip in a little to help out.