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谢国忠

谢国忠博客:只说出心中真相

 
 
 

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麻省理工学院经济学博士

个性介绍: 1960年出生于上海,1983年毕业于上海同济大学路桥系,1987年获麻省理工学院土木工程学硕士,1990年获麻省理工学院经济学博士。同年加入世界银行,担任经济分析员。在世行的五年时间,谢国忠所参与的项目涉及拉美、南亚及东亚地区,并负责处理该银行于印尼的工商业发展项目,以及其他亚太地区国家的电讯及电力发展项目。1995年,加入新加坡的Macquarie Bank,担任企业财务部的联席董事。1997年加入摩根士丹利,任亚太区经济学家,2006年9月辞去该职务。

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market meltdown   

2008-03-12 13:42:22|  分类: 言论 |  标签: |举报 |字号 订阅

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谢国忠搜狐博客 http://xieguozhong.blog.sohu.com/



The following was just printed in South China Morning Post.

Market meltdown

The credit crisis is only the first phase of a greater unravelling of the financial system

Andy Xie

Mar 12, 2008

Whenyou see a cockroach, assume that there are hundreds of others behindit. This redneck wisdom seems to work best in finance: the recentbankruptcies of several funds administered by hedge funds and privateequity firms may be followed by an avalanche. Hedge funds and privateequity firms have over US$3 trillion under management; their debts maybe twice as high. Their investment activities are primarily concernedwith borrowing cheaply to buy higher-return assets. "Higher return", oflate, has come to mean "faster appreciating", not "higher yielding". Asdebt costs rise and asset prices fall, thousands of funds may alreadybe under water. When their banks make margin calls, they have toliquidate.

This liquidation bounces backon lenders. Most large financial institutions have been mimicking hedgefunds and private equity firms by acquiring assets with debts,warehousing them for appreciation, and booking the appreciation asearnings. As hedge funds and private equity firms liquidate, they haveto mark-to-market their assets - that is, value their assets andliabilities on their balance sheet using the assets' current marketvalues. Global financial institutions may have to write down threetimes the US$160 billion that they have announced.

Asthe financial market melts down, many investors may want to withdrawfrom good-performing funds, usually small hedge funds, to preservetheir wealth. They may be surprised to learn that these funds were notso good after all; they have been supporting the share prices of smallcompanies. When these funds liquidate, there are no takers. Their realperformance may be even worse than the bad ones.

Whatis occurring is the meltdown of the biggest pyramid game in humanhistory. Since the burst of the Nasdaq bubble in March 2000, hedgefunds, private equity funds and proprietary trading at banks have cometo dominate money making. The new business model depends on assetprices rising. As so many rushed to the same side at the same time,their demand pushed up asset prices; thus, this model wasself-fulfilling.

So much demand for debtshould have pushed up their costs and invalidated the model. Luckilyfor our heroes, the then Federal Reserve chairman Alan Greenspan keptthe liquidity spigot flowing to meet all the debt demand. Our heroesprospered by raising capital from other people and borrowing fromfinancial institutions, which borrowed from other people. This newmodel created very young heroes.

When thetide goes out, you discover who is not wearing a bathing costume, asthey say. This time, it turns out, nobody is. Now, our naked youngheroes are being fired left and right. Their grey-haired bosses blamethem for the big losses that their firms are suffering; never mind thatthey paid themselves tens of millions of dollars on their erstwhileheroes' false profits.

In the Nasdaqbust, chief executives of the collapsing firms also blamed others atfirst, claiming ignorance of the financial shenanigans at their owncompanies. As the wheels of justice turned, they went to jail one afteranother. I suspect we are witnessing a repeat of this eternal drama -and that some Wall Street executives will go to jail this time, too.

Weare through only the first wave of this credit bubble bursting. Thebankruptcies of hedge funds and private equity firms will lead tocapital losses for their investors and their financing banks. Aroundthe corner, the second wave of writedowns will come frommarking-to-market mortgage-backed securities, corporate credits andleveraged loans. As the financial turmoil brings down the economy,consumer credit will deteriorate in quality. The third wave ofwritedowns will occur amid surging unemployment late this year or earlynext.

So far, the decline of asset priceshas been mostly normalisation; they were exaggerated by excessiveleverage. Declining asset prices do temporarily crimp consumption andinvestment, which causes economic weakness and inspires fear in thefinancial market. Declining capital stock in the global financialsystem, however, is a bigger factor. The right course of action is forthe US government to establish a Resolution Trust Corporation to takeover failing financial institutions, including hedge funds and privateequity firms, and leave the Fed to tackle inflation. But a Republicanadministration could not go to a Democratic Congress for money tocapitalise such a corporation. It could not justify spending US$1trillion to bail out those who deceived investors around the world anddestroyed the finest financial institutions in America for their owngains. Instead, the Fed will be called on to save the financial system,boost the economy and suppress inflation at the same time.

Fedchairman Ben Bernanke will go down in history as a tragic figure. Hehas focused on stabilising the financial system first and foremost. Hiscutting of interest rates has opened up a big gap between short- andlong-term rates. Financial institutions could profit from the gap byborrowing short-term funds for investing in long-term bonds. But thistrick is not working well now, as financial institutions lack thecapital. Instead, they are looking to make a fast buck in commoditymarkets, which is increasing inflationary pressure. Wall Street isburning the man who is trying to save it. History will inevitablycompare Dr Bernanke with Arthur Burns, the Fed chairman who presidedover stagflation in the 1970s.

When thefinancial system stabilises, inflation will force Dr Bernanke to raiseinterest rates quickly and to a very high level, causing agut-wrenching recession, as Paul Volker did to cure Burns' stagflation.Dr Bernanke could become Burns and Mr Volker in one term.

Andy Xie is an independent economist

谢国忠搜狐博客 http://xieguozhong.blog.sohu.com/

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