The Sarcasm Report v.43

Questions and Answers about the Financial Crisis* (pdf)

There was a banking panic, starting August 9, 2007.

I jumped on this like a rabid weasel. 22 days later I launched this blog. I probably could have acted quicker, but once the initial euphoria about describing the end times as we know it abated, apathy and procrastination once again became the norm. That's just my nature. Sorry.

The panic in 2007 was not observed by anyone other than those trading or otherwise involved in the capital markets because the repo market does not involve regular people, but firms and institutional investors.

Fortunately, I am not a regular person. What regular person would want to be called Stagflationary Mark? It's like something out of a comic book. Only a true nutcase would do that!

Outstanding subprime securitization was not large enough by itself to have caused the losses that were experienced. Further, the timing is wrong. Subprime mortgages started to deteriorate in January 2007, eight months before the panic in August.

I know! It's so silly. I mean, sure, there were cracks in the dam. Water was starting to leak out but there really wasn't that much. So why would the dam fail so much later? There weren't even sirens until the last possible minute.



Holding loans on the balance sheets of banks is not profitable. This is a fundamental point. This is why the parallel or shadow banking system developed. If an industry is not profitable, the owners exit the industry by not investing; they invest elsewhere.

I always wondered how my checking account could be free. I just thought I was one of the lucky ones though.

How big was the repo market? No one knows. The Federal Reserve only measures repo done by the 19 primary dealer banks that it is willing to trade with. So, the overall size of the market is not known. I roughly guess that it is at least $12 trillion, the size of the total assets in the regulated banking sector. The fact is, however, that the repo market was never properly measured, so we will likely never know for sure how big it was.

I like it. I like it a lot. It adds an air of mystery van.



The crisis was not a one‐time, unique, event. The problem is structural. The explanation for the crisis lies in the structure of private transaction securities that are created by banks. This structure, while very important for the economy, is subject to periodic panics if there are shocks that cause concerns about counterparty default.

That's great news. I think there's a bull market in counterparty default concerns! I'd hate to think that my blog would become obsolete.