In this issue
April 9, 2014

Jonathan Tobin: Why Did Kerry Lie About Israeli Blame?

Samuel G. Freedman: A resolution 70 years later for a father's unsettling legacy of ashes from Dachau

Jessica Ivins: A resolution 70 years later for a father's unsettling legacy of ashes from Dachau

Kim Giles: Asking for help is not weakness

Kathy Kristof and Barbara Hoch Marcus: 7 Great Growth Israeli Stocks

Matthew Mientka: How Beans, Peas, And Chickpeas Cleanse Bad Cholesterol and Lowers Risk of Heart Disease

Sabrina Bachai: 5 At-Home Treatments For Headaches

The Kosher Gourmet by Daniel Neman Have yourself a matzo ball: The secrets bubby never told you and recipes she could have never imagined

April 8, 2014

Lori Nawyn: At Your Wit's End and Back: Finding Peace

Susan B. Garland and Rachel L. Sheedy: Strategies Married Couples Can Use to Boost Benefits

David Muhlbaum: Smart Tax Deductions Non-Itemizers Can Claim

Jill Weisenberger, M.S., R.D.N., C.D.E : Before You Lose Your Mental Edge

Dana Dovey: Coffee Drinkers Rejoice! Your Cup Of Joe Can Prevent Death From Liver Disease

Chris Weller: Electric 'Thinking Cap' Puts Your Brain Power Into High Gear

The Kosher Gourmet by Marlene Parrish A gift of hazelnuts keeps giving --- for a variety of nutty recipes: Entree, side, soup, dessert

April 4, 2014

Rabbi David Gutterman: The Word for Nothing Means Everything

Charles Krauthammer: Kerry's folly, Chapter 3

Amy Peterson: A life of love: How to build lasting relationships with your children

John Ericson: Older Women: Save Your Heart, Prevent Stroke Don't Drink Diet

John Ericson: Why 50 million Americans will still have spring allergies after taking meds

Cameron Huddleston: Best and Worst Buys of April 2014

Stacy Rapacon: Great Mutual Funds for Young Investors

Sarah Boesveld: Teacher keeps promise to mail thousands of former students letters written by their past selves

The Kosher Gourmet by Sharon Thompson Anyone can make a salad, you say. But can they make a great salad? (SECRETS, TESTED TECHNIQUES + 4 RECIPES, INCLUDING DRESSINGS)

April 2, 2014

Paul Greenberg: Death and joy in the spring

Dan Barry: Should South Carolina Jews be forced to maintain this chimney built by Germans serving the Nazis?

Mayra Bitsko: Save me! An alien took over my child's personality

Frank Clayton: Get happy: 20 scientifically proven happiness activities

Susan Scutti: It's Genetic! Obesity and the 'Carb Breakdown' Gene

Lecia Bushak: Why Hand Sanitizer May Actually Harm Your Health

Stacy Rapacon: Great Funds You Can Own for $500 or Less

Cameron Huddleston: 7 Ways to Save on Home Decor

The Kosher Gourmet by Steve Petusevsky Exploring ingredients as edible-stuffed containers (TWO RECIPES + TIPS & TECHINQUES)

Jewish World Review Sept. 21, 2007 / 9 Tishrei 5768

More risky business

By Mort Zuckerman

Mort Zuckerman
Printer Friendly Version
Email this article

http://www.JewishWorldReview.com | Earthquakes have taught vulnerable countries to impose stricter architectural standards so that buildings don't fall down at the first tremor. Something like that will have to follow the shock to our new financial architecture, now experiencing its first major crisis. The danger is that the credit crunch, moving with unnerving speed, may hit Main Street, and not just Main Street in America but in many of the world's major financial centers.

Before the 1930s, the greatest threat to financial stability came from bank runs. The Federal Deposit Insurance Act was passed to protect deposits and calm the panic that caused people to rush to take their money out. There is no such protection in the new financial architecture, built on securities rather than bank loans. We're now in a world where loans are packaged, sold, and resold to a chain of investors around the globe. With everyone having sold risk to everyone else, no one is sure where the losses are or how much the value of these securities has fallen. In this new financial realm, there is no equivalent of deposit insurance to maintain confidence, much less the price of the underlying assets.

Mortgage lenders, money market mutual funds, hedge funds, and investment banks risk losing the source of their funds, such as short-term IOUs, by which they had financed these securities. What we have is the 21st-century version of a bank run.

Iffy IOUs. These short-term IOUs, known as asset-backed commercial paper, represent about $1 trillion and were bought because they were rated AAA. They seemed to have the backup of solid collateral, but now no one knows for sure whether the assets backing the paper are worth what the issuers say, given that a proportion of these assets are those iffy subprime mortgages, which have contaminated the whole category.

The valuation of these assets was determined by sophisticated mathematical models rather than by the market, since they were rarely traded. But the models were based on simulations of the past—a past that did not capture the lax credit standards of subprime loans (for homes bought on speculation with virtually no equity)—nor did they assess the prospects of a sharp decline in the price of real estate. Adding to the uncertainty is the knowledge that hedge funds had every incentive to over-value their assets, since they receive a fee of 2 percent of the asset value of holdings plus a 20 percent participation in the appreciation.

Now, nobody knows who has lost or how much. How to distinguish solvent from shaky borrowers? The new financial architecture dispersed risk—which was passed from buyer to buyer—but it also dispersed trust. Even the banks no longer trust other banks enough to lend them money, except on onerous terms. Hence we face a credit crunch and a liquidity crisis that may yet cause runs on otherwise solvent financial institutions.

Lenders facing uncertainty have pushed up rates on all debt other than U.S. treasuries. Risk is back big time as the spread between junk bond rates and treasuries has more than doubled after a sharp fall from 2001. Then, the spread between the average junk bond and the 10-year treasury bond was more than 9 points; earlier this year, it hit a low of about 2.6 percentage points before heading up.

Can the central banks come to the rescue? There are limits. Cheaper money from the Fed will not necessarily restore the value of this paper. If these assets have been de-rated or down-rated by the credit rating agencies, changes in interest rates won't reverse most of the loss of wealth.

For the moment, the Fed and the European Central Bank have been injecting liquidity into bank reserves. But the banks, meanwhile, have been cutting back on their lending, making it more difficult for the Fed to transmit liquidity to the rest of the financial system through them: Most of the doubtful paper is held by hedge funds, investment banks, and similar institutions.

Indeed, the Fed can do little to control the behavior of these bodies that have to decide whether to hold on or conduct fire sales. This is a new world of finance. Lowering the discount rates of loans to banks will not suffice. The best that the Fed can do is cut the federal funds rate so as to lower the cost and increase the availability of funds. That would give lenders the time to sort out their mistakes.

But we must understand that no one knows where this market turmoil will lead or where it will end. Lower interest rates cannot make up for the decline in asset pricing, at a time when foolish borrowers decided to borrow what they could not afford and foolish investors invested in what they did not understand.

While the Federal Reserve hesitates, we've run out of fools. The Fed must take into account the potential lrisks posed to economic growth by the new seismic tremors.

Every weekday JewishWorldReview.com publishes what many in in the media and Washington consider "must-reading". Sign up for the daily JWR update. It's free. Just click here.

JWR contributor Mort Zuckerman is editor-in-chief and publisher of U.S. News and World Report. Send your comments to him by clicking here.


© 2005, Mortimer Zuckerman