“Grundfest: You and your partner, Warren Buffett, have for years warned about the dangers of the modern derivatives markets, particularly credit derivatives, and about interest rate swaps, currency swaps, and equity swaps.
“Munger: Interest rate swaps have enormous dangers given their size and the accounting that has been allowed. But credit default derivatives took that danger to new levels of excess—from something that was already gross and wrong. In the ’20s we had the “bucket shop.” The term bucket shop was a term of derision, because it described a gambling parlor. The bucket shop didn’t buy any securities. It just enabled people to make bets against the house and the house furnished little statements of how the bets came out. It was like the off-track betting system.
“Grundfest: Until the house lost its money and suddenly disappeared. Or the house made its money and suddenly disappeared.
“Munger: That is right. Derivatives trading, with no central clearing, brought back the bucket shop, because you could make bets without having any interest in the basic security, and people did make such bets in the billions and billions of dollars. Some of the most admired people in finance — including Alan Greenspan — argued that derivatives trading, substituting for the old bucket shop, was a great contribution to modern economic civilization. There’s another word for this: bonkers. It is not a credit to academic economics that Greenspan’s view was so common.”
–Stanford Lawyer, “Q&A with Charles T. Munger” (PDF)
“Foreclosure filings in the U.S. rose to a record for the second consecutive month in April as banks increased efforts to seize homes from delinquent borrowers….
“‘What you’re seeing is the inevitable result of severe job losses,’ Nicolas Retsinas, director of housing studies at Harvard University in Cambridge, Massachusetts, said in an interview. ‘Until we stem the job losses, we can expect to see continuing foreclosures.'”
“Several senators are expected to seek caps for credit-card interest rates, with a proposed ceiling as low as 18%. Caps on rates are unlikely to draw enough bipartisan support to clear the full Senate, however. Even if one of the proposals for a higher cap (around 36%) did pass, it would face resistance even from some Democrats in the House (where legislation passed with strong bipartisan support — and no rate caps).”
“Nearly three-quarters of survey respondents said the recent increase in the U.S. saving rate is the beginning of a major behavioral shift.
“A consumer retrenchment is one factor that is likely to make any recovery a long slog. The economists on average expect the unemployment rate to climb to 9.7% by the end of the year, with two million more jobs lost over the next 12 months, even as growth returns to the economy.”
“President Barack Obama, calling current deficit spending ‘unsustainable,’ warned of skyrocketing interest rates for consumers if the U.S. continues to finance government by borrowing from other countries.
“‘We can’t keep on just borrowing from China,’ Obama said at a town-hall meeting in Rio Rancho, New Mexico, outside Albuquerque. ‘We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt.’
“Holders of U.S. debt will eventually ‘get tired’ of buying it, causing interest rates on everything from auto loans to home mortgages to increase, Obama said. ‘It will have a dampening effect on our economy.'”
More: Krugman on China and global warming: “Empire of carbon”; Robert Reich, “The truth behind the Social Security and Medicare alarm bells”; NYT reporter Edmund Andrews: “My personal credit crisis”; NYT: “Angry ads seek to channel consumer outrage”; WSJ: “Drug makers’ lobbying bets rise”; Bloomberg: “‘Good bad’ economy inspires consumers as slump eases”