who is krugman, page-16

C'mawn adwebster...

Next yr gonna jump in there with Cramer and start blaming the intelligentsia for the whole credit crisis.

Making blanket statements like this is beyond wrong...

And just to demonstrate a case in point.

Roubini - who is an academic - was able to call the crisis before it happened. How did he do it? One of his most important observations was that a great number of highly leveraged institutions were completely reliant on the sort term corporate debt market for their day to day funding. He knew that this market was an extremely risk averse market and would shut down at the merest whisper of fear.

This is exactly what happened. It started with Deutsche Industriebank - a german lending institution. Word spread that it was involved in various ways with mortgage back securities. Investors were spooked after two hedge funds associated with bear stearns had to be bailed out because of subprime losses. The Deutsche bank was actually perfectly sound - but the corporate debt markets weren't prepared to take any risks whatsoever. The problem was that the use of CDOs and CDSs had spread the risk all over the place... and no one really knew who held what. So they just backed out of the entire game. This marked the start of the whole crisis... as it started sending various hedge funds and SIVs to the wall which eventually knocked on to the bigger institutions.

Now - the people who invented all these fancy financial instruments... none of them called the crisis. These guys were the guys who did markets day in and day out. They believed that the creation of these new instruments would disperse risk. And they were right. But what they didn't realise was that this entire fact of this dispersal would be the thing to shut the markets down. This is something that roubini spotted - an academic - that the traders didn't.

As always - the moral to the story is not that academics are right or wrong because they're academics... or traders are right or wrong because they're traders... The moral is - saying that you shouldn't listen to someone, or to cast dispersion on their analysis because of a particular professional label - is not an argument. It's just an insult - and adds very little to a discussion.

:)