Wrapping up 2008: the year of the first blogged financial crisis

I wrote this column for the Fin at the end of the year only to discover that I was on leave. Anyway, it was put in this morning’s Fin in a slightly edited back form. The original is below.

Blogging the Crisis: Enter the bright world ushered in by 2008

George Soros called 2008 the end of an era the bursting of a super-bubble. It also the beginning of an era: The era in which an unlikely cast of characters assembled themselves to crowdsource answers to the global financial crisis.

In late 2006 a former academic in English with decades of experience in Americas mortgage industry, off work ill, began posting at finance industry blog Calculated Risk, anatomising her industry and prophesying doom with encyclopedic knowledge and wry hilarity.

Why were things going off the rails?  “Because God hates us” she suggested beginning a paragraph that explained yet another attenuation of the relationship between borrower and ultimate lender in the (by then) stupefyingly complex chain of mortgage securitisation.

To retain her good name in the industry she wrote pseudonymously using only her family nickname Tanta. But in the intellectual hothouse of the blogosphere she rapidly gained the authority she deserved even being cited in Federal Reserve research.

Welcome to the turbocharged ecology of cyber-opinion where intellectual esteem matters rather than notoriety or media budgets: Where towering figures usually, but not exclusively, top academics direct the traffic, and literally hundreds of high quality contributors weigh in with posts and comments like a set of strategically placed cameras around a sports ground. Blogs like Naked Capitalism, Angry Bear, Follow the Money and Grasping Reality bring you the action from every angle.

One of my favourites is Steve Randy Waldman whose searching posts on Interfluidity rethink issues from first principles with bracing originality and perspicacity.

A doctoral student in Kentucky he admits “I’m not the brightest bulb on the tree”. But dont be fooled. In an introductory post in March 2006 he’s willing himself to articulate his thoughts. “I am not a humble person. There are things I have to contribute that could really matter, that could be revolutionary even”. I wont be surprised if he pulls it off.

As the crisis unfolded, from one bailout to the next, we’d see the wisdom of this crowd at work within hours, pouring over the detail and the theory, sharing inside stories, and proposing or refining alternative policies, orthodox and otherwise.

The crowd’s influence had been kept at bay whilst bailouts were agreed behind closed doors and presented as a fait accompli, but those doors got prized open when the scale of the next bailout US$700 billion required Congressional approval. Treasury Secretary Hank Paulson put his case in a skimpy (three page) proposal.

Within hours the blogosphere was crawling over the plan like a swarm of angry ants. Tanta hated it. Waldman pronounced it breathtakingly awful. If troubled assets were purchased at market prices as Paulson was publicly suggesting, this could help liquidity concerns which arise when creditors seek payment before banks loans fall due. But the real problem had become banks’ solvency – their liabilities swamping their assets. And to tackle solvency, the troubled assets would have to be purchased at inflated prices.

If so, then the plan simply slipped money to the banks (like Goldman Sachs whose immediate previous CEO had been Hank Paulson) with no quid pro quo such as requirements to maintain lending, constraints on executive salaries or some share in the upside of the governments investment (for instance by way of equity in the banks).

Yves Smith of Naked Capitalism duly turned up evidence that, behind those closed doors, Paulson had conceded his intention to pay inflated prices, something US Fed Governor Ben Bernanke publicly conceded soon afterwards.

Already the best known economic commentator since Keynes, New York Times columnist Professor Paul Krugman had recently taken to blogging making him even more of a focal point. He denounced the plan as Cash for Trash. He documented how Hank Paulson’s self-justifications kept changing in contradictory ways, and likened Paulson’s proposal that his execution of the $700 billion plan be immune from all legal scrutiny to Louis XIV: L’etat, c’est Hank.

Heavyweight academic and former chairman of President Bush’s Council of Economic Advisors and now regular blogger Greg Mankiw weighed in against Paulson’s preference for debate behind closed doors. “If the Washington crowd cannot bring along the intellectual elite as a first step toward convincing a broader audience, they will end up pretty much alone.”

And so it was that Congress insisted on improving Paulson’s plan to make it more like what the bloggers were calling for. Indeed Paulson has used the plan to acquire equity from the firms it’s bailed out, though on remarkably, (though still somehow unsurprisingly) favourable terms for Wall St. Of course the bloggers and columnists weren’t the only voices. Gordon Brown’s decisive temporary nationalisation of several British banks set an obvious example (though the blogosphere immediately broadcast its significance). And people like Steve Waldman and Tanta got a real voice, and made a real difference.

Then things were capped off by two events. Paul Krugman won the Nobel Prize, though not for his work on financial crises (his immediate reaction was I dont have time for this).

And Tantas identity was revealed as 47 year old Doris Dungey.

The illness that had driven her from the workforce was ovarian cancer which had now claimed her. Of course the family that called her Tanta had grown by then through a process beautifully laid out by Steve Waldman on Interfluidity.

I am struck . . . by the odd intimacy of this medium. . . .

When Paul Krugman won his Nobel, I was oddly euphoric. I’ve never met the man, or even corresponded with him, but he felt like somebody I know . . . because he participates so actively in this endless sprawled-out conversation . . . . When Krugman won a Nobel, it felt like a kid from my neighborhood had hit the big time . . . .

I’ve never met or corresponded with Tanta, though Ive long been a fan. But this doesn’t feel like the death of a distant celebrity. . . . Tanta came out of nowhere and contributed greatly . . . . She described the mortgage industry in amazing detail, without ever being dry or dull. (Is that even possible?) A quirky, brilliant voice has disappeared.

Her silence will be loud in the cacophony.

Indeed it will. She died a pioneer of a medium that was just coming into its own and that was already doing us a power of good.

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