I have been trying to understand the origins of the financial crisis for some time. I have read some great books (The Big Short, All The Devils are Here, On the Brink). I have listened to some great podcasts (here and here). I have spent hours reading the website of authorities on these matters (The Baseline Scenario).
Still I was unprepared to write about it. There were so many parts and my understanding was unstitched.
Then along came my wife to bring clarity to the issue. The following is a true story.
Yesterday, she was making dinner rolls in preparation for the Christmas feast. My two daughters, for the sake of this post let’s call them Frances and Frederique, were merrily helping. She was mixing the ingredients when I hear from the other room “This isn’t bread, it’s a giant soup.” It turns out she had added twice the milk called for. With rolls needed there was really only one outcome that could come from this. You could even say that at this point the crisis was baked into the cake.
Already having provisioned for an over-supply of bunnery, she doubled the rest of the ingredients.
Rolls were the original intent – and rolls were made. However, that demand was soon met and much material remained. Being pretty creative she knew how to put this over-supply to work. She made new food products; cinnamon Danishes and cranberry-orange delicacies (CDSs and CDOs for short).
Batch after batch she baked and baked. Batch after batch we ate and ate. We ate hot buns. We ate cold Danishes. We ate whatever came out of the oven just because it was there and it tasted so good. We couldn’t stop ourselves.
Despite what we ate, my wife made ten pans of rolls, CDOs and CDSs. I felt queasy. Now, on Christmas eve, the big meal still to come, I also feel like Michael Burry, the guy that saw the crisis coming.
I can see the future. There is not a one in our family that can turn these buns down. All will over-consume. On December 26th the bun asset market will collapse. We will be left with a sick feeling.
And we will pay, one way or the other, for this exuberance.
Either we will cut back on future food consumption and pay off our calorie debt or we will have big inflation of the waistline.
Yep, that’s it. That’s the financial crisis in a nutshell . . . er, bun pan.
Christmas Bun Crisis Recipe (The story of the financial crisis).
- Start with a couple of helpers and twice the milk called for.
- Fannie and Freddie creating a market for subprime loans and a loose Fed monetary policy
- Create new pastries to sop up the great soup of yeast
- Neglect to follow the recipe
- failure of the feds to regulate CDOs and CDSs
- Bake much more than you need.
- Loose credit led to over-built residential and commercial real estate markets
- Then over-eat, feel queasy, can’t eat any more. The bun market will collapse.
- consumers borrowed beyond needs and means and began to default causing the real estate market to collapse.
- Now we either cut back or inflate our waists.
- We either have to substantially reduce our spending and pay down debt (personal and governmental) or have big inflation.