Something I don't do very often

Which is discuss about finance. WARNING:LONG POST THAT I DON'T REALLY UNDERSTAND MYSELF. READ AT YOUR OWN DISCRETION. Here is a Financial Times article written by former Fed(eral Reserve) Chairman Alan Greenspan.

With the emerging financial doom and gloom lead by the sub-prime mortgage crisis and compounded with a steadying dropping consumer confidence and rising oil prices, I thought it would be a good thing to listen to what this guy had to say. He obviously knows a lot more about finance than me. So I'm gonna be leaving pointers on what I think is interesting/important.

1. Apparently this might be the worse crunch for the US since World War II. I guess we should be "privileged" to live in such interesting times.

2. The biggest component of this mess is the housing market. And until the liquidation of the excess inventory has happened in earnest, there won't be stabilization. Which means, that it's a good time to go investing if you can spare a few hundred thousand USD (My thoughts). However, single family housing supply has sharply fallen in the past year. Mr Greenspan predicts that in 2008, around 400,000 homes will be sold. And next year's supply is limited as well so that will prevent even more empty houses flooding the market.

3. One of the biggest changes that should occur from the fallout of this crisis is how risk is assessed by the financial sector. I don't fully realise the impact of his words so I'm just gonna quote verbatim here.

To be sure, the systems of setting bank capital requirements, both economic and regulatory, which have developed over the past two decades will be overhauled substantially in light of recent experience. Indeed, private investors are already demanding larger capital buffers and collateral, and the mavens convened under the auspices of the Bank for International Settlements will surely amend the newly minted Basel II international regulatory accord

The manner of risk-taking companies took were not able to withstand the stress when the whole market took a downturn.

One difficult problem is that much of the dubious financial-market behaviour that chronically emerges during the expansion phase is the result not of ignorance of badly underpriced risk, but of the concern that unless firms participate in a current euphoria, they will irretrievably lose market share. Risk management seeks to maximise risk-adjusted rates of return on equity; often, in the process, underused capital is considered “waste”. Gone are the days when banks prided themselves on triple-A ratings and sometimes hinted at hidden balance-sheet reserves (often true) that conveyed an aura of invulnerability. Today, or at least prior to August 9 2007, the assets and capital that define triple-A status, or seemed to, entailed too high a competitive cost.

4. Current models have an X-factor thrown in to model the market. This means that they cannot adequately describe what is happening. Ideally, we should be able to simulate what happens when the market is given to hysteria. As long as we can predict the systematic lows of the market, we should be able to prepare for it. But that is beyond my expertise as to how such things should occur (My thoughts).

I hope that was informative! And yes, I know it was too long. Bleah.