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It is now clear that the delusional hope that the severe credit and liquidity crunch that hit US and global financial markets would ease has been shattered by the events of the last few weeks. This credit crunch is getting much worse and its financial and real fallout will be severe. The amount of losses that financial institutions have already recognized - $20 billion – is just the very tip of the iceberg of much larger losses that will end up in the hundreds of billions of dollars. At stake – in subprime alone – is about a trillion of sub-prime related RMBS and hundreds of billions of mortgage related CDOs. But calling this crisis a sub-prime meltdown is ludicrous as by now the contagion has seriously spread to near prime and prime mortgages. And it is spreading to subprime and near prime credit cards and auto loans where deliquencies are rising and will sharply rise further in the year ahead. And it is spreading to every corner of the securitized financial system that is either frozen or on the way to freeze: CDOs issuance is near dead; the LBO market – and the related leveraged loans market – is piling deals that have been postponed, restructured or cancelled; the liquidity squeeze in the interbank market – especially at the one month to three months maturities - is continuing; the losses that banks and investment banks will experience in the next few quarters will erode their Tier 1 capital ratio; the ABCP and related SIV sectors are near dead and unraveling; and since the Super-conduit will flop the only options are those of bringing those SIV assets on balance sheet (with significant capital and liquidity effects) or sell them at a large loss; similar problems and crunches are emerging in the CLO, CMO and CMBS markets; junk bonds spreads are widening and corporate default rates will soon start to rise. Every corner of the securitization world is now under severe stress, including so called highly rated and “safe” (AAA and AA) securities.

This is indeed the message that comes from true market prices – that are not indirectly available via the ABX indices. Those prices tell you not only that the mezzanine and equity tranches of subprime CDOs are now worth close to zero; they also tell you that prices for the AAA and AA tranches – that until recently were hovering near par of 100 – are now down to 79 and 50 respectively. Hundreds of billions of subprime RMBS and senior tranches of CDOs are still being evaluated as if they are worth 100 cents on the dollar. What the ABX is telling you is that they are worth much less; thus the losses from subprime alone are an order of magnitude larger than recognized by most firms.  But most firms are not using such market prices – or their proxies – to value their illiquid assets.

Economists distinguish between “Risk” and “Uncertainty”: the former can be priced by financial markets while the latter cannot. The distinction between the two was made by the famous economist Frank H. Knight in his seminal book, Risk, Uncertainty, and Profit (1921). In brief, “Risk is present when future events occur with measurable probability” while “Uncertainty is present when the likelihood of future events is indefinite or incalculable”.    This distinction between risk and uncertainty helps to explain the recent market panic and turmoil. Today, the FT cites a market economist at Lehman who said: “We are in a minefield. No one knows where the mines are planted and we are just trying to stumble through it”. A few days ago another market participant put it this way: “It is not the corpses at the surface that are scary; it is the unknown corpses below the surface that may pop up unexpectedly”.   Unknown minefield; unexpected corpses: this is “uncertainty” rather than “risk”. Risk can be measured and priced because it depends on know distributions of events to which investors can assign probabilities. Uncertainty cannot be priced by markets because it relates to “fat tail” distributions and extreme events that cannot be easily predicted or measured.

A few days ago the CFO of Goldman Sachs justified the massive – 30% plus  - losses of the two Goldman Sachs hedge funds by arguing that these were unpredictable “25 standard deviation events” that should occur only once in a million years. The same thing was said by the LTCM “masters of the universe” when their highly leveraged hedge fund went belly up in 1998.

The proliferation of such products, as I have often noted before, carries many benefits for the financial system (most notably that they disperse risk across a much wider pool of investors). But this trend also carries at least one downside; it is adding to the opacity of the financial world. For although many corners of the structured credit universe are becoming more transparent, almost as soon as one chink of light emerges, another shadowy wave of activity emerges that is far more opaque.

rust vs. Mistrust by media source How to know? Who to believe? The new-media revolution has subverted as well as expanded the possibilities of knowledge-based understanding. Tony Curzon Price presents openDemocracy’s response to a crisis of trust. The Enlightenment faith that knowledge will lead to understanding, and understanding to a better world, is central to openDemocracy's being. It informs both what we publish - in-depth analysis and commentary by public intellectuals, professionals, writers, academics and activists - and how we view ourselves: the product, process and the purpose alike.

it should be apparent to all of us that sometimes senior executives, including the chairman, do not fully understand the businesses in which the company is involved. The financial instruments now causing such turmoil were not properly priced for their inherent risk and managers were unaware of the integral problems with these instruments. Much of this was made possible by the advanced technology used to devise and distribute these instruments.

Thou Shalt Find It Impossible to Live Like the Bible Tells You to By Anneli Rufus, AlterNet. Posted November 17, 2007. Author A.J. Jacobs spent a year trying to follow the 600+ laws he found proscribed in the Bible, and concluded he's doomed to live in sin. Tools EMAIL PRINT 84 COMMENTS The Year of Living Biblically by A.J. Jacobs (Simon & Schuster, 2007) Share and save this post: Also in Rights and Liberties Indicted! Barry Bonds Is a Perfect Distraction from Real Events Dave Zirin Striking Nurses in W. Va are Met With Intimidation, Harassment and Car Fires! Richard Negri Hillary Auditions to Be a Feminist John Wayne Susan Faludi Democracy Belongs in the Workplace, Not Just in the Voting Booth Omar Freilla Gay? U.S. House Says That's Okay Deb Price More stories by Anneli Rufus Rights and Liberties RSS Feed Main AlterNet RSS Feed Get AlterNet in your mailbox!   Advertisement border-style: solid; border-color: rgb(216, 216, 216); border-width: 0pt 1px 1px; p

#1Thou Shalt Find It Impo >

As the cultural historian Markman Ellis writes, in Eighteenth-Century Coffee-House Culture, the British coffee house, a “heady combination of news, literature, debate and writing”, was “the central locus of newly egalitarian practices of discussion and conversation, including forms of structured discourse, such as lectures and debates, as well as unregulated discourse, such as gossip and chatter”.

The freedom of speech led to time-wasting and “gabbling” (“Here men carried by instinct sipp muddy water, and like Frogs confusedly murmur Insignificant Notes, which tickle their own ears, and, to their inharmonious sense, make Music of jarring strings”). The education on offer was “a school . . . without a master”.

The eighteenth-century coffee house was undoubtedly a great vehicle for the reading of newspapers. A Continental observer in the late eighteenth century noted that, whereas the French coffee house was a place where games were played, in Britain “you neither see billiards nor backgammon tables” because people frequent coffee houses principally to read “the PAPERS”. There was a close and sometimes volatile relationship between the coffee-men and the newspaper-men, which came to a head in 1728, when the coffee-men launched an abortive scheme for setting up their own newspapers. Coffee shops had long been used as places for reading papers without having to pay for them. The coffee-men resented the high price of newspapers and the fact that there were so many of them. The newspaper-men objected that coffee houses relied on newspapers to attract custom. There is a comparable symbiosis now between cafés and information, whether in the form of newspapers (Starbucks has an exclusive deal with The Times, Costa with the Daily Telegraph) or internet connection. It is hard to see which party owes most to whom. As a pamphleteer of 1729 wrote, “Papers mutually beget company, and Company papers”.

"Jimbo" — was a finance major at Auburn University when the Mises Institute's Mark Thornton suggested he read "The Use of Knowledge in Society," a now-famous essay written by Austro-libertarian economist and Nobel laureate Friedrich von Hayek. The essay argues that prices in the market represent a spontaneous order that results from the interaction of individuals with diverse wants, allowing them to cooperate to achieve complex goals. According to a June 2007 Reason magazine interview, this insight of Hayek's is what led Wales to found Wikipedia. The rather lofty vision that inspired Wales? "Imagine a world in which every single person on the planet is given free access to the sum of all human knowledge. That's what we're doing."

Pogue wrote what the company told him to. This is the trouble with exclusives. Pogue wrote a glowing review, ahead of the product's launch, and then looked like a fool when the company's website -- which Pogue hadn't seen, since it was scheduled to launch the same day as his exclusive review came out -- posted very different prices than were in print.

It was one of the more fascinating, odd and troubling scientific ventures of the last century. An outline reads like some pulp sci-fi tale: During the 1930s, a hero pilot teams up with a brilliant surgeon in a spooky, black-walled lab to unlock the secret of eternal life to save the West. It sounds a bit nutty, but this isn't fiction.

In Nature’s Casino

The global imbalances created by this dynamic of American borrowing and foreign lending appear stable for now, but if they slip suddenly, that could pose serious dangers for middle- and working-class Americans through soaring interest rates, a crash in the housing market, and sharply higher prices for anything no longer made domestically.

was a run on the pound sterling and he blocked the International Monetary Fund (IMF) from stabilizing the currency. With sterling on the verge of collapse, says Frankel, “Eisenhower told them, ‘We are not going to bail out the pound unless you pull out of Suez.’” Facing bankruptcy, the British withdrew. This incident, notes Frankel, “marked the end of Great Britain’s ability to conduct an independent foreign policy.”