(Yet Another) Existential Crisis

I have this pipe dream that just keeps on clinging, like static-charged saran wrap. Maybe I should have gone to journalism school.

The "R" Word

Here at the Fed, we've been in a bit of a tizzy, looking for signs that we are, in the words of former Chairman Greenspan, undergoing a "cumulative dynamic unwinding of economic activity that feeds upon itself," also known as a recession. To make things even more interesting, I am in the finance group, which means I have an upfront view of the hottest-burning fires. It's ironic that I came to the Fed because I wanted nothing to do with investment banking...yet here I am, 6 months later, learning all sorts of things about finance, albeit from a much more theoretical vantage. Who knows, I may end up working at a big bank after all...

A lot of people have been asking me questions like "Why does the economy suck balls?" The short non-answer is, it's complicated. In a nutshell, in the aftermath of 9/11, the Fed lowered interest rates and credit became cheap, e.g. borrowing money was really easy. Mortgage brokers began underwriting loans to borrowers with checkered credit histories. Why would you lend money to unreliable borrowers though? Well, here's an innovative idea: you can bundle these subprime mortgages into new securities and sell them to investors, like other banks, hedge funds, institutional investors, etc. That way, rather than holding the loans on your balance sheet, you can resell these securities and escape risk-free. But who would buy securities based on crappy loans? Well, we could bundle a large portfolio of mortgages into separate tranches, with a range of risk levels, say, AAA through CCC. If some borrowers default, investors in the lower-rated tranches will not get paid, but the higher-ranked senior tranches will continue to pay. To compensate for the increased risk, junior tranches will also receive higher interest pay-offs. Wow, now we've even managed to create AAA securities out of a bundle of sketchy loans! This process sort of cycles through (you can repackage securities again), until homeowners decide they can't afford their mortgage payments, bank balance sheets are a black hole of intangible assets, and investors suddenly realize the emperor is wearing no clothes.

To further complicate matters, most of the financial terminology being thrown around is confusing for economists, not to mention reporters and novitiate news readers. Alt-A mortgages? SIVs? ABS? CDOs? CLOs? A new acronym seems to pop up every week. No wonder the mainstream press is replete with errors when they try to explain the unfolding events. When our department gathered for a meeting earlier this week, someone commented, "Who knew 3 weeks ago what an auction-rate security was?" This garnered a lot of laughs.

The combination of bubbles in the housing market and the financial sector is a bludgeoning one-two blow to the economy. Whereas a few years ago, credit was too cheap, now credit is too expensive, and businesses and consumers who should be able to borrow are being denied loans. Banks are nervous about lending out money, particularly to each other, and the anxiety is pervasive. This credit crunch is unusually far-reaching in scope, and seems to be taking down arcane sectors of the financial markets that have nothing to do with housing. A month ago, the leveraged loan market was under pressure. The next week, it was municipal bonds and student loans. The week after that, auction-rate securities fell victim. And now, it looks like Bear Stearns (the 5th largest investment bank on Wall St) is on the verge of going bust.

This news scares me more than any other development so far. Basically, at the beginning of the week, rumors and speculation began swirling that Bear Stearns didn't have the cash flows to meet the demands of its creditors. Despite releases and press conferences by Bear Stearns' top brass stating that their liquidity positions were sound, the market's fears were not eased. By Thursday, investors were pulling funds out en masse, and by Friday, it was clear that, regardless of whether the original rumors were true, Bear Stearns' "liquidity position in the last 24 hours had significantly deteriorated." Take a good, hard look, because we have just witnessed the modern-day equivalent of a bank run. For more details, Felix Salmon has an excellent, clear explanation of what just blew up.

Luckily, J.P. Morgan and the Federal Reserve are working to partially bail-out Bear Stearns. Amusingly enough, almost exactly one century ago, J. P. Morgan himself stepped with large sums of cash to quell the Panic of 1907, and stabilize the US economy.

As FDR once said, the only thing we have to fear is fear itself.

The next FOMC meeting is on Tues the 18th. I intend to take my final exam for stochastic processes (man, those quarters zip by fast compared to semesters!), and then dash back to my computer to see what sort of rate cut will be unfurled.

Pi/Dragon/St. Patrick's Day

(with apologies to Don McLean)

Pi, pi, what's the value of pi?
Starts 3 . 1 4 1 5 9
Them good ol' boys gave it a try
But the decimal never dies, the decimal never dies...

It's March 14th, and we all know what that means - time to celebrate Pi Day! Much like Talk Like A Pirate Day or Towel Day, Pi Day is part of that pantheon of holidays that, well, take a special someone to appreciate.

At 1:59 pm sharp, Phil brought in a splendiferous assortment of pi(e)s: peach, apple, cherry and pumpkin. Considering there were only about a dozen AEs, it was quite a lot of pie to go around. (Note: actual pies consumed differed a bit from the ones displayed above.) Next year, I think we should have a pie with the pi symbol on it, and a second pi with the digits of e on it (2.71828...) so that all together, we have a complete pie.


Meanwhile, spring break has kicked off at Cornell, which means it's time for the annual architecture bacchanal, otherwise known as Dragon Day. Since I never managed to go anywhere exciting for spring break, I was almost always in town to watch the Dragon Day parade and pyre. So, those of us who hadn't jetted to Cancun were treated to the sight of sleep-deprived, festively costumed archies burning an elaborate dragon in the middle of the Arts Quad. As I recall, the weather varied wildly from cold rain to warmth & clear skies to thick snow last year. And it appears that the engineers finally got their act together and constructed a competing phoenix this year.


This morning, as I was waiting in the dentist's office, Coldplay's "Clocks" began playing on the radio. All of the sudden, I was flooded with memories of playing Clocks on chimes, hearing Clocks on marimba, jogging around campus as Clocks emanated from the clocktower as the sun set. It has been almost a year now since I last chimed regularly; would I still be able to play the (notoriously difficult) piece today? Would I be able to sprint up the 9 flights of stairs like I used to? And forget chiming, it's been years since I stopped playing piano regularly, and even longer since I dropped violin. What was the point of all those lessons again? It was a sobering reminder of the passage of time.

Anyway, back to the present. Dragon Day has always coincided with the weekend of St. Patrick's Day, and curious about a possible linkage, I sat down to investigate the origins of the former. As it turns out, Dragon Day began as a celebration of Architecture School pride by Willard Straight, and he chose St. Patrick's Day, who legendarily drove the serpents out of Ireland. Ergo, the burning of our dragon every year actually has some throwbacks to Catholicism. Who would've thought?

Chicago historically has had a large Irish Catholic population, though I suppose many other cities also claim to be Irish-friendly, since it's much more in vogue than being say, Iranian-friendly. However, unlike many other cities, we have perfected the art of dyeing our river shamrock green for St. Patrick's Day. The dye solution has been tested to be eco-friendly, but it looks like the exact composition is a city secret. The fountains at Daley Plaza, which were spouting orange back in Oct, are now bubbling green as well.