CNN: The worldwide leader in jargon

I am stepping out of character here at the beginning to talk about why articles like the one I deconstruct below are so gosh darn pernicious. It's not just that the article is poorly written. It's not just that it contains a bewildering combination of unsubstantiated statements, oversimplifications, paragraphs packed with jargon that most people won't know, and weird metaphors about salad. It's that articles like this, which doesn't do a good job of explaining anything, leave people with the feeling that this stuff can't be explained. They throw up their hands, panic, or just find someone who seems smart and well informed and follow what he says. This financial crisis is far from simple, but it's not inexplicable. A well-written guide to what's going on is possible, and National Public Radio has done a good job of covering the happenings (in audio format.) But instead of spending the time and money to sit down and hammer out the details CNN, and a lot of other media sources, seem to prefer putting up slapdash articles and video pieces describing a small bit of what's going on, with facts and causality often missing or wrong. It's an approach that fosters panic and confusion. It's irresponsible and lazy. This article is an example of that approach.


David Smick has a beard. He also runs a financial market advisory firm in D.C. Sometimes he writes for CNN. This is his latest column.

-- At this point in the credit crisis, at least one thing is certain: most policymakers lack a clue of what is really at stake.

Bold statement. So what really is at stake?

Those with some knowledge are driving policy looking through the rearview mirror.

It's a nitpick, but do you really look THROUGH a rearview mirror? Don't you look into one? They're not transparent.

Begin with the U.S. Treasury's $700 billion bailout package. This was presented as some magic pill which, if gulped down, would quickly restore financial stability.

Far be it from me to defend the bailout, which is problematic, but I don't remember the term "Magic pill" being bandied about. More like "Extreme but necessary measure so that we don't have complete economic collapse." It was more of a "Take this or you DIE!" situation than "Take one of these and you'll be fine by morning."

The "shock and awe" of the sheer size of the taxpayer-funded bailout would somehow restore confidence.

Shock and awe is in quotation marks here. Nobody ever used that term. Also, once again, a lot of people were talking about how the $700 billion was a relatively small amount given the size of the crisis. I don't recall anyone arguing that this was a giant wave of money that would sweep the crisis away. It was more that the crisis was so huge that to even put a dent in it you needed this unfathomable sum.

The reason I bring this up is that David Smick is clearly building a strawman argument, which he will proceed to tear apart, and he isn't even being subtle about it.

Instead, stock markets collapsed and credit markets remained frozen.

For one week. A week which precedes any of the bailout money actually being spent. It's a bit soon to be calling failure on the thing BEFORE ANY ASSETS HAVE BEEN PURCHASED.

This is because the credit crisis reflects something more fundamental than a serious problem of mortgage defaults. Global investors, now on the sidelines, have declared a buyers' strike against the sophisticated paper assets of securitization that financial institutions use to measure and offload risk.

This is accurate, but is the average CNN reader really going to understand what it means? There has to be a level of sophistication between Tickle Me Elmo metaphors and "Global boycott on sophisticated paper assets of securitization."

In recent years, our banks, borrowing to maximize the leverage of their assets at unheard-of levels, produced mountains of financial paper instruments (called asset-backed securities) with little means of measuring their value. Incredibly, these paper instruments were insured by more dubious paper instruments.

Also accurate (if incredibly non-specific). Also requires enough familiarity with what's been happening and what's going on that if you know what all of this means YOU DON'T NEED THIS COLUMN.


Therefore, the housing crisis was a mere trigger for a collapse of trust in paper, followed by a de-leveraging of the entire global financial system.

"Therefore" implies that you have constructed a logical argument we can follow. You have not. You just have a beard. What you said previously does not necessarily lead to this conclusion without a boatload of outside information. You skipped a few dozen steps.

As a result, we are experiencing the painful downward reappraisal of the value of virtually every asset in the world.

Except for sweet ass beards. That's an asset whose value is never reappraised downwards in the face of a massive worldwide de-leveraging. Am I right? Also, you haven't really explained why the de-leveraging leads to downward reappraisal (Short answer: Less money around means everything is worth less, numerically. Essentially deflation. Longer answer: This might be a part of what's going on, but not even close to the whole story. Some assets are, in fact, increasing in value. There's a lot of other stuff at play.)


So what are these paper instruments, these asset-backed or mortgage-backed securities?

Ooh, ooh, tell me!

I like to use a salad analogy.

My bad metaphor sense is tingling, but give it a shot.

Before the last decade, bankers simply lent in the form of syndicated loans.

Salady!

But with the huge expansion of the global economy in the 1990s, which produced an ocean of new capital, the bankers came up with an idea called securitization.

I like a lemon-vinaigrette dressing.

Instead of making simple loans and holding them until maturity, a bank collected all its loans together, then diced and sliced them up into a big, beautiful tossed salad.

That sounds...a little papery. Smooth transition into the metaphor there.

The idea was to sell (for huge fees) individual servings of diversified financial salad around the world.

Invest Fresh!

The only problem: under an occasional piece of lettuce was a speck of toxic waste in the form of a defaulting subprime mortgage.

Call the FDA! Is it just me or is this metaphor adding absolutely nothing but confusion to this half-assed attempt to explain what happened?

Eat that piece of salad, and you're dead.

Piece of salad? You mean the lettuce? Or the serving? Or the toxic waste? Can we wash it off? Piece of salad? What?

The overall salad looked delicious, but suddenly global investors were no longer ordering salad.

They'll get FAT!

No one knew the location of the toxic waste.

IT'S UNDER THE LETTUCE!

This distrust heightened when global interest rates began to rise.

What distrust? You have yet to use that word, or use any combination of words that would describe that concept.

So what does this salad boycott mean for the future

Fat investors. We've been over this. I like how Smick keeps dropping into and out of the metaphor seemingly at random.

and why have financial markets collapsed so brutally?

Yes. Why?

The markets are telling us the world will face a serious credit crunch in 2009 regardless of how much money government spends to remove the toxic salad from bank balance sheets.

That's a prediction for the future, not an explanation of the collapse. And why can't you just say toxic securities? The salad gambit failed. It failed like a Tickle Me Elmo salesman who overstocked his store based on previous...never mind.

Policymakers have no means of forcing the banks to start lending short of nationalizing the entire financial system. After all, the U.S. banks alone so far during the crisis have lost upwards of $2 trillion from their collective asset base.

"After all" once again implies that the second sentence explains the first, BUT IT DOESN'T. It might provide reason why banks are leery to lend at present, but in what way does it keep policy makers from forcing banks to start lending? Doesn't. They're related situations, but not identical.

Most banks are leveraged by more than 10 to 1. Translation:

Great! You're going to explain what leveraging is!

The U.S. financial system will have a whopping $15 trillion to $20 trillion less credit available next year than was around a year and a half before. The cost of money is rising and the availability shrinking.

You rat bastard! Way to sneak the phrase "Cost of money" in there too. I think you mean the cost of credit (That's what this generally means), but who knows. Maybe you think a dollar now costs $1.25. You are writing for CNN. Anything is possible.
.

True, the banks will still lend -- but the fear is they will do it only to people such as Warren Buffett, who don't need loans. What is uncertain is the amount of lending to borrowers engaged in entrepreneurial risk, the center of business reinvention and job creation.

Way to bring this up NOW. Remember when we were talking about asset evaluation? This is a huge part of it. Dried up credit markets are a huge threat to the short and longterm financial health of a lot of important companies. This is, in part, why the stock market is tanking (Along with good old fashioned panic, partially brought about because nobody knows what's happening, because the media has completely dropped the ball) and why companies are shedding jobs. Even big seemingly solid companies rely on short term loans to smooth out their operations, and without access to these credit markets many face severe liquidity crunches, which could potentially lead to service disruptions etc..etc... All of which will make people even more reluctant to lend, and we're in the midst of a vicious cycle that could do serious damage to parts of the economy that weren't even involved in these shenanigans.

Apart from the economic pain resulting from shrinking credit markets, we are about to see an earthquake in the relationship between government and financial markets.

About to see? WATCH OUT NEW ORLEANS! HURRICANE KATRINA IS GONNA BE A DOOZY! We are in the PROCESS of seeing, and in many cases HAVE ALREADY SEEN.

The great uncertainty is whether government has the power to rescue the financial system in times of crisis. It seems doubtful.

This is what is known as the power of positive thinking. If you're going to scare people you should probably at least do them the favor of explaining what it is you think they should be afraid of.

In the United Kingdom, for example, the collected assets of the major banks are four times the nation's gross domestic product (GDP). A similar situation exists in many Euro zone countries. This means government cannot bail out the system even if it wanted to. Given such massive exposure, government guarantees in a time of crisis become meaningless.

Thanks. Although it's probably WORTH NOTING that not all of those assets are toxic or problematic, and so government might very well have enough money to deal with THOSE assets. The government also, to borrow a phrase, still has a thing called a printing press. Fiat money has many problems, but one of its advantages is that it allow the government to spend as much as it wants. It can be very problematic but it's still meaningful.

Yet because of the interconnected web of global financial relationships, we are all vulnerable to the threat. The collapse of, say, a major European bank would hardly leave American workers immune.


Why is that "Yet" there? That is the most useless "Yet" in the history of mankind. Also, I don't think there are a lot of Americans going "Europe's in trouble, but we seem to be doing just fine over here." Phrases like "Economic death spiral" and "Greatest depression" are being bandied about.


Our policy leaders in Washington are thinking domestically when the solution to the credit crisis will be global. It is not that the world lacks money; it is that the world's money is sitting on the sidelines -- more than $6 trillion in idle global money markets alone.

That's nice. Except that we can't make them lend to us, and also the U.S. government's power in this area is ENTIRELY DOMESTIC. We don't get to go to Belgium and tell them what to do about THEIR banking crisis. Not unless we bring guns. Or at least Jeff Speakman

The challenge will be to reform our financial system quickly to draw that global capital back into more productive uses. The first step should be efforts to make the market for future asset-backed paper more transparent and credible.

Seems sensible. Too bad our government can't do anything to make banks lend. Except, apparently, this.

We need a private/public global bank clearing facility. The bankers don't trust each other. The central banks, working with the private institutions in providing enhanced data, need to begin to refashion the world's financial architecture.

I am not going to unpack this. I will just say that it has disappointingly little to do with delicious salad. Do you think that security salad has radicchio in it? I like that stuff.

And while that is happening, the major governments of the world, including the Chinese, should begin major fiscal efforts to stimulate their weakening economies.

Such as?

Oh wait. We're done.