The Frankenstein Economy, part 2: It’s alive!

It’s everywhere now. The Frankenstein metaphor is being used far and wide and fast and furiously to describe the monster of a financial/economic crisis that has taken on a life of its own and is rampaging through the little Bavarian village called America (or perhaps, more accurately, Planet Earth).

Two days ago I uploaded a post (The Frankenstein Economy: Monster metaphor of the moment) noting this trend and offering four examples. Here are more, some from last year, some from more recently. A survey of the field shows that this phenomenon began to stir to life (wink, nudge) in earnest in early 2007, when the shape of the future began to come clear with the bursting of the housing bubble and the advent of mortgage-related troubles.

1) Wall Street can’t cage its mortgage monster (The Los Angeles Times, July 2007)

When the rocket scientists on Wall Street outsmart even themselves, very bad things can happen. The 1987 stock market crash was fueled by an institutional investment strategy that its creators ironically had termed “portfolio insurance.” The collapse of the giant hedge fund Long-Term Capital Management in 1998 was triggered by a sequence of market events that the fund’s engineers believed couldn’t occur in literally billions of years.

Today’s version of Frankenstein turning on its creator is the mortgage loan mess. Wall Street in recent years has taken a simple concept -– bundling mortgages and selling them to investors as interest-paying bonds -– and concocted an alphabet soup of securities so incredibly complex they defy understanding by all but a handful of PhDs….Once again, Wall Street’s rocket scientists have created a monster they can no longer control.

[Note: It’s amazing how closely the language of this article parallels and previews the language used by “former Wall Street economist” Nancy Kimmelman in an NPR story a few days ago. Specifically, the reference to Wall Street rocket scientists in back rooms sounds like she flat-out parroted it. See my first previous Frankenstein Economy post for details and a link.]

2) Revenge of Frankenstein finance (Financial Armageddon, August 6, 2007)

A chimerical force has been rampaging through global markets in recent months, wreaking widespread havoc. Cobbled together from myriad agreements, assumptions, and transactions by academics, financiers, and marketers, this labyrinthine creation was once seen as an unmitigated success of new age financial alchemy. But now, with changing economic and financial conditions exposing the derivatives-securitization monster to the harsh light of day, the nightmare of Frankenstein finance is coming home to roost.

….[N]ow that the man-made monstrosity has emerged from dormancy with a destructive, self-perpetuating momentum, it’s too late, of course, to go back and try to repair the mistakes of the past. All we can do now is batten down the hatches and steel ourselves for a rapidly expanding global threat: the revenge of Frankenstein finance.

3) Has modern finance created a Frankenstein? (The Business Times, December 19, 2007)

4) Our Frankenstein Economy (Globevest, January 19, 2008)

In the classic horror film, Mary Shelly’s gothic colossus is reanimated through massive doses of electro-shock. As bolts of lightning illuminate the silver screen, the Frankenstein corpse begins to twitch, and through the miracle of mad science is awakened from death….Apropos of the film…, the “mad scientists” in Washington are floating plans to stimulate our faltering economy.

5) Frankenstein Finance: Trying to breathe life in WaMu and Wachovia (Blogging Stocks, April 4, 2008)

Do not let the smokescreen fool you. There are still a great deal of problems within the financial sector. These bailouts are designed to bring life to corpses … Dr. Frankenstein, calling Dr. Frankenstein.

6) Henry Paulson’s Frankenstein (The New York Times, September 17, 2008)

Mr. Paulson and company have now backed themselves into a corner. They can allow the Lehmans of the world — those that fail to collapse quickly enough or are unfortunately too small — to go under, but they can’t let companies like A.I.G. go. And after Bear, Fannie and Freddie, the private sector knows that, too.

People will throw around the word “moral hazard” a lot today. But this is not about that concept: this is what we call free riding. The private financial companies are letting their good neighbor do the clean-up, and they’re not helping because they know the neighbor will do it anyway.

In the meantime, I fear that we are creating Frankenstein. Fannie Mae and Freddie Mac are deliberately being expanded over the next year and a half to accommodate the housing crisis. And the semi-strong banks are eating the weak financial institutions, creating more too-big-to-fail institutions. There may be nothing wrong with that, but in its race to provide liquidity (and not have to be seen cutting interest rates), the Fed is engaging in some incredibly risky maneuvers.