Asset-Backed Commercial Paper Syndrome


Merely a few years back sophisticated investors in the Western world were obsessed with ABCP, which was designed on the premise that if you put a lot of risky investments together, whirl them together nicely — removing the need to see the actual ingredients — make them tradable and hence liquid, somehow the basic risk that was right at the core of the ABCP would disappear. Alas, as can be expected, ABCP actually worsened the risk-reward situation, for now broker commissions had to be paid and the lack of risk perception encouraged an increase in the size of the higher-risk ingredients of ABCP.

How did ABCP come to be acceptable by the very best in Western society? It was a result of an irrationality that has been creeping into the society, a result of the subservience of the individual and his thinking to the institutional order, and more importantly of a corruption of the feedback mechanism by the politicization and collectivization of every aspect of life.

By suffering or benefiting from the consequences of our actions, we are enabled to align actions and beliefs to what is best for our prosperity. This we often no longer do. Institutions have interfered to privatize profits and socialize costs. This is socialism. It is also the mysticism that constitutes the very essence of backward, poor societies. For all intents and purposes, mysticism is synonymous with socialism.

In the West, there has been a significant break from individual self-responsibility. It is no longer necessary to do productive work or look after for your health or have a husband to have babies or save for your old age. The nanny state promises to look after you. This has broken the feedback system. The result is that our thinking is no longer aligned to what is best for us, what is rational and what makes for a productive society.

In the West, people increasingly believe that something can be created from nothing, the magic that either the state or God will provide for you if you pray. Rhetoric and sound-bites, accepted as universal truths, allow people to avoid delving deeper. It is now believed possible that the inherent risks of life can be eliminated through top-down management by experts. You have the same vote in political space whether you understand the issues or not, and this means mediocrity in the intellectual space. No value is found in deep exploration of a subject. Meanwhile, mysticism produces a significantly reduced sense of causality. The passion to advance one’s life and explore its possibilities has little value in a mystical culture.

In the West, people increasingly believe that something can be created from nothing, the magic that either the state or God will provide for you if you pray.

The product is an increasingly superstitious society and confused, cloudy thinking. Increased crime and loss of prosperity are the obvious consequence, because self-responsibility has taken a back seat. Dependence on thinking driven by the media and whatever is in fashion makes superstitious beliefs spread very quickly. Not many question how the printing of currency can create prosperity. Who needs to work when wealth can be created by the magic wand? Why look after your health when ultra-high-tech medical technology can take care of all ailments, perhaps making a lot of people subliminally believe that mortality can be avoided. Not many question that the world can be changed by the heavy hand of the US military. Everyone seems to have an answer for how to get rid of poverty and crime.

ABCP thinking makes people in the West worry about such things as the possibility that a certain drug might kill one in a million users. This endless worry about the smallest harm that may come from anything creates terrible regulatory problems and cost increases. Delays in drug approval kill far more people than they were supposed to save.

When 9/11 happened, a lot of Americans shouted, “How could this happen here? This is America.” Alas, there is nothing about America that makes it immune to attacks. It was not just the deaths of 3,000 people that affected Americans but their nationalistic arrogance. The steps Americans took to deal with 9/11 damaged liberty and security instead of strengthening them. Now the equivalent of thousands of lives is wasted in lineups at American airports.

As heartless as it may sound, 20 children being killed by a gunman is not a world-changing event. Many more people are killed on the roads each day in the United States. Many more are murdered in other ways. Just because a certain crime is covered by major news channels does not meant that people have to do something in a kneejerk fashion. That is superstition. Of course, one might want to explore the various reasons behind violent crimes, but putting restrictions on society without a cost-benefit analysis only leaves people with a false sense of security.

Gun control, putting metal detectors in every school, making people to go through porno-scanners at airports, is a wrong reflex. People must get some perspective on life. They also need to develop, or redevelop, a sense of responsibility for themselves. Then, after a bit of thought they may realize that shooting massacres have a way of happening in areas where guns cannot be taken in by decent people. In the end, they may accept the fact that even after all proper actions are taken, bad things will happen. This is the nature of life.

Western society must find a way back to rationality and restore a social structure shaped so that a person faces the consequences of his actions. This will be the antidote to mysticism and will likely put the West back on the path to progress.

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As I look out upon the dark night of statism, I draw comfort from the flames of liberty I see burning brightly. You are one of those flames. Thank you.

Greg Robbins

A wonderfully insightful article. It would be great if people started thinking for themselves instead of following the herd.

Jon Harrison

What an interesting (and well-written) goulash of sound thinking and nonsense! Undoubtedly, we need more self-responsibility and less dependence on government. However, history tells us quite clearly that the individual, no matter how strong, smart, and self-reliant he or she may be, is subject to harm from from forces that he can neither control nor avoid. The well-worn phrase, "No man is an island" was, is, and forever will remain true. The trick is to strike a balance between self-reliance/self responsibilty and action by the community and/or the state to protect individuals from harm. Without question, we have moved too far in the direction of collectivism here in the West. But stripping away everything that reform movements of the 19th and 20th centuries created would return us to an 18th century world -- with 21st century technology (and therefore the means to do harm multiplied manyfold over what as possible in the 1700s). We have gone too far in trying to protect everybody from everything. But some restrictions on human behavior are quite reasonable. Should we, for example, allow individuals to own machine guns? I think not. Heavy penalties for possessing a machine gun have worked reasonably well as a deterrent. Similarly, while I strongly favor more sexual freedom for adolescents (lowering of the age of consent, no government attempts to control "sexting'" etc.), I don't thereofore reason that we should abolish all rules governing sexual behavior. Laws should exist prohibiting sexual contact between adults and pre-adolescents, for example. In any matter, where the line should be drawn is the question; erasing the line completely opens us up to the horrors of anarchy and the behaviors of man the beast of prey.

How did ABCP become acceptable in our society? Contrary to the author's view, it was simple greed (which is not a new human failing caused by government or collectivism) and a dropping of the regulatory reins that led to disaster. Government played two parts in the disaster: actively by pushing for more mortgage lending to bad-risk borrowers, and passively by failing to perform its role as referee in the market. Bhandari's view, in other words, expresses a half truth. It is no coincidence that major financial disruptions occurred on a regular basis until the onset of major regulation in the 1930s, and reappeared with the relaxing of said regulations beginning in the 1980s. Evidence trumps sentiment in this as in most cases. Bhandari falls into the trap of all ideologically-constrained thinkers, bending facts to fit his psychological and ideological bent. It's a common failing; many highly intelligent and interesting people are like this. It's unfortunate that so few of them recognize it in themselves and undertake the task of self-overcoming.

"Mysticism is synonymous with socialism." Talk about painting with a broad brush! But I've already gone on too long; this discussion perhaps will take place another day.

Always interesting and stimulating, Bhandari lacks only nuance to become profound.

H Myers

...but they are hard to get. See ATF regulations regarding NFA (National Firearms Act) weaponry, a category that includes machine guns. I know quite a few citizens who legally own such guns.

Jayant Bhandari

Nowhere did I write that an individual is an island and should not be a part of the community. And where am I saying that you should strip away what reform movements created? In fact, my whole article is asking about STOPPING this from happening.

Any reform or enlightenment in the society should become a part of its culture. If it has to be “enforced” through top-down means by the State, it is not a reform. The State is at best a patchwork where civilization has failed. If “morality” is forced on people, the moral compass within the people will never develop. It will in fact atrophy. This is the dilemma the ex-socialist countries face. Such societies lack a sense of right and wrong. I dare say that Russia is a great example of this, where too much of government atrophied a sense of internal compass from the culture, leaving it on a suicidal course once the heavy-hand of the government weakened. They must now find a compass, organically, very slowly.

In other words the State is a symptom of where society has failed to be civilized. Similarly, as the State has grown for no good reason in the West, its people have commensurately lost a sense of right and wrong, a moral compass. They have lost touch with rationality.

Can the world be cohesive without the State? One might want to visit the extremely busy cities of Seoul and Tokyo. At night time, in bar areas, you see completely drunk people walking around. Young boys and girls sit in pools of their own vomit. There is no one to harass or molest them. And you don’t see any police around. There is no fear and sense of insecurity. Kids don’t go around damaging properties. They don’t need the artificial glue of the State to keep law and order. This was also in ample evidence after Tsunami in Japan. There was no reported rioting and looting in the aftermath.

You imply that the State should have regulated “greed.” How do you think the law can create a fine divide between “legitimate aspirations” and “greed”? How will you define that line? Elsewhere you say that we must find a balance between self-responsibility, action by community and/or the State. Whose definition of “balance” would you use: the bureaucrat’s, or lobbyists’, or those who are looking for something for nothing, or those who suffer from envy? And who will then be the referee? And how will everyone agree that the referee has no conflict of interest? Anyway, my view is that greed is not immoral. Chasing money and women for its own sake might be a waste of time and life but, while you and I might bitch about those who do it, who am I to restrict someone from doing that?

Most importantly, regulations completely failed to control the consequences of ABCP. This is not because there was lack of regulations. Government cannot be the referee in a trade, except in a negative way. Buyers and sellers have to have a sense of what they are doing. Warren Buffet was vehemently against ABCP. So was Frank Martin (who wrote a lot of great stuff on what was happening). So were Doug Casey and Rick Rule. But being drunk, people had no interest in paying attention to these people. The more rules are created the more people get lulled into thinking they don’t have to worry where their money is going. What should have ideally happened is what happens at the casino. The gambler should lose his money and experience the consequences of his actions, in as short a time as possible. In a free, unregulated market, where people were not as indoctrinated as they are today, ABCP investors would have lost their money quickly and would have likely learned a lesson from causality. In the current artificial structure provided to them, the result of their actions took too long to manifest and costs were borne often by others.

Using your words… what is happening today is destroying what the reform movements created in the Western societies.

Regarding your other remark… Lawrence Reed of and Mises Institute have a lot of work on their websites that likely show that it was regulations and government interference that created financial problems in 1930s. See:

Jon Harrison

I understand better what you're saying now. Perhaps I read the piece too quickly. I must say that for the most part I disagree with your views, and I don't think they stand up all that well to objective scrutiny. But hell, that's just me. I do very much appreciate your taking the time to further elucidate your original piece.


Equating mysticism with socialism is a slander on mysticism. Mystics occasionally get things right, socialists never do. The former sometimes stumble into the light, while the latter, by design, rejects the sun in favor of perpetual shade.

Jon Harrison

I agree.

Jayant Bhandari

You are absolutely correct. My apologies. I should have used the word "superstitions" instead.


Thank you for your excellent article, and your even better reply to Jon's criticism. Once again you have put into eloquent words what those who love freedom and progress intuitively know, but sometimes lack the ability to express. Keep up the great work!

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