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Greece is in trouble

24 Feb

http://www.bloomberg.com/apps/news?pid=20601087&sid=auLLhrWZiKi8&pos=8

A fine mess in Greece. This could be start of a major unraveling of the Euro..the end of the unified monetary unit as it becomes painfully obvious that a currency whose value and stability relies on the fiscal management maturity and discipline of 27 different countries..all with their own governments, culture and economy, cannot stand.

On the plus side this may finally make travel to Europe affordable again as we start to see countries with enormous debt who switched to the Euro such as Spain and Portugal return to their native currencies, with extremely favorable exchange rates against the perhaps ironically more stable US Dollar.

The evil of Capitalism – George Cloutier’s example

11 Feb

https://i1.wp.com/graphics8.nytimes.com/images/2010/02/11/business/11sbiz_CA0/11sbiz_CA0-articleLarge.jpg

This article highlites the evil of Capitalism. The placement of profit above EVERYTHING. As this guy says, “Profits Aren’t Everything, They’re the Only Thing”.

http://www.nytimes.com/2010/02/11/business/smallbusiness/11sbiz.html

Here is a previous post I did on why Capitlism can be very evil:
https://carbonatoms.wordpress.com/2009/04/02/why-capitalism-sucks/

why the stock market has risen in 2009

6 Aug

Here is a chart I created showing my analysis of the causes of the stock market plunge of 2007 and the recent stock market climb:

Stock Market Analysis funny

Why Capitalism Sucks

2 Apr
  • The capitalists generate their wealth by exploiting employees. An employee is not paid according to the true worth of his labor but according to what the employer is willing to pay him. The employer pays him less than what his labor is worth so that the employer can make a profit when he sells the produce.
  • Wealth and unequal distribution can create social problems (such as higher crime rates).
  • Government interference in markets can be skewed to benefit the wealthy. In particular, wealthy people have the financial means and incentives to influence or corrupt government officials and to lobby for favorable legislation.
  • Many people have little wealth left over after living expenses, so they can’t make it grow quickly. This further deepens the disparity between rich and poor.
  • Persistent long-term inequality of wealth undermines the motivation of the poor to improve their stance. This creates not only direct but perpetual sociological inequity.
  • Wealthy people save relatively more than poor people. Hence some economists believe that an unequal distribution of wealth undermines an economy’s mass buying power, effectively leading to lower aggregate sales, reduced wealth production, unemployment and crises.
  • Wealth is defined and judged incorrectly, in many different ways. In particular, people may attach value to things for seemingly irrational reasons (sentimental value). Some may also value spiritual development more than material wealth. Capitalism’s focus on absolute monetary value thus undermines the legitimacy of alternate paradigms.
  • The wealthy may not put their wealth to productive use. For example, they may buy land just to deny access to it to others, for personal or environmental reasons. They may buy out other companies that produce better products but are a competitor, and then sit on the product not allowing it to be released to the public.
  • When everything is done for profit, it creates immoral systems. For example, healthcare is currently for-profit. As a result insurance companies will seek whatever means possible to deny expensive care to people to maximize their profit. People who are poor can not afford health care and have a lower quality of life as a result. Many life-saving operations such as organ transplants are so expensive few can afford them and die instead.
  • The disparity between the laborer and the employer is enormous. Currently many executives earn over 500 times what their employees earn.
  • Companies can easily circumvent moral hazard of bad decisions by being ‘too big to fail’. The company is so large and employs so many people that if it were to fail the entire nations economy would plunge. The companies can use this is blackmail to the Government forcing the government to grant large bailouts. This therefore encourages exploitative and damaging investments and tactics by companies.
  • Capitalism encourages debt. Laborers are granted access to loaned money with interest, and encouraged to purchase large items they can not afford to purchase with cash like a house or a car or an education, and then enslaved to that debt for 30 years or more. By the time the debt is paid off the total money repaid is often times more than twice what was borrowed.
  • Capitalism does not care about individual people, only profit. As a result many companies try to get as much labor as possible from as few people as possible, ideally eliminating employees all together. The drive for cheaper labor to maximize profits results in labor being imported from overseas, which takes away jobs from those who live within the capitalist nation.
  • Capitalism encourages people to seek careers in whichever field generates the most income. Thus someone who would have been a promising teacher instead becomes an investment banker solely for the money. People do what pays the most, not what they love the most, or what they are naturally talented at. Vital work for social health such as teachers, social workers, librarians, are paid the least.
  • Capitalism discourages the pursuit of pure science. Funding is easy to find for profitable fields such as baldness treatment, impotence, obesity, skin care and other cosmetic issues, while funding for pure sciences such as theoretical physics, space exploration, etc are much harder to obtain.
  • Capitalism encourages people to seek to amass wealth and possessions rather than to help their fellow man or society. It breeds selfishness and discourages selflesness. There is no profit in helping those who have no means to repay you.
  • Capitalism displaces justice. The wealthy can afford more talented lawyers and buy their way out of excessive jail time or punishments. They can afford higher fines and fees. The poor can not afford good legal defense and suffer harsher sentences as a result.

15 Mind-Blowing Facts About Wealth And Inequality In America

Who cares if a bank goes under? Won’t the FDIC protect depositors?

2 Oct

The FDIC is not funded well enough to bail out even a handful of the biggest banks in America. It has enough money to pay depositors of about three big banks. After that, it’s broke. But here is the real irony: The FDIC, as history will ultimately demonstrate, causes banks to fail. The FDIC creates destruction three ways. First, its very existence encourages banks to take lending risks that they would never otherwise contemplate, while it simultaneously removes depositors’ incentives to keep their bankers prudent. This double influence produces an unsound banking system. We have reached that point today.

Second, the FDIC imposes costly rules on banks. In July, it “implemented a new rule…requiring the 159 [largest] banks to keep records that will give quick access to customer information.” As the American Bankers Association puts it, the new rule “will impose a lot of burden on a lot of banks for no reason.” (AJC, 7/19) Third, the FDIC gets its money in the form of “premiums” from — guess whom? — healthy banks! So as weak banks go under, the FDIC can wring more money from still-solvent banks. If it begins calling in money during a systemic credit implosion, marginal banks will go under, requiring more money for the FDIC, which will have to take more money from banks, breaking more marginal banks, etc. The FDIC could continue this behavior until all banks are bust, but it will more likely give up and renege. Remember, every government program ultimately brings about the opposite of the stated goal, and the FDIC is no exception.

And now it’s “insuring” accounts to $250,000. Like it could have ever handled the 100k cap before.

Thomas Jefferson on the Economy

2 Oct

“Paper is poverty… it is only the ghost of money, and not money itself.”
Thomas Jefferson

“I sincerely believe the banking institutions having the issuing power of money, are more dangerous to liberty than standing armies.”
Thomas Jefferson

“The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered.”
Thomas Jefferson

Timeline of the 2008 Financial Crisis

1 Oct

Here is a timeline I put together:\

  • Feb 13 2008
    • Feds give taxpayers $168 billion (stimulus package) in a desperate attempt to boost the economy
  • Feb 17 2008
    • Northern Rock goes belly up, Bank of England bails it out for $47 billion of British taxpayer money
  • Mar 16 2008
    • Bear Stearns goes belly up, J.P. Morgan Chase buys it for $1.2 billion. Feds finance this deal with taxpayer money.
  • May 2008
    • Feds infuse banks with over $260 billion in capital in an attempt to keep them afloat.
  • Sept 7 2008
    • Fannie Mae and Freddie Mac fail, are bought out by the federal government with over $200 billion of taxpayer money
  • Sept 14 2008
    • Merryl Lynch goes belly up, Bank of America buys it for $50 billion
  • Sept 15 2008

    • Single largest bankruptcy in recorded history (158 year old Lehman Brothers)
  • Sept 16 2008
    • AIG, largest insurer in the world goes bankrupt. Federal government bails it out for $85 billion of taxpayer money
  • Sept 24
    • Washington Mutual (120 year old WaMu) goes bankrupt. Single largest bank failure in US history. Talks still ongoing regarding saleof its assets.
  • Sept 29 2008
    • Single highest point drop to the stock market in recorded history, $1.2 TRILLION is lost in a single day.
    • Single Largest government bailout package in recorded history is brought for approval
    • Bradford & Bingley goes belly up, is bought out by Spanish bank Santader for £612 million.
    • Desperate US Gov increases available Term Auction Facility to $300 billion
    • Wachovia goes belly up, is purchased by CitiGroup for $2.2 Billion

Financial Armageddon Doomsday – How it will happen

30 Sep

From an Article by Chris Laird (written in July 2008)

What will Happen in the great depression of 2008/9

We are now a full year into the credit implosion that started with the collapse of two Bear Stearns hedge funds in Summer of 07. So many dimensions of the world economy have changed dramatically for the worse since that pivotal event…

We can outline many aspects of a disintegrating world economy since Summer 07. But one huge dimension seems to stand out, the dim prospects for the USD going into 09. As we know, the USD has become the key currency to the world economy since WW2. There are several reasons, but one was that the USD was used to stabilize the European currencies during WW2. Following that war, the US became the center of a burgeoning world consumer economy. What happens when the USD is no longer the center to the world economy? That means the end of roughly a century of US economic and currency dominance. That is our discussion.

Since the end of WW2, what was once a boon to the world economy, the USD, is now in a catch 22.  The vast interlinked world economy based on a consumer bubble that we are all used to, that generated unprecedented wealth, is going through a radical transformation as the USD falters. The demise of a consumer bubble based on credit since WW2 is faltering, and the USD is suffering from abuses in the credit system and in the US fiscal situation. The pillar of world commerce since WW2 is faltering. All those James Bond movies you saw celebrated the post WW2 world that grew out of the world USD prosperity bubble (the lifestyle u saw in those movies).

In part one of Dangers, Danger period 2008 and 2009, we discussed some ominous dangers that emerged in 2007 and 2008, and will continue to get worse in 2009. These included the US/Israel- Iran nuclear showdown, the threat of a world financial sell off initiated from a collapsing world credit system, rising world inflation, and rising food and energy prices.

This second part of this ‘Danger’ piece discusses the other main danger, that the USD is faltering, and into 09 has a risk of a major breakdown, if not outright collapse. We have all heard this before, but the difference with now vs the past years is that the US is faced with unprecedented financial disasters that could be putting the final straws on the USD camel’s back.
The implications of a serious USD breakdown to the world economy and financial system are staggering, particularly if you consider that this entire world financial system we are immersed in, from East to West, grew from/with the USD economy in a 50 year world consumer and finance bubble that has built since WW2.

Deconstructing that 50 year economic bubble/system will cause massive economic disruption in the world. The problems the central banks and the world economies are facing, as we speak, to deal with the problems the USD is having now are all related to the shaking of what I call the ‘world USD economic system’. The onset of the world credit crisis in Summer of 07 was the beginning of this latest phase.

Shadow banking system down

The new credit securities markets referred to as the shadow banking system have imploded.  This was the practice of creating credit of all types and then selling it as securities to big investors. This new USD centered way of financing worldwide housing and other credit grew to be 50% of all new credit from 2000 roughly. The collapse of these diverse credit securities led to a severe tightening of credit worldwide, as lenders had to pull back drastically to raise capital they lost in the last year. This credit collapse is affecting all the Western nations, from the US all the way to the emerging Eastern EU economies, and will also affect all the major Asian economies by 09 as well.

At the same time, inflation has exploded in only one year, not only in the Western economies but in Asia, and the commodity economies such as the Mid East to Australia. Inflation is 10% and higher in most of the big world economic zones. That level is not tolerable without a severe reduction in living standards for everyone.

USD at risk this time

The last time the entire world economy had this kind of economic paralysis was in the 1930s during the Great Depression. At that time, the USD was not on the verge of a collapse. This time the USD is on the verge of a collapse, or at least a major devaluation. That means that the US has far less latitude to do fiscal stimulus and bailouts to combat the present economic emergency spreading over the world. The US can only go so far this time with economic stimulus.

Rising inflation is putting pressure on the US trade partner economies which forces them to raise interest rates, and that causes competition to the USD, while the US has to keep rates low to fend off a total financial and economic meltdown. This is boxing in not only the US economy, but our trade partner’s economies and central banks as well. It is very clear that the gigantic financial losses in the US since Summer 07 have spread all over the world as they have become sort of tied at the hip with the US economy, the USD being the world’s main trade currency for the last 50 years.

There are a lot of aspects to presently emerging world stagflation. But, compared to previous Western recessions, there is now a combined Western Bank crisis and, this time, the prospect of a very shaky USD.

In the last great world depression in the 1930s, the big difference from today was that the USD was strong, and even gold backed…and destined to become the world trade currency of the 20th century (20th century was the 1900s). The 21st century is the century of – what, the first global government?

That is not the case today. The USD is not strong. That is going to be a real problem for the world going into 2009. Thus, we have a second major difficulty the world has to overcome, what to do about the USD, to avoid a total financial disaster into 09. The world’s economic weakness right now is only a foretaste of what is to come from a weak USD. A weak and possible collapsing USD means a weak/collapsing world economy.

What this USD situation means today is that the US, with all of Bernanke’s willingness to use inflationary methods to combat debt deflation, is constrained by the problems that heavy inflationary methods will create for the USD going into 2009. Because the US economy is so central to the rest of the world, what limits the US limits the rest of the central banks and their economies. If the USD were not the world reserve currency, most of these problems would be confined to the US economy.

The USD is probably at a limit of stress at this moment, with interest rates at 2% and the ever present need for our trade partners to send about $700 billion a year to us to buy US bonds of all sorts. Bernanke will cut the ground from the USD if he tries any further rate cuts. Our trade partners who are basically subsidizing the USD for their own reasons will balk. Not only that, but inflation in the US in some areas in already more than 10%, such as in food and energy. Any further rate cuts to combat the present financial disaster in the US will only allow an inflation explosion.(Yes, the USD is indeed the world reserve currency, but now that seems funny. It wasn’t funny during and in the 50 years after WW2.)

If the US persists in trying to ‘bail out’ ‘everything’ the USD will collapse. Our treasury officials and the Fed are well aware of this fact. The USD is at an extremity, right now. We are at the limits of unlimited USD expansion since WW2. The US is at a crossroads with the USD system. If the US Treasury and Fed try to bail everything out, the 50 year world prosperity Jig since WW2 is up. I already heard talk by Bernanke that the Fannie Freddie mess might be nationalized.

The bailouts are not just the US. Now, every major economy is talking about massive bailouts. Their currencies will all suffer, and this post WW2 world prosperity boom is just about done for. They are going to bail out their banks, stock markets, bond markets, and economies by debasing all their currencies because they don’t have the political guts to endure a serious world recession. China too….the final result will be horrific.

What would be the outcomes if the USD world financial / economic system fell apart?

Supposing the USD devalued by over 50 to 70% in a year’s time, after endless attempts to save a collapsing world consumer credit economy, we may see:

  • First of all, the savings of the US would drop drastically in value. That means everything from savings accounts to pensions would lose much purchasing power, and prices of every necessity would skyrocket.
  • Second, our major trade partner’s economies would have to do massive readjustments. They are not in a good position to do that. We can take the present rapidly spreading economic weakness of the EU zone as an example. Asia will not escape either. They will desperately try to keep their currencies from strengthening too much at first as the USD falls. This is why the USD seems to have 9 lives. These attempts to debase along with the USD allow the USD to stay higher than it would.
  • World inflation will spiral out of control, lowering standards of living. Other major currencies such as the Euro and Yen will be heavily pressured as well. Until the world figures out how to actually delink from an imploding US economy, they will suffer along with the US’s fate. So far, the delink theory has been shown to be completely wrong. Why? Because the world economy is tied at the hip to the USD (The delink theory is that other strong economies of Asia or the EU will be able to carry the world economy even if the US economy falls apart. So far, that has been completely discredited in this latest world economic slowdown).
  • Big geopolitical turmoil as regimes combat out of control food and fuel prices.
  • A war in the Middle East over oil. The Iran / Israel situation might also be called a proxy war/struggle over Mid East influence for China, the US, Russia, the EU, and Asia because energy is so expensive.
  • A very possible period of insurrection, riots, shortages, and chaos in large US cities. I also believe that the EU and China and India are at risk for this too.
  • A 10 year world economic depression, that China in particular cannot tolerate, as the world economy readjusts out of necessity into a totally new form, one that is less global and probably more warlike.
  • Debt deflation where a rapidly dropping USD effectively wipes out outstanding debts, while the population struggles merely to exist.
  • Vast bank failures in the US and major Western economies, and likely China as well.
  • Efforts of world central banks to ‘bail out’ ‘everything’ resulting in their currencies falling drastically in value while inflation skyrockets, until either they learn better, or have hyperinflation and their own currency collapses after the USD falls apart. In effect they will have to either ‘let go’ of the USD or suffer the same fate.
  • Stock markets at 10% of where they are now in 3 or 4 years if the USD actually lets go by 50% or more in 09 (nominal stock prices might actually stay higher but the devaluation of the currencies would effectively cut the purchasing power in half anyway.)
  • Prices of most essentials effectively 4 times higher, worldwide.
  • Big increases in energy and food prices causes many other sectors of world economies to fall apart, as all ‘money’ is used merely to survive.
  • Gold at $3000to $5000 plus and oil at $300 plus putting a further huge crimp on world economic growth. Obviously if the USD did a real collapse, say to 10% of its purchasing power now over several years, gold is over $10,000 and in some areas you will buy a decent house for one ounce of gold. Oil will be traded/priced in other currencies, and probably rationed in the US at a cost of $20 or more a gallon. In this case, the present world economy that depends on cheap transportation totally devolves.  Globalization becomes de-Globalization, and China either figures out how to migrate to its own domestic demand or faces a huge collapse of their export economy.
  • Severe world currency restrictions and foreign exchange controls. You won’t be able to move your money out of your country. Likely restrictions of withdrawals to monthly limits from bank accounts as governments attempt to deal with currency chaos.
  • Rationing of necessities as the world economy enters paralysis and governments have no choice.
  • One bright spot for all, the return of employment to local instead of outsourcing. Production and consumption returns to local economies, as it should have been all along. That is a long 20 year process and involves a severe deep economic depression until the world economies/economy is rebuilt from scratch compared to what it is now. Debt repudiation on a massive scale as the world emerges from the ashes (hopefully not real ashes…)
  • Many new governments worldwide after revolutions during economic collapses and or wars. Democracies falter worldwide, and more authoritarian governments appear to deal with the chaos as the democracies enter paralysis.

In case you think these outcomes are exaggerated, these are the things that happened after the French Revolution, the fall of the Roman Empire, The fall of the Spanish Empire, the Fall of Byzantium, the fall of the British Empire… etc. The fall of the US economic system, the world USD system, and the US as a superpower won’t be any different. Also, a lot of these outcomes happened during and after the Great Depression of the 1930’s. That all happened commensurate with the decline and fall of the British Empire and Pound that dominated world economies for 200 years, and eventually led to the USD system taking prominence after WW2 and the USD was used to stabilize the European currencies during the war.

How we reached a USD tipping point

After WW2, the US emerged as the dominant world economy and manufacturing power. Because the USD ended up being used to stabilize European currencies during the war, after the war was won the US had a lot of economic clout. Eventually, after running a bunch of fiscal deficits with the Vietnam and Korean and cold wars, the USD started to have pressure to let go of its gold standard. Once the gold standard was abandoned, the recipe was created for the US to use and inflate the USD for any and everything. The US congress happily obliged. This resulted in a world consumer and economic bubble that leads us to our present times. This lead to a simulative USD world economic bubble. The result is our present indebted world economy and its imminent bankruptcy.

The rest of the world economies will try to devalue along with the USD. At some point they will be forced to let go, or they face the fate of the USD losing 50% to 90% of its value.
What will any saver in the world do?

  • First of all, your currencies, retirements, bonds and annuities will be severely devalued. Your savings will be severely downgraded in purchasing power. The world governments clearly will not act until they are forced to, as they are weakened. They are going to debase your money to try to delay the inevitable economic retrenchment in a post USD centered world.
  • Your primary objective might be to save any wealth you have. You will have to try to keep enough liquid wealth, cash, various currencies to be able to pay bills. You will have to reduce your financial expenses.
  • You will have to try to keep wealth in paid off assets, such as non bubble real estate (yes that still exists in most parts of the world) and also maybe in gold or other precious metals. You will have to plan on currency restrictions if things get bad, and limited monthly withdrawals on your accounts, regardless of how much they have in them. You are going to experience your financial accounts being restricted and or frozen in some institutions.
  • You are going to have to plan on some place you can live in if you lose your income, or that income is drastically reduced in purchasing power… preferably some modest property that is paid off.
  • People will have to deal with fuel and food shortages and high costs.
  • People are going to have to give up the idea of getting investment returns since risk is out of sight, and merely keeping what money/wealth they have is most important.
  • You must toughen yourselves, regardless of your age or position in life.

If you do these things, you may survive without terrible hardship. But you will find some kind of hardship regardless, because that is what these kinds of times cause for anyone on the planet. You are going to have to tell your loved ones to do the same too. Families will most likely have to live together to survive. You are going to have to tell loved ones ‘no’ at some point if they insist on remaining in the same level that USED to be. This is all happening as we speak.
Then, hopefully, the world regains its economic footing. This all happened worldwide in the 1930’s depression, and it lasted 10 long years.

 

Invest in guns and canned goods

30 Sep

An extremely scary and prophetic article about doomsday:

http://www.marketoracle.co.uk/Article6048.html

If that is true, then the theory I laid out above, that we are witnessing a peak in a parabolic finance/asset/stock bubble of world proportions, is going to pan out. I think the entire credit crisis can be looked at from that perspective. We are merely witnessing the relentless unwinding of the biggest financial bubble in history. And, ominously, this particular bubble has grown from the end of WW2 to the present. That is one HUGE economic bubble, and this one envelops the entire world. This is not just a bubble in one country’s economy.

https://i1.wp.com/www.marketoracle.co.uk/images/2008/usd-economic-bubble.jpg

The point of emphasizing it’s from the end of WW2 is that we are not talking merely about a banking crisis, or whatever. We are talking about the deleveraging of the greatest economic/finance bubble in history. Once the level of leverage reached 60 to 1, it becomes impossible to stay ahead of the deleveraging, even for central banks. The implications are staggering. Every major economy in the world is involved. The outcomes of deleveraging this monster bubble, represented by the green oval, will be what I term Credit Crisis II. At 60 to 1 leverage, a loss of 1 to 2% wipes out the capital.

https://i2.wp.com/www.thedigeratilife.com/images/india-stock-market.jpg

The Financial Disaster 2008 – Summary of the Story so Far

29 Sep

https://i0.wp.com/i2.cdn.turner.com/cnn/2008/images/09/29/t1wide.mrkt.bail.mon.03.ap.jpg

What Happened?

What’s happened is that banks have mortgage backed securities that they had counted as assets, that they used for collateral for short term loans, as well as credit default swaps, etc. It turned out that those mortgage backed securities aren’t worth what they thought they were, so they have to retain more capital to cover the various loans and contract obligations they made. And it gets worse, because their credit rating is getting downgraded, and everytime they get downgraded, they need to hold more capital. It’s basically an inescapable spiral. They’re all so overleveraged, that as soon as their bonds get downgraded, they’re either going bankrupt or getting bought out, or both.

What this means is that these banks that are on the edge of insolvency literally cannot lend money without charging exhorbitant rates. It doesn’t matter how good your credit is, they don’t have any money to lend without tipping themselves over into insolvency. They need capital and they need it now, that’s what this bailout is supposed to accomplish. It’s supposed to give them a buffer so they can write off the bullshit Mortgages they own and get back into the business of loaning money.

The root of the problem

The problem is over leveraging, and the reason it gets to be a problem is that people put too much trust in a formula:

http://en.wikipedia.org/wiki/Black-Scholes

It’s a formula for pricing options and derivatives that allows you to balance every investment with a hedge in case something goes the other way. That’s what futures contracts and credit default swaps are about. The reason there were trillions of dollars of these out there is that they thought that everything was so carefully balanced and hedged, that no matter what happened, they’d be covered.

The problem is that when your models are based on faulty assumptions, you’ve gone so far out on a limb that you’re absolutely fucked when things go wrong. It’s what brought down LTCM a decade ago.

Say you have 100% to invest.

You want to earn as high a return as possible.

Now, you COULD loan that money out to someone for 3% interest. That’s pretty good.

But if you have really good credit and you can borrow money at say, 2%, then you can loan out 100 at 3% interest, and use that loan (which is an asset) as collateral to borrow, say $1000 at 2% interest and then loan it all out to a slightly riskier person for a 5% return — so instead of getting back $3 yearly, you’re now getting $50 yearly and have to pay $20 yearly in interest — boom, you’ve just multiplied your income by 1000%. Now, that 5% interest loan is a little bit riskier, so you kind of spread it around as 10 $100 loans instead of one big loan. But even then, you’re kind of fucked if more than 1 or two of those loans go bad — you’re still on the hook for all the money, but you’re not getting the returns to pay off the money you borrowed.

So what you do is you buy insurance from a third party for, say 1% of the loan, which pays you off in case any of those loans default. That’s basically a credit default swap. Now, with that in place, you can borrow and loan an almost unlimited amount of money nearly “risk-free”, with almost no initial capital investment.

You can see how this quickly gets out of control, particularly when you then decide to start selling insurance of your own. Now you have a bunch of banks essentially creating money out of thin air, and it’s all beautiful as long as the loans you’re making to the only actual source of wealth (ie, workers) don’t start defaulting in large numbers.

Which is what happened here. Suddenly all that free money has to be spent all at once, and *poof* it evaporates. All the money you thought you had is gone. It may not have been a problem, if they had kept a large enough cushion, but they counted all this money as ‘profit’, and kept siphoning it off into dividends and huge payments to executives/brokers, etc.

Long story short, there’s really nothing wrong with any of this as long as there are limits to how much you can leverage yourself to loan money out. People thought that hedge funds would eliminate risk, and what hedge funds do is externalize risk. Hedging eliminates your personal risk, but the risk still exists, it’s just been moved out to another company. That company then needs to hedge its risk out to another company and so on. It just expands and expands and expands until the economy literally can’t take any more risk on and then it all bursts, which is what we just saw. The economy is a closed system, you can’t remove risk entirely, ever.

https://i0.wp.com/i2.cdn.turner.com/cnn/2008/images/09/29/t1wide.mrkt.bail.mon.01.ap.jpg

What could happen next

(http://blogs.ft.com/maverecon/2008/09/those-whom-the-gods-would-destroy-they-first-make-mad/#more-312 )

The US stock market tanks. Bank shares collapse, as do the valuations of all highly leveraged financial institutions. Weaker versions of this occur in Europe, in Japan and in the emerging markets. CDS spreads for banks explode, as will those of all highly leveraged financial institutions. Credits spreads generally take on loan-shark proportions, even for reputable borrowers. Again the rest of the world will experience a slightly milder version of this. No US bank will lend to any other US bank or any other highly leveraged institution. The same will happen elsewhere. Remaining sources of external finance for banks, other than the facilities created by the central banks and the Treasuries, will dry up. Banks and other highly leveraged institutions will try to unload assets at fire-sale prices in illiquid markets. Even assets not viewed as toxic before will become unsaleable at any price.

The interaction of a growing lack of funding liquidity and increasing market illiquidity will destroy the banks’ business models. Banks will stop providing credit to households and to non-financial enterprises.Banks will collapse, both through balance sheet insolvency and through liquidity insolvency. No bank will be safe, not even the household names for whom the crisis has thus far brought more opportunities than disasters.

Other highly leveraged financial institutions collapse on a large scale. Households and non-financial businesses revert to financial autarky, among wide-spread defaults and insolvencies.Consumer demand and investment demand collapse. Unemployment shoots up. The government suspends all trading in financial stocks until further notice.

The government nationalizes all US banks and other highly leveraged financial institutions. The shareholders get nothing up front and have to wait for an eventual re-privatisation or liquidation to find out whether they are left with anything at all. Holders of bank debt get a sizeable haircut ‘up front’ on the face value of the debt and have part of the remainder converted into equity that shares the fate of the old equity.

We have the Great Depression of the 2010s.

http://www.youtube.com/watch?v=nUukDJCyqfM <— some opposition, well explained to the bailout

and here is a Very long, but excellent analysis of the current situation

My thoughts

But really, we are in uncharted territory. It’s very hard to say what will happen next.

It’s like cloning cattle..without genetic diversity one virus kills them all. We are a victim of lack of real diversity. The same weakness, reliance on mortgage-backed securities, and flawed mathematical models of guaranteed wealth will make EVERYTHING crash. The bailout will help for a very very short while, unthaw the economy for a tiny while, but our entire system of financing is broke. Hedge funds don’t hedge anything. Risk is not eliminated. Recession / depression is inevitable.

The mortgage crisis is not really the cause of this mess, but our entire system of economy (profiting from debt). All it does is encourage banks to lay more and more debt on the working class.

Workers are the only source of real income, it’s the real economy. Wall Street is this nether realm of a 2nd economy that speculates on where the real economy will go. It’s imaginary money rather than real money. If it wasn’t mortgages as a vehicle for debt, it would be something else.

And now the working class will have to pay off the speculative economies greed via probably a decade or more of indentured servitude.

Hedge funding did not shield risk at all, and just like cloning an entire herd of cows subjects them ALL to the same genetic flaws (one virus wipes them out without genetic diversity) our economy is going down the tubes by the same flaw since there never was any real diversity. Everything was spread out so thin in order to shield risk that ironically, everyone now would go down by the same risk..like dropping a single drop of poison in a glass of water the entire glass shares the drop of poison alike.

So to summarize: Predatory lending on the working class by banks fueled by an economy that like some sort of money vampire feeds off debt is the root cause of this. The bailout will only keep the banks afloat to lend to the public again in some other speculative debt-fueled economic push. It will start all over again and as always, the working class suffers.

Why do you think there was such a push to get the american people to own homes from 1938 onward? For home ownership, it is NOT because it is the wish of the Government to ensure every american gets to fulfill the american dream and own their own home. It’s because they want you to get a 300,000 loan. No one ‘buys’ a home. ‘Owning’ the home is an illusion. If you fail to pay on your home what happens? The bank takes it, because it’s their house. What you do own is an enormous loan.

Everyone gets a HUGE loan and then slowly, painfully slowly pays it off. The American economy feeds off debt. Thats the reality..thats what we all have to wake up to. Normally, someone getting a 500,000 loan to buy something when they earn, say, 60,000 combined household income would seem insane. But it was encouraged by the government because again, massive debt is what the economy thrives on.

Debt is a horrible thing to base an economy on. Keeping the public enslaved in debt to fuel the profits of the few at the top is immoral, it’s modern slavery. You are toiling in cotton fields for the master in his warm house and go to bed at night in a mud shack eating leftovers from their table as your dinner. Debt-fueld economy is nothing more than an enormous pyramid scheme, doomed to failure with only a tiny few at the top raking enormous, obscene profits.

Economy in the shitter

12 Jan

Unemployment rates in the United states are the worst since 1994, it’s at 6% and has been at 6% for months..thats 6 out of every 100 americans can’t find work..what’s worse is an additional 100,000 jobs were eliminated this month alone. The economy is not looking good. If you have a good job hold on to it. These figures don’t encompass everyhting, for example people who have jobs but hours are cut, or people like the United airline pilots who had to agree to a 35% pay cut to keep their jobs, or people who have had bonuses removed and overtime hours they depended on removed. Scary stuff. Then we are headed to war with Iraq..things are only gonna get worse.