I'm brand new to the board here, but I have been writing on and discussing many of the topics discussed here for quite some time on my own board. In order to introduce myself, I'm going to drop on here several posts I have made since the Bear Stearns collapse, tracing the root causes of this and where it is leading. I welcome any and all discussion on these topics. Its a lot to read, have fun!
Rogue Economist
Economic Temporal Mandibular Jaw Syndrome
Gotta love Wall Street Bankers.
In the wake of food riots overseas and a continuing downward spiral in the
mortgage market here, the BIG worry really isn't there, its in the Credit
Default Swap Market, which goes on behind closed doors and has served
as a form of insurance hedging against large loan losses. Its a
wholly unregulated market engaged in by only a few of the Major
Players in the financial industry like Lehman Brothers, Goldman-Sachs,
Credit Suisse, the Royal Bank of Scotland, the Royal Bank of Saudi
Arabia, the Bank of the People's Republic of China...you get the
picture. In simple terms, its a market which the holders of the vast
majority of the world's wealth are playing in, basically trying to
swap out risks with each other.
These folks KNOW they are in trouble right now in the wake of the Bear
Stearns collapse, where the Cascade of Failures was only prevented by
the Fed offering up taxpayer money to bail out the banks involved in
those bad risks. Of course, given the fact the Fed really CAN'T bail
out everyone, now the bankers are trying to figure out a new scheme to
protect themselves from the risk of the products themselves designed
to limit risk. LOL. Detect a Ponzi Scheme here?
The latest scheme being proposed is a reinsurance scheme for a
reinsurance market. LOL. In this scenario, a central bank is
responsible for negotiating the Credit Default Swaps and valuing them
properly, and then collecting some fee from each participating bank to
insure against any one Big Player getting hammered down in a mass
failure.
This scheme has more problems than I can POSSIBLY explain here, even
IF I had a complete understanding of it, which I don't. However, let
me present what is the most OBVIOUS problem, which is an actuarial
one. If the risk is actually valued PROPERLY, then the COST of the
reinsurance through the clearing house would be OUTRAGEOUS. The
outflow of capital to the clearing house necessary to insure against
the risk would seriously eat into any possible profit the
participating banks might make through their trades, both in the
general market and the credit default swap market also. However, to
be able to cover the losses of any individual bank participating,
their slush fund of liquid capital would have to be simply ENORMOUS,
on any given day these days a big player announces Write Downs on bad
debt in the BILLIONS. So, lemme ask you, if Credit Suisse has a $15B
write down one day, and Merrill Lynch has a $25B write down the next,
just HTF is their reinsurance slush fund gonna cover THAT? It CAN'T.
Not unless the clearing house had $40B in liquid capital available at
the drop of a hat, and they WON'T. Why? Because simply having $40B
in capital lying dormant waiting for a disaster to happen makes no
money, and it is annoying as all hell to bankers and traders who wanna
MAKE MONEY on that money. So, even IF bankers agreed on a Central
Bank or Investment firm to manage and value the Credit Default Swap
Market, that firm ITSELF would be involved in using that money to try
to make more money in the markets. What happens on that day that the
clearing house can't meet the reinsurance obligations it has from
major players with Credit Default Swap problems? You guessed it,
every last player that bought into the system goes down the tubes
right along with the central bank doing the reinsurance!
As I see it, this scheme probably can delay a complete meltdown by
maybe a year or so. However, it changes nothing with regard to the
absolute amount of capital available, or with the inherent risk
involved in the manipulation of that capital thru the markets. All it
does really is to centralize the risk into one bank, whereas now the
risk is among a couple of dozen banks, all inextricably tied to one
another through the credit default swaps. Just as any individual
player remains at risk here, so also does the whole system remain at
risk, simply because its IMPOSSIBLE to reinsure against something
which is INEVITABLY going to happen.
To make this clear to you, its the same reason Dental Insurance
doesn't really work as Insurance. EVERYBODY eventually has problems
with their teeth, and so eventually EVERYBODY hits on the insurance
company to pay for their tooth problems. Tooth Decay is INEVITABLE,
you can't insure against what is inevitable, only against what might
not happen. What we have HERE is the equivalent of Tooth Decay in the
financial markets due to a heavily recessionary economy, exacerbated
by the Gingivitis of accelerating inflation in Energy and Food costs.
Its all undermining the overall capacity of the world economic jaw to
CHEW. Think of this as Temporal Mandibular Jaw Syndrome of Economics.
To read the inspiration for this post, read this one from the Wall
Street Journal:
http://online.wsj.com/article/SB1208986 ... ooglenew...
JJ the Rogue Economist
Slow Motion Car Crash and the Ticking Economic Time-Bomb
In the big news from the Financial Sector, American Group
International, the world's largest insurer announced today it lost
$7.81B in the first quarter and would raise $12.5B in new capital to offset
these losses. WTF to people keep buying pieces of these businesses
that are losing their shirts with no end in sight to the write-downs?
Crude Oil Futures rose to $125 a barrel on Friday, a new record.
Not getting so much reporting was a much smaller local story reported
an hour ago on a bank in Idaho Falls shut down by Federal Regulators
for "unsound business practices". Basically, the bank is a small
version of investment banks like Bear Stearns and faced the same
problems all banks have right now with failing mortgages and low
returns on their investments. The Feds call this "Unsound" NOW, but
its just a LITTLE bit too late here, now isn't it? LOL.
http://www.localnews8.com/Global/story. ... enu554_2_4
Anyhow, in this case its one of those corner banks with the "FDIC"
logo on it which means the Goverment insures any account up to
$100,000 and will make good on the money those depostiors have,
basically by having Ben Bernanke turn on his Xerox machine again.
LOL.
One of the most enduring images from the Great Depression are the
throngs of people outside of Banks with closed doors trying to get
their money out.
http://www.babybloomermagazine.com/maga ... g/dep2.jpg
Of course in those days there was no FDIC, and the money those banks
had that they had invested in stocks rendered worthless on Black
Thursday was truly GONE, and the world spiralled downward to econmic
collapse of gargantuan proportions. Its going to be even BIGGER this
time around though.
Now really folks, just how long can Ben Bernanke keep on printing
money to send $600 to every taxpayer in the country and then also
guarantee $30B for the purchase of Bear Stearns and then ALSO make
good on the bank accounts of everyone who has up to $100K in the
bank? You know how many people even a small bank in Idaho Falls has
with people with Accounts ranging from $20K to $100K? Hundreds, if
not thousands. Even JJ has a Bank Account in that range in these days
of devalued dollars.
So, the first story has been written about a local bank shutting its
doors, but it won't be the last. Feds ask people with loans from the
bank to continue paying on them as they normally would. WTF? The
Bank is OUTTA BUSINESS! LOL. So anyhow, the Feds now have to ALSO try
to collect on the loans the bank issued consuming still more of your
Tax Dollars paying Federal Employee Accountants to try to collect the
money. If the loan you have is a mortgage on your house, WTF is the
Government going to do if you don't pay on it? Reposses your house
and make another taxpayer homeless? Man, the Media would have a field
day with that one. LOL.
How many of these teams of Accountants do you think the Feds really
HAVE anyhow? Can these guys really go in and administer all the the
balance sheets of all the banks that have financial problems right
now? Obviously not.
Watching the Dominoes Fall here is like watching a Car Crash in Slow
Motion. You can see where its going but its happening at a snail's
pace right now. At some point though, its gonna hit a critical mass,
and the Shouts of SELL! SELL! SELL! will be shouted across the floor
of the New York Stock Exchange, but there will be no Deep Pockets
around left Buying. Its a ticking time bomb, I just can't tell you
exactly when it will go off, but it WILL go off.
JJ the Rogue Economist
The Economic Shell Game
A little more in the way of explaining what is going on in the Shell
Game Ben Bernanke is playing.
With Investment Banks holding so much Bad Paper their liquidity has
about dried up, basically they have no cash to lend out. Without
cash to lend, Business about grinds to a halt, businesses have no
source of capital to start new projects, employ new people, etc.
So, in order to GIVE Banks Cash to lend, Ben is buying up all the Bad
Paper and handing over lending cash to the Banks in return,
theoretically for them to start lending again. Acouple of problems
with this. First off, though Ben says all the mortgage backed
securities he is buying for us taxpayers are AAA rated, it simply
doesn't matter as long as the housing market keeps going down. Those
securities will NEVER pay off, he's buying JUNK.
The second problem here is more insidious. The purpose of doing this
is to give money to the banks to start lending again, except they
aren't doing that. LOL. What they are doing is trying to shore up
their capital reserves in the expectation of having to take still
further write downs in the coming months. Citibank is selling off
Assets like their commercial lending unit in Japan, try to get $500M
for it I think but who is gonna buy it?
Not only are the banks not lending to businesses, they aren;t lending
to each other either. Everybody is scared to death of what is coming
down the pipe and they are battening down the hatches. Swiss Giant
UMB is laying off something like 10,000 financial workers, Citibank
and Merrill Lynch are doing the same thing. Trying to cut payroll to
the bone to get the balance sheet in order. Well thing is, all those
folks who just lost their jobs are the very people who make the loans
and sell the securities and trade the stocks every day. Its pretty
hard to figure out how you are gonna start making loans again when
there is nobody sitting at the loan desk to do business. LOL.
Trying to prime the pump, Ben has dropped the interest rate 3%, down
to 2% now. It isn't doing a damn thing. Once he drops it down to Zero
%, just what is he gonna do? Pay the Banks to take his money? LOL.
The thing that a lot of folks don't understand that its NOT just Sub-
Prime Housing loans that Banks have a problem with, its a MOUNTAIN of
Debt from all sectors, from consumer debt to business debt to
government debt. The commercial banking system within our country is
seizing up because of this, and so the Central Bank is trying to keep
liquidity and business going, but THEY are going to run out of money
to do it. We borrow from other Central Banks, but at a certain point
here they don't trust either that we can pay up on the debt we already
have as a nation, and under the Republicans our National Debt has
ballooned to outrageous proportions, basically they impoverished us
all to make a few people wealthy.
How can it all get paid off? Well, by devaluing the dollar
sufficiently you make our products more competitive overseas and stuff
other people make more expensive here. So that in theory should
improve the trade deficit. Problem is of course it impoverishes us,
like the rest of the world we will find it impossible to afford gas
for our cars or food for our kids. You could try raising taxes, but
since nobody is doing business companies aren't making a whole lot
right now to tax them on and individuals already have a big tax
burden, so its unlikely you can get much money that way.
At a certain point, I can see it as possible the US Treasury will go
into default on the money owed to other Nations. That of course would
trigger a Global Economic Depression, along with probably an eventual
World War with China. That is what got us out of the last Great
Depression. Coming soon to a Theatre near you.
JJ the Rogue Economist
Socialism for the Rich
For those of you who truly are interested in what is occuring in the
Financial Markets and why we are truly in the Deep Doo-Doo, I suggest
you read the following two articles.
They are long, even longer than stuff I write, and that is LONG. They
are pretty complex also, but no so much in the numbers way as in
understanding the concepts involved. I think both these authors,
Antal Fakete in the Asia Times writing about "The Twilight of
Irredeemable Debt" and Stephen Bindman for the Atlantic Free Press
writing about "Pseudo-Capitalism in Disarray" do a terrific job of
explaining just how the debt crisis is being mishandled and how
inevitably the house of cards will come tumbling down. The fact is
Capitalism doesn't exist, it hasn't existed since the 1970s and the
Nixon Administration. What we have in its place is a form of Pseudo-
Capitalism, where when banks are making money all that money goes to
the Rich, but when they make bad judgements and take bad risks we as
the taxpayers are forced to bail them out, because they are "too big
to fail". Its Socialism for the Rich when they lose their shirts,
lol.
http://atlanticfreepress.com/content/view/3854/32/
http://www.atimes.com/atimes/Global_Eco ... 2Dj06.html
What is of course remarkable is that unless you really read a LOT, you
just wouldn't know what was happening here based on what you hear on
Fox News or even really read in the Wall Street Journal. Its only by
reading WSJ and NYT and Bloomberg and then following further links
that eventually you dig up the TRUTH here, and it ain't pretty.
JJ the Rogue Economist
Who Owns What?
In the scenario of Bank Failures, you got the good question of just
who owns what?
The reason Bear Stearns nearly went under and ALL of the Investment
Banks are teetering on the edge of collapse is they are leveraged up
to beat the band, or "geared up" as the current parlance has it.
Basically, the Bankers made a lot of bad bets that are now going
south. If YOU made a bad bet at the Poker table and lost your shirt,
the Fed certainly wouldn't bail YOU out, now would they?
Problem here is that about ALL of the wealth of the WORLD is being
held by these Investment Banks in the form of securities they package
up and sell. So, WTF happens when such a bank goes Belly Up?
Well, the Bank held your Mortgage, right? They theoretically owned
whatever portion of the property you hadn't yet paid off on. If you
couldn't pay them, they could reposess your home. However, the Bank
no longer EXISTS because they went bankrupt, they are GONE. So who do
you owe money to now?
Since Ben Bernanke is buying up these securities from the Banks, you
now owe the money directly to the Government. Except who IS the
Government? Its YOU. A government of the people, by the people and
for the people.
Now, your own government could go ahead and repo your house, but WTF
good would that do the government? They can't sell the house EITHER
for the value of the mortgage you owed, they would have to get into
the business of Auctioning off the properties they repo. Which they
do to an extent now, but in this case your talking a thousand-fold
magnification of the problem.
If the Government repos your house and makes you Homeless, then its
going to be darn hard for them to keep collecting property taxes from
you not to mention you'll have a hard time keeping your job if you
still have one, so they'll also probably lose your Income Tax money.
This is not just a Consumer level problem. MOST businesses are
leveraged up to some extent, taking out loans for business expansion
and so forth all the time up until the Credit Markets seized up. Like
the Banks they owe money to, they probably are leveraged past their
ability to pay off even if they sold off ALL their assets and went
bankrupt. Ben Bernanke is ALSO buying up their loans as well as the
Investment Banks trade them out for Treasury Bonds. So effectively
here, what has happenned? The GOVERNMENT now OWNS these businesses!
SOCIALISM by DEFAULT! LOL.
In the name of the Taxpayer who will foot the bill here, Ben Bernanke
is buying every money losing mortgage and every money losing business
that is leveraged up past its ability to pay. The problem of course
is that we as Taxpayers can't afford to pay these debts EITHER, and
besides that the companies are OUTTA business! So why should WE pay
off those debts?
Well the reason is that if we don't then the entire US Treasury goes
into default, because we ALSO as a Nation won't be able to pay off on
the spectacularly large debt the Greedy Republicans racked up over the
last 30 years since Milton Friedman and Richard Nixon deregulated the
Banking industry so that the Rich could get Richer.
What happens when we don't payoff on the HUGE debt we have to the
National Bank of China? Well, then THEIR banking system goes blooey
also, and all the Factories they have been building to supply products
to insatiable American Consumers will close their doors, putting HUGE
numbers of Chinese out of work and on the Bread Lines, except there
won't be much bread at the end of the line, there isn't now and there
will be a good deal less then. This is going to make 6 Billion
Chinese VERY angry, and if they are starving and dying ANYHOW, they
might as well go to WAR against us to if not get their money back, at
least take all of our farmland from us so they can feed themselves.
It all started back in the 70s when the Republicans got hold of the
Banking system and made it possible for Bankers to risk huge sums of
the world's wealth on some very dicey financial products. Ph.Ds in
Economics were hired to design risk management schemes and reinsurance
schemes and more and more money was pumped into the money supply by Alan Greenspan, but
there wasn't that much true economic growth, most of it was a Bubble
in the Financial Sector with ever larger amounts of money being
gambled and a few people sieving off the profits.
The time has come now to Pay the Piper. You just CAN'T keep printing
money without real growth in the production, all it does is devalue
the currency and you end up with inflation. The growth we saw was a
GHOST, it was huge profits being taken by Investment Banks betting on
a Future that just did not come true. They borrowed from each other
and kept making bigger and bigger bets with the money they borrowed.
Unfortunately all it took was one little Blip, the crash of the sub-
prime loans to start the dominoes falling, and now ALL the Bad Paper
they ALL hold is at risk. It CAN'T be paid off, not in our lifetimes
anyhow, and since even TRYING to pay it off will impoverish us all,
the only logical result is a WORLD WAR. That is what happened after
the Great Depression. Why starve to death in Beijing when you can go
out in a Blaze of Glory mowing down American Farmboys on the
Cornfields of Iowa?
Coming to a Theatre near you, courtesy of a Generation of Greedy
Republicans.
JJ the Rogue Economist
Credit Default Swaps
While we all are currently focused on the Sub-Prime Mortgage Loans and
the Housing Market that started the whole House of Cards tumbling
down, what is less reported on but FAR more important and far reaching
is the problem in the Credit Default Swap (CDS) market, which Warren
Buffet called "Weapons of Mass Economic Destruction".
The CDS market is a shadow market, its not regulated but its actual
value in 2007 was over $45 TRILLION. Double the size of the US Stock
Market at $22 Trillion and quadruple the mortgage market and 10 TIMES
the value of the Treasuries market.
What CDS is supposed to do is insure the risk against a default, butt
he problem is that CDS securities are bought and sold without
regulation, sometimes as many as 15 or 20 times. Who the end holder
of the Security is has no relationship whatsoever to the company
involved or the loans they take. Moreover, with no regulation, there
is no assurance WHATSOEVER that the end holder of the CDS contract has
the money to make good on that contract in the event of a Default, and
they almost certainly do not. In aggregate, they can't POSSIBLY,
because the actual value of the companies traded on the market is half
the value of the CDS Market itself! LOL. Basically, to insure
themselves against the risk of companies going bankrupt, Investment
Banks created this instrument but then it took on a life of its own,
and the BETTING drove up the value of the instrument for turning a
financial profit in a time when few companies were going bankrupt.
You got money for nothing, so to speak. Unfortunately NOW, LOTS of
companies are going bankrupt, even the Investment Banks themselves are
bankrupt, just a shell game is being played to keep this from being
obvious. The whole CDS market is a SHAM, NOBODY has $45 TRILLION
dollars to pay off on here. Gwnerously estimating Warren Buffetts net
worth at $100B, it would take 10 Warren Buffets to pay $1 Trillion
Dollars in Debt. The whole freaking Iraqui War from its inception to
now probably only cost about $1 Trillion. Poor single moms on Welfare
and Illegal Alien Medical Bills all rolled up into one is probably
only half the cost of THAT! The Bankers however in the last 5-10 years
have managed to rack up $45 TRILLION here in Bad Paper they will want
the Taxpayer to pay off on when they go Belly Up and are deemed "too
big to fail". You REALLY think people on Welfare can lose as much
money as a Republican Banker can? They don't even come CLOSE.
So when will the CDS crisis hit? Well, it already has begun, American
Group International is the worlds largest insurer, and they just took
a $7.8B write down. I'll bet on at least one new big insurer
announcing another write down this month. I'll go with about a 6
month timeline here before the Fed runs out of manipulation tricks to
try to keep the market liquid. $45 Trillion is just NOT something
ANYBODY can Bail Out, and so when those instruments start to fail, the
big Insurers and Banks holding them will go Belly Up. Its got to
happen.
JJ the Rogue Economist
Depression Campfires
Well, you heard it here first, but the talk of Depression is spreading
like Wild Fire across the Blogs, across the Newspapers and across the
World. Read the following article "The Black Death of Financial
Collapse" by James Cumes, former Ambassador to the European Union and
the United Nations for Australia:
http://webdiary.com.au/cms/?q=node/2330
All I really gotta do is plug in terms like "depression", "credit
default swaps", or "collateralized debt obligations" into Google's
Search Engine, and I get enough reading material to keep me busy for
an entire day, no problem. LOL. Its ALL OVER the web now, from ex-
Ambassadors to the UN to Ph.Ds in economics from Princeton, about
EVERYONE is writing right now their take on the freeze up of the
credit markets. You know the only people you hear GOOD things from
like "the Worst is Over!"? Either Politicians currently in Power or
CEOs currently running Banks. Why do I have trouble BELIEVING these
people? They won't show me their Financial Reports, that's why! The
"toxic waste" of debt they hold is mostly off the publicly reported
balance sheets.
Clearly, the Aussie and NZ markets are going down EXACTLY the same
road ours is, just lagging behind by a year or so right now. The
Brits are in exactly the same place we are right now, and Germany
ALREADY had to bail out its state owned banks. Are the Chinese in the
Catbird Seat with their Trade Surplus? Hardly, because as the
American Economy goes down the toilet and we stop CONSUMING, all the
goods the Chinese are PRODUCING just go into Inventory. Those
factories will not stay open long, and those workers will not have a
job for long either.
Meanwhile, the Super Rich with their Hedge Funds seem oblivious to it
all, these folks are STILL buying up all the securities that Ben
Bernanke isn't. So now they own addtional house they don't live in
besides the one in Malibu, the one in Aspen, the one in East Hampton
and the one in Costa Rica. LOL. They own YOUR house too now! Keep up
on the mortgage maybe they will let you live in it, otherwise it will
be a Dog House for Fifi the Poodle. LOL.
I read one article about all the stress the Stockbrokers are under
these days and how there is a Suicide Watch in many firms as the lay
off their Loan Officers and Stockborkers. Reminds you of the
Stockbrokers jumping out of Wall Street Skyscraper windows on Black
Thursday of 1929. Just graduated Harvard, just invested the family
fortune in Credit Default Swaps, just lost the ENTIRE family fortune
in a matter of HOURS! LOL. Man, I really feel bad for those guys.
LOL.
Well, mostly that hasn't happenned yet, because Ben Bernanke is STILL
pledging Taxpayer Money to make sure the Scions of the Wealthy don't
lose their shirts. Unfortunately here, the Taxpayers are about SPENT,
and when the Credit Default Swap fiasco HITS, even GOLDMAN SACHS will
GO DOWN, and the Hedge Funds with them.
I would really enjoy it if it didn't mean that *I* will be in the
toilet also and probably unemployed as there won't be any gymmies who
can afford to come to the gym anymore. Still, I can live on about
nothing, I got no debts I can't pay and I will find SOME way to
scrounge it out. I won't lose my house, I never HAD a house to lose!
LOL. I will really enjoy watching the rich go down though, as six
figure accountants lose their jobs and their homes I will laugh at
them. They can join me at my campfire and maybe I will share some
stew with them, if they bring a potato or some carrots to contribute.
Its coming folks. You know, Michael Jackson JUST staved of his
Neverland Ranch being Repoed this week by getting some Hedge Fund to
buy his mortgage that he defaulted on. I will tell you right now
though, Michael Jackson will NOT be welcome at my campfire, even if he
DOES bring some Potatoes and Carrots. LOL.
JJ the Rogue Economist
Chinese Inflation
http://www.forbes.com/markets/feeds/afx ... 95548.html
While Ben Bernanke and the Fed are lowering interest rates charged to
their subsidairy lenders in an effort to stimulate the economy HERE,
the Chinese are having the opposite problem: their inflationary
pressures are so great they are heaving UP the interest rates, now at
16.5%.
What does this tell you? What it tells me is that in the Carry Trade
across currencies, you will have a HUGE outflow of Capital to Chinese
based securities. Securities HERE aren't paying a damn these days,
but if you convert to Yuan and invest there, you get at LEAST a 16.5%
return on the investment. Subtract of course the inflation pressure of
8.5% or so, but still you do better than the 2% in the American
market.
Regardless of the fact better returns appear on the Chinese Market
right now, the hyper-inflation they are undergoing is going to
devastate their own economy, and if it continues will destabilize the
government. Like the Weimar Republic, you simply cannot function if
your inflation rate gets this high, it makes what you made at work
yesterday worthless, you can't save anything because your savings are
devalued.
So, while the Fed here loosens its Monetary policy, the Chinese
simultaneously are tightening theirs. Do you sense a problem here?
LOL. I do. While we have Globalization of the markets, the actual
economies and their problems are separate. However, the Hedge Funds
and the mega Capital being shifted around by the mega Rich will flow
toward whichever currency is ging to give the best return on
investment, in this case the Chinese. That means LESS available
capital to help our own markets. This money is about the only
available liquid capital LEFT at tis point, and its not going into
investments here because the Chinese investments hold much more profit
potential in the short term. Long term also probably, since there are
so many Chinese and they are so much poorer.
Sadly of course, Chinese growth is tied to American Consumerism, and
if we can’t buy their products then the 10% type growth they have
experienced over the last 5 years won't continue, and so they wont be
able to pay off on the investments EITHER. Meanwhile, the population
is further impoverished through inflation.
Nasty isn't it? Kind of thing that leads to WORLD WAR.
JJ the Rogue Economist
