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Forum Post: economic risk

Posted 2 years ago on Jan. 28, 2012, 7:08 a.m. EST by flip (7101)
This content is user submitted and not an official statement

About 10 years ago there was an important book called Global Finance at Risk, by two well-known economists John Eatwell and Lance Taylor. In it they refer to the well-known fact that there are basic inefficiencies intrinsic to markets. In the case of financial markets, they under-price risk. They don't count in systemic risk — general social costs. So for example if you sell me a car, you and I may make a good bargain, but we don't count in the costs to the society — pollution, congestion and so on. In financial markets, this means that risks are under-priced, so there are more risks taken than would happen in an efficient system. And that of course leads to crashes. If you had adequate regulation, you could control and prevent market inefficiencies. If you deregulate, you're going to maximize market inefficiency.

This is pretty elementary economics. They happen to discuss it in this book; others have discussed it too. And that's what's happening. Risks were under-priced, therefore more risks were taken than should have been, and sooner or later it was going to crash. Nobody predicted exactly when, and the depth of the crash is a little surprising. That's in part because of the creation of exotic financial instruments which were deregulated, meaning that nobody really knew who owed what to whom. It was all split up in crazy ways. So the depth of the crisis is pretty severe — we're not to the bottom yet — and the architects of this are the people who are now designing Obama's economic policies.

Dean Baker, one of the few economists who saw what was coming all along, pointed out that it's almost like appointing Osama bin Laden to run the so-called war on terror. Robert Rubin and Lawrence Summers, Clinton's treasury secretaries, are among the main architects of the crisis. Summers intervened strongly to prevent any regulation of derivatives and other exotic instruments. Rubin, who preceded him, was right in the lead of undermining the Glass-Steagall act, all of which is pretty ironic. The Glass-Steagall Act protected commercial banks from risky investment firms, insurance firms, and so on, which kind of protected the core of the economy. That was broken up in 1999 largely under Rubin's influence. He immediately left the treasury department and became a director of Citigroup, which benefited from the breakdown of Glass-Steagall by expanding and becoming a "financial supermarket" as they called it. Just to increase the irony (or the tragedy if you like) Citigroup is now getting huge taxpayer subsidies to try to keep it together and just in the last few weeks announced that it's breaking up. It's going back to trying to protect its commercial banking from risky side investments. Rubin resigned in disgrace — he's largely responsible for this. But he's one of Obama's major economic advisors, Summers is another one; Summer's protégé Tim Geithner is the Treasury Secretary.

None of this is really unanticipated. There were very good economists like say David Felix, an international economist who's been writing about this for years. And the reasons are known: markets are inefficient; they under-price social costs. And financial institutions underprice systemic risk. So say you're a CEO of Goldman Sachs. If you're doing your job correctly, when you make a loan you ensure that the risk to you is low. So if it collapses, you'll be able to handle it. You do care about the risk to yourself, you price that in. But you don't price in systemic risk, the risk that the whole financial system will erode. That's not part of your calculation.

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106 Comments


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[-] 3 points by PublicCurrency (1387) 2 years ago

Alan Greenspan lobbied for the repeal of Glass-Steagall, as well.

Now that investment banking has been merged with commercial banking, banks may utilize "fractional reserve banking" for the purchase of investments.

The commodities which are experiencing inflation are each and everyone traded in Goldman Sachs Commodities Index Fund.

[-] 0 points by flip (7101) 2 years ago

sounds like you d not believe in resource scarcity - the fractional reserve line always makes me nervous - ron paul free market types are not thinking clearly!

[-] 2 points by PublicCurrency (1387) 2 years ago

Sounds like you are not aware of Goldman's Commodities Futures Index.

No, I am not a Ron Paul, Ayn Rand, Alan Greenspan free market type. I prefer the United States Constitution. The founders of this country put the “purse powers” in the hands of the most democratic body – i.e., Congress – so the people would have the right and power to vote on their monetary policy every two years, course correct their own society and economy, and escape the predictable ruin of a private debt-money system under which we have no alternative or escape.

Today, under a private central bank system we have no such public privilege or power. We are powerless at the hands of the real owners of the “Federal’ Reserve – i.e., the major investment banks and historic banking families both here and abroad. These are the very people and institutions who have profited, geared the structure to their endless, debt-money, advantage and proceeded to rape the system until it collapses and the public is forced to rescue and bailout the very predators and criminals at the helm.

http://www.publiccentralbank.com/

[-] 1 points by flip (7101) 2 years ago

i agree with you for the most part - economic democracy is the issue at hand seems to me. i think what you say about the fed is largely correct but perhaps a bit overstated. as to goldman i am invested in some of their commodity etfs so i am very aware of them - how about my question - resource scarcity??

[-] 1 points by PublicCurrency (1387) 2 years ago

Glad that we agree for the most part.

I do not think that the inflation of prices for commodities is a result of resource scarcity. Matt Taibbi explains it very well in “Griftopia,” read it and you will not regret it.

Paul Craig Roberts, Ph.D. Economics, wrote in a book review:

“Matt Taibbi is the best–certainly the most entertaining –financial/political reporter in the country. There is no better book than Griftopia (2010) to which to turn to understand how stupidity, greed, and criminality, spread evenly among policymakers and Wall Street, created the financial crisis that has left Americans overburdened with both private and public debt. Taibbi walks the reader through the fraudulent financial instruments that littered the American, British, and European financial communities with toxic waste. He has figured it all out, and what in other hands might be an arcane account for MBAs is in Taibbi’s hands a highly readable and entertaining story.”

Paul Craig Roberts was Assistant Secretary of the Treasury during President Reagan’s first term. He was Associate Editor of the Wall Street Journal. He has held numerous academic appointments, including the William E. Simon Chair, Center for Strategic and International Studies, Georgetown University, and Senior Research Fellow, Hoover Institution, Stanford University.

[-] 1 points by flip (7101) 2 years ago

i like taibbi and think he has lots good to say bout this financial system but he is wrong about scarcity - i will send you a bit from grantham - the charts will not come through but look for your self - chart north sea oil production - mexican oil production - we have probably peaked already - food, copper iron ore - read what the insiders are saying! here is Jeremy Grantham must-read, “Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever”

By Joe Romm on May 2, 2011 at 12:15 pm

Grantham

Summary of the Summary:  The world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value.  We all need to adjust our behavior to this new environment. It would help if we did it quickly.

That’s the conclusion of an important analysis by uber-hedge fund manager Jeremy Grantham, a self-described “die hard contrarian.” He is one of the few leading financial figures who gets both peak oil and global warming

I’m going to repost his entire analysis below, which comprises the entire quarterly newsletter from the former Chairman and now Chief Investment Strategist of GMO Capital, which has more than $100 billion in assets under management. This is a key piece of supporting analysis for the claim that the global economy is a Ponzi scheme.

In Grantham’s blunt 2Q 2010 letter (see “Grantham: Everything You Need to Know About Global Warming in 5 Minutes“), he wrote “Global warming will be the most important investment issue for the foreseeable future.” Then in his January 2011 newsletter he wrote about “Things that Really Matter in 2011 and Beyond”: “Global warming causing destabilized weather patterns, adding to agricultural price pressures.”

Now he takes the analysis to the next step.

NOTE: I am not endorsing any of his investment suggestions — but I didn’t want to cut anything out of this must-read piece. Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever

Jeremy Grantham

Summary of the Summary The world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value. We all need to adjust our behavior to this new environment. It would help if we did it quickly.

Summary

Until about 1800, our species had no safety margin and lived, like other animals, up to the limit of the food supply, ebbing and fl owing in population.
From about 1800 on the use of hydrocarbons allowed for an explosion in energy use, in food supply, and, through the creation of surpluses, a dramatic increase in wealth and scientifi c progress.
Since 1800, the population has surged from 800 million to 7 billion, on its way to an estimated 8 billion, at minimum.
The rise in population, the ten-fold increase in wealth in developed countries, and the current explosive growth in developing countries have eaten rapidly into our fi nite resources of hydrocarbons and metals, fertilizer, available land, and water.
Now, despite a massive increase in fertilizer use, the growth in crop yields per acre has declined from 3.5% in the 1960s to 1.2% today. There is little productive new land to bring on and, as people get richer, they eat more grain-intensive meat. Because the population continues to grow at over 1%, there is little safety margin.
The problems of compounding growth in the face of fi nite resources are not easily understood by optimistic, short-term-oriented, and relatively innumerate humans (especially the political variety).
The fact is that no compound growth is sustainable. If we maintain our desperate focus on growth, we will run out of everything and crash. We must substitute qualitative growth for quantitative growth.
But Mrs. Market is helping, and right now she is sending us the Mother of all price signals. The prices of all important commodities except oil declined for 100 years until 2002, by an average of 70%. From 2002 until now, this entire decline was erased by a bigger price surge than occurred during World War II.
Statistically, most commodities are now so far away from their former downward trend that it makes it very probable that the old trend has changed – that there is in fact a Paradigm Shift – perhaps the most important economic event since the Industrial Revolution.
Climate change is associated with weather instability, but the last year was exceptionally bad. Near term it will surely get less bad.

[JR: Well, it may get less bad, but not "surely." This year is pretty extreme already and 2012 could be as bad or worse than 2010, according to Hansen here.]

Excellent long-term investment opportunities in resources and resource efficiency are compromised by the high chance of an improvement in weather next year and by the possibility that China may stumble.
From now on, price pressure and shortages of resources will be a permanent feature of our lives. This will increasingly slow down the growth rate of the developed and developing world and put a severe burden on poor countries.

We all need to develop serious resource plans, particularly energy policies. There is little time to waste. Introduction

The purpose of this, my second (and much longer) piece on resource limitations, is to persuade investors with an interest in the long term to change their whole frame of reference: to recognize that we now live in a different, more constrained, world in which prices of raw materials will rise and shortages will be common. (Previously, I had promised to update you when we had new data. Well, after a lot of grinding, this is our first comprehensive look at some of this data.)

Accelerated demand from developing countries, especially China, has caused an unprecedented shift in the price structure of resources: after 100 hundred years or more of price declines, they are now rising, and in the last 8 years have undone, remarkably, the effects of the last 100-year decline! Statistically, also, the level of price rises makes it extremely unlikely that the old trend is still in place. If I am right, we are now entering a period in which, like it or not, we must finally follow President Carter’s advice to develop a thoughtful energy policy and give up our carefree and careless ways with resources. The quicker we do this, the lower the cost will be. Any improvement at all in lifestyle for our grandchildren will take much more thoughtful behavior from political leaders and more restraint from everyone. Rapid growth is not ours by divine right; it is not even mathematically possible over a sustained period. Our goal should be to get everyone out of abject poverty, even if it necessitates some income redistribution. Because we have way overstepped sustainable levels, the greatest challenge will be in redesigning lifestyles to emphasize quality of life while quantitatively reducing our demand levels. A lower population would help. Just to start you off, I offer Exhibit 1: the world’s population growth. X marks the spot where Malthus wrote his defining work. Y marks my entry into the world. What a surge in population has occurred since then! Such compound growth cannot continue with finite resources. Along the way, you are certain to have a paradigm shift. And, increasingly, it looks like this is it!

[-] 1 points by PublicCurrency (1387) 2 years ago

Well you don't even know what Taibbi had to say about it. I'm not prepared to explain as I couldn't do it justice, but will try to get back to you.

[-] 3 points by beautifulworld (22090) 2 years ago

Reinstate Glass-Steagall !!!!

[-] 1 points by dreamingforward (394) from Tacoma, WA 2 years ago

Yes, by trying money to something like gold, you at least ground the social fabric to the earth, allowing some marginal amount of feedback to contain an otherwise runaway process. Another idea is tying to fresh water.

[-] 1 points by beautifulworld (22090) 2 years ago

Interesting.

[Removed]

[-] 2 points by MonetizingDiscontent (1257) 2 years ago

The FRACTIONAL Problem

(((Satire))): http://maxkeiser.com/2012/02/05/the-fractional-problem/ =)~

[-] 2 points by MonetizingDiscontent (1257) 2 years ago

~Great Post~ Bring Back Glass Steagall!! Glass Steagall will Break up the Too Big To Fails. Glass Steagall is what kept Big Investment Banks (who take an ownership position) from being able to merge with our commercial FDIC insured taxpayer-backed lending banks. (which is a conflict of interests)

This is how TooBIGTooFail Investment Banks are dumping their losses from bad risky bets onto the FDIC insured commercial banks (TaxpayerBacked)

...Glass Steagall also imposed position limits on Investment banks...

[-] 1 points by ciaoant1 (16) 2 years ago

Leveraging/Deleveraging: “Give me a lever long enough and a fulcrum on which to place it, and I shall move the world” http://whataboutmarx.blogspot.com/2012/01/leveragingdeleveraging-give-me-lever.html

[-] 1 points by flip (7101) 2 years ago

from doug henwood -SL: Earlier you mentioned a project that was started about four decades ago, a project of restructuring class power in the United States and around the world. It involved increasing the financialization of the system, which helped facilitate transactions relating to global production, as well as increasing the concentration of wealth and power. Given all that, do you think the genie of finance could be put back in the bottle through regulation, without altering that project of class power in radical ways? DH: I think not. As I was saying earlier, the financial markets are instruments of class power, they're political instruments. If you want to regulate finance, that means really altering class relations. That's not easy to do. People sometimes speak as if regulating finance is a rather simple thing. I'm not talking about the technicalities of regulating finance -- I don't think those are. I think those technical problems can be overcome. But the problem is that if you're going after finance, you're really going after instruments of ruling class formation and ruling class power. And that's not easily done. If you, for example, wanted to regulate what people call speculation, that means you're really stepping on the toes of the owning class and their ability to move their money around freely. And it's going to take a very, very substantial political mobilization to do something like that. It's not just a technocratic matter; it's a really a deeply political thing.SL: Taking things back much further than 1837, there are those uneasy about the current arrangement of our economic system who perennially launch community money initiatives. That is, they create a community currency that people can use for various local transactions, with the idea of keeping money within a community. In your view, what's wrong with such efforts?

DH: It runs into the same problems that I was talking about trying to go back before the corporate form. You run into the problem of scale and scope. The local currency might be appropriate for buying locally produced baked goods, but what about the flour, what about the wheat, what about the milling equipment to produce the flour? It may be appropriate for haircuts, but what about scissors and the steel that makes the scissors? Money isn't just a substitute for barter. Money is like a system of social organization. It's a way of organizing production on a large scale. And I don't see how creating little community currencies can solve that problem. It can maybe mitigate things in a crisis, when there is a shortage of money, but as a principle of large-scale organization, it's just not up to the task.

[-] 1 points by abin22 (15) 2 years ago

The Mondragon Cooprerative Corporation is worker owned and controlled. They cannot trade on there stock. It is owned by the workers. This is about there retail stores.

The Eroski Group has climbed 14 places compared to 2009, when it was in 90th position. This growth was a result of the expansion of its chain of stores, as well as of the takeover of Caprabo. In the supermarket segment, Eroski is in 25th place in the world ranking. This and other information was presented yesterday Sunday in New York, at the sector’s annual convention in the United States, which was attended by 17,500 professionals from all over the world. The Deloitte report, which analyses the performance of and the prospects for the retail sector worldwide, shows a fall in profit margin, from 3.7% to 2.4%, due to the aggressive promotions necessary to encourage sales. This result is accounted for by the economic crisis which has made itself felt with a slowdown in growth. The report also indicates that the behaviour of consumers is changing in this global economic recession, as they are now demanding more value, opting more for own-brand products and keeping down consumer demand, especially in countries where this been very high, amongst which the United States, the United Kingdom and Spain are expressly mentioned. The Eroski chain now totals close to 2,300 stores and is made up of Eroski hypermarkets, Eroski/center, Caprabo and Eroski/city supermarkets, Eroski/viajes travel agency branches, petrol stations, Forum Sport stores, IF perfume stores, Abac leisure and culture outlets and 25 goods depots. In addition, there are also 482 self-service stores operated on a franchise basis. In France, Eroski operates 39 stores (hypermarkets, supermarkets and petrol stations) and 4 IF perfume stores in Andorra. For 40 years now, 10% of Eroski’s profits have been earmarked for initiatives of a social nature. A large part of these profits are channelled through the Eroski Foundation to be reinvested in society mainly to meet the needs of the community in three different areas: consumer information and education, protecting the environment and solidarity.

see the Workers Economic Bill of Rights on this forum or where I originally posted at Occupy Eugene, http://occupyeugenemedia.org/discussion/viewforum.php?f=33

[-] 1 points by flip (7101) 2 years ago

we build the road as we travel - alvarado street bakery is also a co-op - the make great flourless bread

[-] 1 points by freewriterguy (882) 2 years ago

well one thing they didnt consider is whats so blatantly outlined in the constitution: we have certain inalienable rights, but american land hogs decided otherwise, that only elitists and college grads should own a home, yet they depend on the working class citizens to perform the labor of nearly every life sustaining part of their life, they didnt want to share with them a home, and even blame them for "buying something they can't afford. Fact is every working american should be allowed the opportunity to own a home. What is there not enough space on the earth for them ? It is written, he that digs a pit for his neighbor shall be the one to fall into the pit, this is why the poor inherit the earth, not the rich. So predictable in the bible 2000 years ago. Nothing has changed, people dont change. well heres one for you, that you may not have heard, "Except I visit this people with death and destruction, they are slow to remember me" A quote from their Lord.

[-] 1 points by flip (7101) 2 years ago

don't really believe in the "male sky god - yahweh but looks like he is going to visit destruction on us - and we are slow to remember - maybe not him but the things we should

[-] 1 points by abin22 (15) 2 years ago

This is the reason why we the people need to change our view of economics. We need see the supremacy of labor over capital. We need democratic economics thru worker ownership. See The Economic Bill of Rights I put on this forum for more information about democratic economics

[-] 1 points by BackRider (83) 2 years ago

with the deregulation of risky loans.. there was a lot of optimism .. banks would profit .. and home buyers would be happy . What they did not account for was that the low interest rates and increase in buyers would flood the market and a 100,00 dollar home would sell for 250,000 dollars. thats where their plan fell flat on its face. When you deregulate in one area , you need to regulate in another .. to stabalize balance. they did not . and the temptation was to great .. at this point restoring glass-steagal would have little effect. Bankers are already being more careful. they know next time they won't get bailed out. Were any of the economists aware of this ? how were they planning to compensate for a flood of home buyers and prices skyrocketing?

[-] 1 points by flip (7101) 2 years ago

there was optimism on the part of the guys who made big money that is for sure. bankers are making money outside of the real economy seems to me. they are not funding investment but making money on trading and arbitrage. as to economists - dean baker and others saw it coming - again - chomsky - Dean Baker, one of the few economists who saw what was coming all along, pointed out that it's almost like appointing Osama bin Laden to run the so-called war on terror. Robert Rubin and Lawrence Summers, Clinton's treasury secretaries, are among the main architects of the crisis. Summers intervened strongly to prevent any regulation of derivatives and other exotic instruments. Rubin, who preceded him, was right in the lead of undermining the Glass-Steagall act, all of which is pretty ironic.

[-] 1 points by BackRider (83) 2 years ago

ha .. bin laden would have done great .. since he already knew where the base hideouts were and all the key players .. of course he would have been reluctant to accept such an offer .. kinda bashfully ..

[-] -2 points by slammersworldisback (-217) 2 years ago

You might find this unusual for me to say, given my other postings...

But, I think the separations of Glass-Steagle should be reinstated, for several reasons....One, they open taxpayers to profound risk because the merging of financial sectors place a massive potential burden on the FDIC should an Investment held by a banking entity go south and ruin the bank.....

There should be stability in financial accounts sold and marketed as stable....like passbook savings accounts, and those that carry risk should be separate and independent of those without risk enough so that the failure of the one does not effect the the other.....

Also laws like the Community Reinvestment Act that change terms for small segments of the population by law should be removed.....Banks should be allowed to set terms for their own loans so that they can mitigate risk of repayment...

Also, the Fed.....interest rates as low as they are now are not helpful....there should be a minimum interest rate of somewhere near 7-8% so that banks are once again encouraged to pay better interest on deposits and less willing to take risks with "cheap money" borrowed from the Fed....

[-] 2 points by BackRider (83) 2 years ago

perhaps there should have been a home owners insurance , where incase of default the insurance would pick up the mortgage ? Or perhaps in the future there should be an underwater insurance where a seller gaurantees a refund if the value of a home drops below sales value .. at least the portion underwater refunded .. wouldn't that great .. sure would take the risk out of buying a home .. !

[-] -2 points by slammersworldisback (-217) 2 years ago

right...so then people could bid up the prices of homes beyond real value because of cheap easy money (like what happened preceding the mortgage crisis) and then just make a claim against their own stupidity...

You really don't think out your responses very deeply, do you?

[-] 2 points by BackRider (83) 2 years ago

AIG got bailed out didn't they ? Why can't home owners ? it only seems fair.. or the other choice of underwawater insurance would surely prevent sellers from selling at ridiculous prices would it not .. and isn't that what really got us into this mess..

of course there is your brainie idea of raising interest rates .. a true example of clever thinking and follow through beyond surfacy observations.. haha

[-] 0 points by slammersworldisback (-217) 2 years ago

The "bailout" was a stupid move....but, without out it the FDIC would likely have been overwhelmed beyond ability to pay depositors...

doubling down to bail out homeowners who accepted and signed for loans many KNEW they didn't the resources to pay is foolish and pointless.....Your, and other's insistence that the borrowers had no responsibility in the crisis are apologists for the people who were the DIRECT cause of it all, people who were hoping to get something for nothing.....homes with no equity invested in them whatsoever, and no stake in losing them.....combined with the budget busting, stability upsetting democrat congress that took control in 2007 and doubled the yearly deficit in a single year and passed massive amounts of regulations that obstructed business all contributed to the perfect storm of the mortgage crisis....your contention that it was "banks" exclusively is myopic and naive and further demonstrative of your lack of understanding of things beyond reading biased news stories and partisan blogs

[-] 1 points by BackRider (83) 2 years ago

Well you suggested they would bid up prices .. is that what you think happened ? there was no home insurance , they did not bid up prices and still were unable to pay off their loans , why? because of job loss which you so advocately believe should be the responsibility of private investors and the the government .. well in that case the private investors should insure home buyers of their mortgages .. since they control the jobs .. how's that smartass .. are you chasing your tail yet or would you like me to throw another spin at you .. yes the bailout was stupid.. but that didn't stop AIG whom is private enterprise .. your buddies .. from accepting the dish. I never said anything about home owners responsibility .. when they took loans .. surely they had intent to pay the mortgage .. most of them .. unfortunately private enterprise held the knife to their throat [ again your buddies] so when will you see the the truth and remove yourself from the denial you've been living with.

[-] 0 points by slammersworldisback (-217) 2 years ago

of course home buyers bid up prices.......

[-] 1 points by BackRider (83) 2 years ago

well that is out of context .. you were suggesting with an insurance they would bid to extreme prices and bail on their own recklessness .. I was referring to the present where there is no insurance and yet still prices were too high .. it wasn't because as you suggest .. stay with the conversation slammer

[-] 0 points by slammersworldisback (-217) 2 years ago

In reality, no insurance company would underwrite a policy to someone who isn't qualified to pay their loan back....

In your fantasy where insurance was mandated regardless of the ability to pay the loan back buyers would simple bid up the house until they outbid other interested parties, and then fill a claim to have the mortgage reduced to "market" levels...

You, like all other foolish little socialists think you can alter the marketplace...and you can't

The problem with your idea's is that they aren't founded in reality...you think you can reduce the influence of money, or success, or popularity (regardless of it's basis) in politics and give the typical none participatory slug equal influence...which is simply NOT possible.....

The more influence government asserts in the business world the more influence the business world will assume in government...you and others who think you can change that are the worst of naive......

[-] 1 points by shoozTroll (17632) 2 years ago

Why are still whining?

Why do refuse to innovate, and then accuse those who try, of being something you consider socialist?

I am not overpowered by your blatant narcissism.

You are.

Please stop whining, it's not useful.

[-] 1 points by BackRider (83) 2 years ago

wasn't AIG an insurance company , insuring all those loans .. ? in reality .and wasn't the bailout simply paying off those insurances .. and weren't there multiple insurances sold on each loan .. AIG was raking in on that gamble .. until it all fell through .. Yes I realize an insurance on a loan is hard to fathom .. but if there was a way to make this possible .. insurance companies would want in on it..

[-] 1 points by shoozTroll (17632) 2 years ago

Are you whining again???

It's all you do.

Not a single viable plan, nor a single clear interpretation of what's going on.

Just pissing and moaning.

[-] 0 points by slammersworldisback (-217) 2 years ago

if you don't have something to add why don't you keep your head where it is most of the time...lodged firmly up your ass

[-] 1 points by shoozTroll (17632) 2 years ago

I am adding something.

The simple fact that you're a whiner, with nothing innovative to add.

I repeat, nothing innovative to add.

Just self centered negativity.

Such is the way of the narcissist.

Then toss in an invective.

Shall I respond in kind?

[-] 0 points by slammersworldisback (-217) 2 years ago

still nothing......your comments are as vacuous as your idea's

[-] 1 points by shoozTroll (17632) 2 years ago

OK.

That wasn't even an innovative put down.

Could you scare up statistics to back you claim?

Nope.

I repeat..................NOTHING is what you've added.

You still can't clearly answer a question.

So, what's your viable plan, oh high and mighty narcissist?

[-] 0 points by slammersworldisback (-217) 2 years ago

my plan,,,,pretty simple:

those who participate, contribute, produce and earn, succeed,

those who are totally unable to participate are taken care of...

those who can participate and do not......suffer the consequences of their own actions, they are given the opportunity, if they don't take it, the fault is their own

pretty simple...

[-] 1 points by shoozTroll (17632) 2 years ago

What if coercion was involved?

There is a lot of that going on.

Should they still be "forced" to suffer?

[-] -1 points by slammersworldisback (-217) 2 years ago

no one is "forced" to suffer....that is hyperbole.....most suffering is by choice and due to behavior

[-] 1 points by shoozTroll (17632) 2 years ago

You've said all along, they should be "forced" to suffer for their "bad choices".

That makes your comment hyperbole.

Or you just hold a very narrow view of "forced".

You never dealt with coercion either.

All kind of people are "forced" out of their jobs, by the actions of others, and often coercion is the weapon used..

[-] 0 points by slammersworldisback (-217) 2 years ago

again parsing words.....the force of cause/effect consequence is much different than the outside force of the compulsion by others under threat....

If you want to talk coercion we can discuss Organized labor which creates a situation where employees must join their rank or be prohibited from working.........THAT is coercion...

[-] 1 points by FivePercentForNothing (190) 2 years ago

There are two things you are leaving out.

  1. What were the risky investments.
  2. Why were the risky investments being made.

The government was pushing home loans to people who should not have qualified and backing these loans through Fannie and Freddie. At the same time they were pushing down interest rates. This caused the bubble in the housing market. The risk reared it's head when the people who should not have qualified started defaulting on thier loans.

[-] 1 points by flip (7101) 2 years ago

you are a joke - i hope you know that - let see how that works. the government told bankers to loan money to people who couldn't afford to pay - sure! they were making money hand over fist and selling them out the back door so they did not care if they were paid or not. you know that right - you are not as stupid as you appear - right? then the government told goldman to bet on the loans and told aig to insure the loans right?? then the government told goldman to get paulson to make up some really shitty packages to bet against. then the government told goldman to sell the shitty ones to the german banks or anyone else stupid enough to buy that shit. sure - makes perfect sense! there are only 4 people who still believe that shit - you, the smart capitalist (what a contradiction in terms!) and that idiot slammerguy - not sure who the 4th is - i think it is some idiot named robert rubin or was it summers or hubbard - that's it, i think it was that sick fuck hubbard

[-] 1 points by FivePercentForNothing (190) 2 years ago

What were the risky loads?

[-] 1 points by flip (7101) 2 years ago

i assume you mean loans - you figure it out - you read the follow the news don't you?

[-] 1 points by FivePercentForNothing (190) 2 years ago

Yes I meant loans.

Of course I can figure it out. I am wondering what you think the loans were and why they were high risk.

[-] 1 points by flip (7101) 2 years ago

are you trying to make this more difficult than i should be - i work full time (just walked in) and take care of grandchildren - don't have time to play games. if you have something to say - do so. if you need educating - say so. read "the monster" - "too big to fail" - "the big short" - "trillion dollar meltdown" - when you have finished those let me know - i do not feel like going upstairs and can't remember the other titles - that should do it i would think! i am going to lie down - let me know what you have figured out!

[-] 1 points by FivePercentForNothing (190) 2 years ago

If is a simple question that would take 5 seconds to answer.

What were the loans and why they were high risk.

[-] 1 points by flip (7101) 2 years ago

just got home from work (almost 10pm - what are you doing?) - my own business - a good capitalist! this is what you are referring to i imagine - then the government told goldman to bet on the loans and told aig to insure the loans right?? then the government told goldman to get paulson to make up some really shitty packages to bet against. then the government told goldman to sell the shitty ones to the german banks or anyone else stupid enough to buy that shit. sure - makes perfect sense! - so to answer your question buffet's wmd's - The Meridian

The Meridian is the official blog of Scott Dauenhauer and Meridian Wealth Management - "MBS, CDO's and CDS's In Layman's Terms...... You've probably been hearing a lot about securities that you've never heard of before. I bet you never thought it would be important to know what an MBS or CDO or CDS was......now you may be wondering. I'll try to give you a brief synopsis of each.

MBS - Mortgage Backed Security

This is in its simplest form a bond. The bond is backed by a pool of mortgages that are being paid by homeowners across the United States. Each month a homeowner makes a payment, that payment basically sent to the holder of this bond. If one were to buy a Mortgage Backed Security (MBS) they would receive an interest payment and a partial repayment of their principal (since some of a homeowners payment is interest and principal). These securities are issued by Fannie Mae, Freddie Mac and Ginnie Mae - but can also be issued by other institutions. When an investor buys a Fannie Mae bond, they are essentially buying the cash flow from different homeowners as they make their monthly mortgage payments. If a homeowner defaults on their mortgage or misses a payment, the MBS holder suffers....of course this is where Fannie, Freddie and Ginnie step in and make them whole. With so many people in foreclosure and not making payments......you can see why Fannie and Freddie had to be bailed out.

O.K. - as if MBS was not hard enough - Collateralized Debt Obligations or CDO's.

These are tough to understand and I won't bore you with the internals, but think of this as a Mortgage Backed Security on steroids. Instead of one investor owning the cash flow of a mortgage - multiple investors could own it. Here is an example of how a CDO might work:

Pretend that you have a mortgage (okay, most of us aren't pretending) and you make principal and interest payments each month - these payments are made to your loan servicer and then split up as follows:

Investor A - Gets all of the interest payments from years 1 - 4 Investor B - Gets all of the principal payments from years 1 - 4 Investor C - Gets all of the interest payments from year 5 Investor D - Gets all of the principal payments from year 5 Investor E - Gets the interest and principal payments from years 6 - 10 Investor F - Gets interest payments from years 11- 24 Investor G - Gets principal payments from years 11 - 24 Investor H - Gets the remainder of principal and interest payments, if made from years 25 - 30

Imagine you are the borrower - your payments don't just go to your local bank anymore - they get split up depending on the year you are making a payment and how much is principal and interest. All of these investors who are in line to receive these payments have bought into a trust - called a CDO. The trustee of the trust has a fiduciary responsibility to each of these investors. Now you know why when someone who is having problems paying their mortgage and is on the brink of foreclosure is having such problems trying to get their loan modified - if the trustee changes the interest payments, one of multiple investors may get hurt at the expense of another, same goes for principal changes. The trustee is in an impossible situation and thus does nothing........the house forecloses even though a workout was entirely possible.

CDO's were purchased by investors who were told by "creditable" ratings agencies that these securities were "investment grade". Some of these investors obviously didn't believe the credit agencies and decided to seek insurance in the case that their CDO defaulted. They went out and bought.........Credit Default Swaps or CDS.

There is nothing wrong with a Credit Default Swap - it is basically an insurance policy against the failure of a specific asset. The reason these have been in the news is because some companies - like AIG, Lehman and Fortis (and many others) found these insurance policies to be very lucrative business. AIG in particular issued Credit Default Swaps on CDO's so that institutions that held CDO's would be made whole if the CDO defaulted. The problem is that AIG didn't foresee that ANY of these would default - they thought this was a risk free operation. AIG took in a ton of money to insure the CDO's through Credit Default Swaps - but never reserved for losses. As we all know now, AIG made a huge mistake as there were and is risk with CDO's. Credit Default Swaps are basically just insurance policies for securities.

Consider this a 101 class on mortgage derivatives.....its probably boring to you, but it might help to explain a little of what is going on right now.

If you're an expert in these derivates please don't e-mail me telling me how I botched these explanations.....they are correct enough to ensure normal people understand the basics of what is going on!

[-] 1 points by FivePercentForNothing (190) 2 years ago

You did not answer the question. I did not ask how mortgage deriviatives work. I understand what CDOs and CDSs are and how they hid the risk.

I asked why were the individual loans risky.
The simple answer is that they were given to people who should not have qualified.

[-] 1 points by flip (7101) 2 years ago

you mean the loans upon which all of this shit was created - oh so you are blaming the guy who took the loan from the banker and could not repay when the rate of interest skyrocketed. come on now - read "the monster" mr nothing. go to a banker and try to get some money to go to vegas - see what they give you. and then goldman and citi etc made up this shit - why - you're so smart - you must know why - follow the money - who made out and who lost. i always wonder in these situations - do you really believe your nonsense or are you smart enough to know the reality. are you a bullshitter or are you stupid enough to believe your own bullshit

[-] 1 points by FivePercentForNothing (190) 2 years ago

I did not blame anyone.

I stated that they were loans people who should not have qualified.

By the way, There are 10, 15, 20, and 30 year fixed rate mortgages. That is what I have.

As for adjustable reate mortgages, the rates have been falling to thier lowest point in 50 years.

[-] 1 points by flip (7101) 2 years ago

are you stupid - they are the lowest rate in years because of the recession and we are in the recession - why? mbs, cdo - should i go on? they were sub prime for most of those who should not have qualified - reset at much higher rates in 2 yrs for the most part. and how did they qualify - one more time - read the monster - just the first chapter and you will have an idea!

[-] 1 points by FivePercentForNothing (190) 2 years ago

You are the one who said

"could not repay when the rate of interest skyrocketed"

[-] 1 points by flip (7101) 2 years ago

and what were they doing in 2006 as the crisis was starting - and why were they called teaser rates - 30 yr fixed did not cause the problem - watch the movie "too big to fail" if you don't want to read the book

[-] 1 points by flip (7101) 2 years ago

do you know what arm stands for?

[-] 1 points by FivePercentForNothing (190) 2 years ago

Adjustable Rate Mortgage rates have been falling for years. 5/1 ARM interest rates are based on the 5 year securities yield. These rates have been falling for years.

In any case I have a 30 year fixed. In hindsight would have saved money with an ARM since their rates falling for years. I just don't like taking chances so I chose a Fixed Rate Mortgage.

[-] 1 points by flip (7101) 2 years ago

if you are not stupid (i will take you at your word) then why send this - interest rates have not skyrocketed. - you must know how things played out - bankers gave loans to people who could not pay if real estate stopped booming - took huge fees then sold the bundled loans to the rich all over the world - real estate stopped booming - arm rates rose and loans could not be flipped - the shit hit the fan and the fed dropped rates to zero. so yes, rates are low but when and why - try refinancing if you are under water. so great - you have a nice life - how about helping others reach for that - you are not helping - you are shilling for the .01% - if you do not realize that then i am sorry - you are stupid - well maybe ignorant is a better term (the root is ignore). you also said this - Every home mortgage is transacted with a standardized HUD-1 form that includes the amount borrowed, APR, monthly payment, and months to pay back. - once again - read "the monster" and educate yourself - lots of fraud out there - stop ignoring! as to rich and stupid it should be obvious - who put us in this mess and who is running the country - the poor - i don't think so!

[-] 1 points by FivePercentForNothing (190) 2 years ago

ARM rates did not rise, you are misinformed. I would never go for an ARM mortgage anyway.

When you buy a house it does not matter if the values of houses are going up or down, your mortgage remains the same. If you paid 200,000 for your house and borrowed 180,000 you have to pay back the 180,000 over 30 years. If house prices go up or down that does not change what you owe or the monthly payment. Also, you would not need to refinance if you bought a house you could afford. That argument does not hold water.

I never pointed blame at the poor and I am not saying that there were not realtors and mortgages brokers that were selling people more than they can afford. That was and still is a big part of the problem. That does not eliminate all blame from the borrower. I experienced it the realtors and brokers. I looked at the monthly payment and said no way. No thanks, I'll that that smaller house over there. People made bad decisions because they wanted that better house and the nicer car and racked up their credit cards filling their houses with big screen TVs and leather couches.

"how about helping others reach for that" - People can reach for what they want but they should not expect it to be handed to them. I worked and work very hard for what I have. I live within my means.

I do not have a problem helping those who are really in need. I do help those in need by volunteering almost every week.

[-] 1 points by flip (7101) 2 years ago

you are stupid - i hope you are rich - it is your only excuse

[-] 1 points by FivePercentForNothing (190) 2 years ago

I have a great family. I have beautiful hills, rivers, and streams around me to take long walks with my wife and dog. I live in a country where I am mostly free. I guess you could say I am rich in sprit.

I don't think I am stupid and I ma not sure how being rich would be an excuse for being stupid.

[-] 1 points by flip (7101) 2 years ago

correct - read the book and educate yourself - or not and keep thinking you now what happened

[-] 1 points by FivePercentForNothing (190) 2 years ago

interest rates have not skyrocketed.

[-] 0 points by smartcapitalist (143) 2 years ago

your definitions are fine but I did not understand why you posted them here

[-] 1 points by flip (7101) 2 years ago

trying to figure out who to blame - the bottom of the ladder guy who took out an arm and couldn't pay or the banker who sold him the shit and then moved it out the back door to some rich dope who got aaa rated high interest money

[-] 1 points by opensociety4us (914) from Norwalk, CT 2 years ago

Blame for what?

The bankers (and our govt) get the blame for tanking the economy as they allowed these debts to enter into our economic system. The borrowers didn't walk into a bank with a gun and demand the money. The bankers (and our govt) approved the loans and gave out the money.

The borrowers get the blame for tanking their lives, as they allowed the liabilities to enter their lives. They, however, can go bankrupt without much of an impact on you or me. In fact, their bankruptcy would be a good thing as it allows them to get back into the economy and begin spending again, which helps all of us.

We all know what happens when banks go bankrupt and that is why bankers, as the gatekeepers of debt in our economy, should be held to a higher standard than borrowers in their decision making.

[-] 1 points by flip (7101) 2 years ago

The borrowers get the blame for tanking their lives, as they allowed the liabilities to enter their lives. - much of what you say is true but that is mostly nonsense - it is called blaming the victim! looks like you have no idea how the other half lives - look around you - get out of your nice neighborhood

[-] 1 points by opensociety4us (914) from Norwalk, CT 2 years ago

To some extent, you're correct. I have been extremely fortunate to end up with much more than I need and that makes it nearly impossible to internalize how the other the half lives. Essentially, I can't ever truly get out of my nice neighborhood.

Let me clarify my comment. To the extent that borrowers foolishly borrowed money, they are responsible for the damage to their lives that that foolish borrowing caused.

I do recognize, however, and have a concern that, in our economy, borrowing is becoming a prerequisite for basic survival for too many. To me this is a sign of an economy that is not working (or is decreasing its standard of living for its participants).

[-] 1 points by flip (7101) 2 years ago

ok, i am with you here somewhat - are you aware that a huge number of mortgage defaults come about because of medical problems. there is plenty of blame to go around but an old time banking system would never had allowed this to happen. and who profited???

[-] 1 points by opensociety4us (914) from Norwalk, CT 2 years ago

To me, it seems so unnecessary that medical problems account for such a high rate of bankruptcy in this great nation.

The deregulation of financial intermediaries combined with the "bonus" culture of those intermediaries basically provides bankers with more opportunites to take risk under a compensation structure where they have only upside and no downside. This distortion of risk/reward causes reckless behavior which impacts us all.

[-] 0 points by smartcapitalist (143) 2 years ago
  1. The risks of losing your job in finance is far more than most other professions because the responsibilities and money involved. In most jobs the decisions you take aren't as intense as in finance and course correction far easier and less costly. We have no lazy mondays and easy fridays.

  2. And if you screw up and lose your job, it can pretty tough finding another job. The competition is intense and there are always 10 other smart, probably smarter guys, looking to take your role. In fact a lot of people do not take up finance simply because of the stress and risks involved.

  3. It's not a 'put' but a 'call'. And no not every type of financial firm is backed by taxpayer (like hedge fund, mutual funds, PE etc), seriously it's time you down from that high horse of yours. Not even all parts of a bank would be supported by govt if it failed. And that too the govt would bat an eyelid if a single bank was failing. And besides, as you may not know, the loan (TARP) was paid back eons ago.

  4. Trading on your own money ('proprietary trading') is a legal quagmire. In fact the govt wants to ban it because of the legal and ethical issues involved. Prop trading forms a very small part of most trading floors.

  5. It's not about her leaving me, she does not need my money and has a pretty good job that can support both of us without me needing to work. But that's not the point. There are certain things I would like to provide for as a husband and as a father and even as a son, and I need to be very sure I can meet those benchmarks. Hedge funds go down all the time, not because they lost money but because they did not make as much money as they promised. Hence my apprehensions.

[-] 1 points by opensociety4us (914) from Norwalk, CT 2 years ago

"The risks of losing your job in finance is far more than most other professions because the responsibilities and money involved. In most jobs the decisions you take aren't as intense as in finance and course correction far easier and less costly. We have no lazy mondays and easy fridays."

"And if you screw up and lose your job, it can pretty tough finding another job. The competition is intense and there are always 10 other smart, probably smarter guys, looking to take your role. In fact a lot of people do not take up finance simply because of the stress and risks involved."

There's a lot of competition for that "no downside / all upside" edge. It's all about making money without having to risk your own. Hey, man, you're the one who wants to play that game. Being a charlatan is a tough way to make a living. It can be lucrative, but it's tough.

"It's not a 'put' but a 'call'. And no not every type of financial firm is backed by taxpayer (like hedge fund, mutual funds, PE etc), seriously it's time you down from that high horse of yours. Not even all parts of a bank would be supported by govt if it failed. And that too the govt would bat an eyelid if a single bank was failing. And besides, as you may not know, the loan (TARP) was paid back eons ago.

It's a "Put". Large financial institutions are being given a long "Put" option position by the taxpayer for free. When the shit starts to stink, they Put it to the taxpayer (or else). The TARP money and its return is not the issue. Until the taxpayer is adequately compensated for the risk it is taking for bailing out failed companies (ie receive an ongoing premium for the Put that the taxpayer is providing to large financial firms or own the financial institution on terms commensurate with a similar deal subject to the laws of real "Capitalism") the current bailout deals are nothing short of corruption. Hedge funds, mutual funds, PE that do not need or take taxpayer money are not part of this discussion. Many of those firms can fail just fine. They should be able to make as much money as they legally can while risking only their and their investors money.

"Trading on your own money ('proprietary trading') is a legal quagmire. In fact the govt wants to ban it because of the legal and ethical issues involved. Prop trading forms a very small part of most trading floors."

Prop trading should be a private activity not any part of a financial intermediary. The hedge fund model is just fine. They win, they keep. They lose, THEY lose.

"It's not about her leaving me, she does not need my money and has a pretty good job that can support both of us without me needing to work. But that's not the point. There are certain things I would like to provide for as a husband and as a father and even as a son, and I need to be very sure I can meet those benchmarks. Hedge funds go down all the time, not because they lost money but because they did not make as much money as they promised. Hence my apprehensions."

Goodness, I feel sorry for you. It doesn't have to be that way. It's all in your head.

[-] 0 points by smartcapitalist (143) 2 years ago

I wish there were no downside. In the last 3 years I have seen so many people around me losing their jobs, whether new hires or old hands. My own job is never secure, and that is one of the reason I am not getting married yet. I am waiting for the economy to revive a little more before I take such a huge step. Talk about no downsides.

[-] 2 points by opensociety4us (914) from Norwalk, CT 2 years ago

Everybody is subject to the downside of losing their job, not just you.

If, should the trade go bad, all I'm risking is my job, then I'd be more than happy to take the potential bonus on a successful $1bil trade (backed by, of course, a free "Put" provided by the taxpayer). Now if I have to contribute my own capital going into the trade and potentially lose my own money should things go bad, that's a different story.

Until bankers/traders contribute their own capital going into trades and have the potential of losing their own money when things go bad, this moral hazard will always exist. And it explains why, in the history of banking, banks have lost money for shareholders. Bankers are the consummate deep out of the money uncovered option seller, except they have the luxury of using other people's money to post as collateral.

Stop being a pussy and get married. If she won't stick by you during this volatility, then she's not worth it.

[-] 1 points by FivePercentForNothing (190) 2 years ago

The person who did not pay back the loan broke his contract. A contract is your promise to honor the terms of the loan. THey banker did not break the contract the borrower did.

Every home mortgage is transacted with a standardized HUD-1 form that includes the amount borrowed, APR, monthly payment, and months to pay back.

[-] 0 points by smartcapitalist (143) 2 years ago

Bankers (I believe you mean traders here) had no say in what mortgage was being sold to whom. They just traded on those. As for the credit rating agencies, they too believed (with some justification but clearly not enough( that those securities were really as good as they were rating them. I dont think, by and large, that they were knowingly doing anything unethical.

[-] 1 points by flip (7101) 2 years ago

no i meant bankers - those who sold the loans - then the big bankers bundled them together rating agencies were either stupid or unethical - you choose. read a few books on the crisis i start with "the monster" then let me know what you think

[-] 0 points by smartcapitalist (143) 2 years ago

the loans were sold by mortgage agencies to traders who then bundled it (called structuring) and sold it to investors. I dont have to read books on the crisis. I joined the financial sector just before the crisis.

[-] 1 points by flip (7101) 2 years ago

never mind!

[-] 1 points by flip (7101) 2 years ago

i read liars poker - why are you telling me this?? you are not bringing much to the conversation - care to comment on what went down

[-] 0 points by smartcapitalist (143) 2 years ago

what went down where?

[-] 1 points by flip (7101) 2 years ago

no banks involved? you do need to do some reading. i doubt you are in a position to have the overview of michael hudson. this - I joined the financial sector just before the crisis. - does not qualify you to have a real understanding of the situation. and previous to joining the financial sector - and what part of it - let's not pretend to know too much - that usually gets you in trouble!

[-] 0 points by smartcapitalist (143) 2 years ago

yes banks were involved. but securitization is done by the sell side (trading desks at banks like GS, Citi, Lehman etc).

[-] -2 points by smartcapitalist (143) 2 years ago

Ah, I see. It's all a government conspiracy. Mystery solved. Yippie.

[-] 1 points by flip (7101) 2 years ago

maybe you are glen hubbard - you seem to be as stupid as he is- i sent you something to play with - work it over, take your time, then end the conversation just like you did last time - by running away! go pick on someone who can't read - you might have better luck.

[-] -2 points by smartcapitalist (143) 2 years ago

I really wish I was as 'stupid' as Prof. Hubbard. But I am happy to know that you are more intelligent than either him or me. And I am also really elated to know that you can, if nothing else, read. Looks like our education system isn't all that bad either.

[-] 1 points by flip (7101) 2 years ago

mr hubbard is a fool and while he knows many things about how the economic system works he cannot see the forest for the trees. to me that is one definition of stupidity - there are many. the education system is about control not education - read john taylor gatto - very good (short) book. again chomsky - "But as far as questions, the only thing I ever get irritated about is elite intellectuals, the stuff they do I do find irritating. I shouldn't. I should expect it. But I do find it irritating. But on the other hand, what you're describing as inane questions usually strike me as perfectly honest questions. People have no reason to believe anything other than what they're saying. If you think about where the questioner is coming from, what the person has been exposed to, that's a very rational and intelligent question. It may sound inane from some other point of view, but it's not at all inane from within the framework in which it's being raised. It's usually quite reasonable. So there's nothing to be irritated about.

You may be sorry about the conditions in which the questions arise. The thing to do is to try to help them get out of their intellectual confinement, which is not just accidental, as I mentioned. There are huge efforts that do go into making people, to borrow Adam Smith's phrase, "as stupid and ignorant as it is possible for a human being to be." A lot of the educational system is designed for that, if you think about it, it's designed for obedience and passivity. From childhood, a lot of it is designed to prevent people from being independent and creative. If you're independent-minded in school, you're probably going to get into trouble very early on. That's not the trait that's being preferred or cultivated. When people live through all this stuff, plus corporate propaganda, plus television, plus the press and the whole mass, the deluge of ideological distortion that goes on, they ask questions that from another point of view are completely reasonable....

[-] 0 points by ironboltbruce (371) from Miami, FL 2 years ago

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[-] -3 points by smartcapitalist (143) 2 years ago
  1. You dont understand what 'systemic risk' is. The cost to society is called 'externalities'.

  2. Also there is no hard and fast rule that deregulation (or regulation) makes markets more or less efficient. It entirely depends on the type of regulation.

  3. Please don't make such generalizations that nobody understand exotics. That's untrue. Again, depends on how complex that exotic is.

  4. And yes, the financial industry does like to create exotics because then we can deliver more structure products that suit our clients needs. Whp likes plain vanilla stuff. Where is the fun in that

  5. Yes markets do tend to underprice social costs. And its because a social cost is hard to calculate. What is the social cost of smoking? What is the social cost of eating Mexican mangoes versus Indian mangoes? What is the carbon foot print of the soup that you made? All of those are incredibly hard to calculate. Which is why the government has a tough time putting a sort of tax on those.

  6. Derivatives do not increase social costs.

  7. Systemic risk are by nature out of the control of the individual making the trade. You can factor in a few systemic risks but you can't even fathom all of them. A meteorite dropping on Wall Street would be a systemic risk but you can't really factor it in. 9/11 like attacks are also systemic risks. For Apple, a fire in Foxxcon that reduces to rubble it's iPad manufacturing hub would be a systemic risk but apple cannot do much about it, may be get an insurance if its feasible. WW3 is a systemic risk. These are black swan events and including these in our calculations makes no sense. It's like saying we should all sleep with a gun and flamethrower under our pillow just in case there is a zombie apocalypse and your zombie wife wants to kill you.

[-] 1 points by opensociety4us (914) from Norwalk, CT 2 years ago

"These are black swan events and including these in our calculations makes no sense. It's like saying we should all sleep with a gun and flamethrower under our pillow just in case there is a zombie apocalypse and your zombie wife wants to kill you."

Nonsense. Black (and Grey) swans do occur and are occurring more frequently as economic systems grow more complex. Accordingly, it is negligent to NOT price in their existence, especially when their occurrence causes a firm to blow-up and collapse the economic system.

This financial crisis in large part is due to bogus risk management models and charlatan bankers/traders that did not account for black or even grey swan events.

A monkey can sell deep out-of-the money uncovered options, especially when you know the taxpayer will back you up when you start getting close to the strike price.

[-] -2 points by smartcapitalist (143) 2 years ago

If an event occurs frequently, it is by definition not black swan.

[-] 2 points by opensociety4us (914) from Norwalk, CT 2 years ago

Yet even the grey swans (increased frequency) are blowing traders/bankers up, let alone the black ones. Let's just all pretend grey and black swans don't matter until they do, of course. And then we can get others to pay for our negligence while we attempt to excuse our negligence by saying "our models designed by the most brilliant of Phd's never expected x to happen." X happens and it's negligent, unethical and unprofessional to expose others to that risk unkowingly. Then again, with the hyper efficiency of financial markets these days, the only way left for charlatans to make money without providing any real service is to bet massively against the rare event with other people's money and collect fees and bonuses until that rare event happens. And when it does the charlatans walk away leaving others holding the bag.

[-] -2 points by smartcapitalist (143) 2 years ago

Yes you are absolutely correct. We should include every possible black swan event meteorite striking wall street, a zombie outbreak, president getting assassinated, floods in sub saharan africa and such others. Totally.

[Deleted]

[-] 1 points by opensociety4us (914) from Norwalk, CT 2 years ago

Nope. Let's just structure things so that the charlatan bankers/traders can't walk away leaving others holding the bag. Let's be sure they have some real downside to match their upside. Although, I suspect that many of these charlatans aren't exactly the courageous type. As soon as they realize they have some downside, I expect they'll exit the industry and seek other ventures where they believe they can fool others with their bogus models into taking the downside while they get the upside. Good riddance.

Or maybe the better solution for our great nation and its history of capitalism is to continue allowing the monkeys on Wall Street to sell deep out of the money uncovered options using taxpayer money as collateral. I don't know. Many of these monkeys performed real well on their SATs and GMATs, so they must know what's best.

[-] -1 points by smartcapitalist (143) 2 years ago

Courageous types? What courageous deed have you done in your life? Where does this huge ego come from man?

[-] 1 points by opensociety4us (914) from Norwalk, CT 2 years ago

My courage or lack thereof is irrelevant, moron. I'm not one of the charlatans blowing up the system.

Get back to your spreadsheets, man. You've got keep fooling people into thinking you know something magical about money they don't so you can maintain your "no downside" edge, which is really all you've got (until you don't, of course)

Sucka!

[-] 1 points by flip (7101) 2 years ago

as he says - This is pretty elementary economics. - we all just watched what happened - you can wiggle all you want but can't change the reality - "there are none so blind as those who will not see"

[-] 0 points by smartcapitalist (143) 2 years ago

I haven't read that book so I don't know exactly what he said. But I am pretty sure they didnt say this. And it is quite likely you did not understand it all. Nevertheless, nice to know you put the effort to read a econ book.

[-] 1 points by flip (7101) 2 years ago

didn't say what? it is very straight forward - elementary economics as chomsky says. i have read too many econ books and sounds like you have also so you should know better. we have been around this block before - chew on this a while and see what you come up with - note at the end he mentions the death penalty for capital flight - don't let that scare you! .........NOAM CHOMSKY: Well I basically agree with your picture. In my view, the breakdown of the Bretton Woods system in the early 1970s is probably the major international event since 1945, much more significant in its implications than the collapse of the Soviet Union.

From roughly 1950 until the early 1970s there was a period of unprecedented economic growth and egalitarian economic growth. So the lowest quintile did as well — in fact they even did a little bit better — than the highest quintile. It was also a period of some limited but real form of benefits for the population. And in fact social indicators, measurements of the health of society, they very closely tracked growth. As growth went up social indicators went up, as you'd expect. Many economists called it the golden age of modern capitalism — they should call it state capitalism because government spending was a major engine of growth and development.

In the mid 1970s that changed. Bretton Woods restrictions on finance were dismantled, finance was freed, speculation boomed, huge amounts of capital started going into speculation against currencies and other paper manipulations, and the entire economy became financialized. The power of the economy shifted to the financial institutions, away from manufacturing. And since then, the majority of the population has had a very tough time; in fact it may be a unique period in American history. There's no other period where real wages — wages adjusted for inflation — have more or less stagnated for so long for a majority of the population and where living standards have stagnated or declined. If you look at social indicators, they track growth pretty closely until 1975, and at that point they started to decline, so much so that now we're pretty much back to the level of 1960. There was growth, but it was highly inegalitarian — it went into a very small number of pockets. There have been brief periods in which this shifted, so during the tech bubble, which was a bubble in the late Clinton years, wages improved and unemployment went down, but these are slight deviations in a steady tendency of stagnation and decline for the majority of the population.

Financial crises have increased during this period, as predicted by a number of international economists. Once financial markets were freed up, there was expected to be an increase in financial crises, and that's happened. This crisis happens to be exploding in the rich countries, so people are talking about it, but it's been happening regularly around the world — some of them very serious — and not only are they increasing in frequency but they're getting deeper. And it's been predicted and discussed and there are good reasons for it. ............... CHOMSKY: It's rather striking to notice that the consensus on how to deal with the crisis in the rich countries is almost the opposite of the consensus on how the poor countries should deal with similar economic crises. So when so-called developing countries have a financial crisis, the IMF rules are: raise interest rates, cut down economic growth, tighten the belt, pay off your debts (to us), privatize, and so on. That's the opposite of what's prescribed here. What's prescribed here is lower interest rates, pour government money into stimulating the economy, nationalize (but don't use the word), and so on. So yes, there's one set of rules for the weak and a different set of rules for the powerful. There's nothing novel about that.

As for the IMF, it is not an independent institution. It's pretty much a branch of the U.S. Treasury Department — not officially, but that's pretty much the way it functions. The IMF was accurately described by a U.S. Executive Director as "the credit community's enforcer." If a loan or an investment from a rich country to a poor country goes bad, the IMF makes sure that the lenders will not suffer. If you had a capitalist system, which of course the wealthy and their protectors don't want, it wouldn't work like that.

For example, suppose I lend you money, and I know that you may not be able to pay it back. Therefore I impose very high interest rates, so that at least I'll get that in case you crash. Then suppose at some point you can't pay the debt. Well in a capitalist system it would be my problem. I made a risky loan, I made a lot of money from it by high interest rates and now you can't pay it back? Ok, tough for me. That's a capitalist system. But that's not the way our system works. If investors make risky loans to say Argentina and get high interest rates and then Argentina can't pay it back, well that's when the IMF steps in, the credit community's enforcer, and says that the people of Argentina, they have to pay it back. Now if you can't pay back a loan to me, I don't say that your neighbors have to pay it back. But that's what the IMF says. The IMF says the people of the country have to pay back the debt which they had nothing to do with, it was usually given to dictators, or rich elites, who sent it off to Switzerland or someplace, but you guys, the poor folks living in the country, you have to pay it back. And furthermore, if I lend money to you and you can't pay it back, in a capitalist system I can't ask my neighbors to pay me, but the IMF does, namely the US taxpayer. They help make sure that the lenders and investors are protected. So yes it's the credit community's enforcer. It's a radical attack on basic capitalist principles, just as the whole functioning of the economy based on the state sector is, but that doesn't change the rhetoric. It's kind of hidden in the woodwork..........One major exception to this is South Korea and Taiwan. They were very poor countries. South Korea in the late 1950s was probably about the level of Ghana today. But they developed by following the Japanese model – violating all the rules of the IMF and Western economists and developing pretty much the way the Western countries had developed, by substantial direction and involvement of the state sector. So South Korea, for example built a major steel industry, one of the most efficient in the world, by flatly violating the advice of the IMF and the World Bank, who said it was impossible. But they did it through state intervention, directing of resources, and also by restricting capital flight. Capital flight is a major problem for a developing country, and also for democracy. Capital flight could be controlled under Bretton Woods rules, but it was opened up in the last 30 years. In South Korea, you could get the death penalty for capital flight. So yes, they developed a pretty solid economy, as did Taiwan. China is a separate story, but they also radically violated the rules, and it's a complex story of how it's ending up. But these are major phenomena in the international economy.

[-] -1 points by smartcapitalist (143) 2 years ago
  1. Chomsky is a commie. Commies live in a time wrap, an alrternate universe

  2. Don't see any problems in doing away with the gold standard.

  3. I dont agree on the state capitalism argument. May be true for the Soviets but Americans firms led the development in those years and they still do.

  4. Agree that financial engineering, which was supposed to facilitate trade, has become the trade. As one of my profs used to say "It is the tail that wags the dog". Not healthy. But then to blame every ill in the world on finance is just stupid.

  5. I can't really determine if his argument on social indicators not tracking growth is correct. I would need, unlike occutards, days of analysis to make a claim one way or the other. By and large quality of life has improved at least in the developed world, the way I see it.

  6. As to what IMF or World Bank prescribes, they usually have flavor of the season presciptions. The will say one thing for a few years and the exact opposite after that.

  7. That being said, IMF and World Bank have done a lot of good in many countries. Sadly they have very little control about how their money is spent, I know because a friend of mine works for a auditing firm that audited World Bank loans in a few countries.

  8. As the Asian tigers example is another where the defied the world economists and did well. Now their lessons are part of economics. They protected certain industries until it reached a level of global competitiveness and opened up those sector which makes all the sense. But you cannot forever protect your industries. What is good at a certain stage of an economy may not be good in the later satge.

  9. China also went against various 'flavor of the season' presciptions by World Bank and they did well. Now other developing economies are following them

[-] 1 points by flip (7101) 2 years ago

a commie he is not - could not be published in the soviet union - get your facts straight. as to state capitalism - explain this - People talk about a return to Keynesianism, but that's because of a systematic refusal to pay attention to the way the economy works. There's a lot of wailing now about "socializing" the economy by bailing out financial institutions. Yeah, in a way we are, but that's icing on the cake. The whole economy's been socialized since — well actually forever, but certainly since the Second World War. This mythology that the economy is based on entrepreneurial initiative and consumer choice, well ok, to an extent it is. For example at the marketing end, you can choose one electronic device and not another. But the core of the economy relies very heavily on the state sector, and transparently so. So for example to take the last economic boom which was based on information technology — where did that come from? Computers and the Internet. Computers and the Internet were almost entirely within the state system for about 30 years — research, development, procurement, other devices — before they were finally handed over to private enterprise for profit-making. It wasn't an instantaneous switch, but that's roughly the picture. And that's the picture pretty much for the core of the economy.

The state sector is innovative and dynamic. It's true across the board from electronics to pharmaceuticals to the new biology-based industries. The idea is that the public is supposed to pay the costs and take the risks, and ultimately if there is any profit, you hand it over to private tyrannies, corporations. If you had to encapsulate the economy in one sentence, that would be the main theme. When you look at the details of course it's a more complex picture, but that's the major theme. So yes, socialization of risk and cost (but not profit) is partially new for the financial institutions, but it's just added on to what's been happening all along.

[-] 0 points by smartcapitalist (143) 2 years ago

So computers and internet are all state stuff? Do you know how old IBM is? Or Cray? I agree a lot of information technology, particularly in the intial days, trickled down from government project. But there was no intention of the govt to make it financially profitable, therefore it is not state capitalism. It was defense expenditure and/or academic research. As for pharma, the state has been pathetic in it.

[-] 1 points by flip (7101) 2 years ago

yes i do know how old ibm is but that does not change what was said here. taxpayer dollars developed computers and the internet - no real question on that score - and what about nukes - who is making money on that now? if you do not think the state has a huge role in the economic system then i don't know what you have been reading! there is plenty of info on the subject so i am sure you can find it yourself but i will help you along - "The military started a number of research projects to try and build computers that could help with these tasks and more. In 1931 the U.S. Navy and IBM began working together to build a general-purpose computer called the Mark 1. It was the first computer to use the base-2 binary system, was programmable, and made of vacuum tubes, relays, magnets, and gears. The Mark 1 was completed in 1944. [20] The Mark 1 had a memory for 72 numbers and could perform 23-digit multiplication in 4 seconds. [5] It was operational for 15 years and performed many calculations for the U.S. Navy during WWII. http://es.geocities.com/jhonyjorge/p35b/historia/eniac.gif The Mark 1 was still a mix of electronic and mechanical. At the same time as the Mark 1, however, there was another project taking place. During WWII the United States army was building new artillery that required firing tables. These firing tables were created by way of intense mathematical calculation that took a very long time to manually compute. To help make this process process quicker the Army started a project in 1943 to build a completely electronic computing device. [21] J. Presper Eckert and John Mauchly headed the project and eventually created the Electronic Numerical Integrator and Calculator (ENIAC), which was completed in 1946. The ENIAC had 18,000 vacuum tubes and absolutely gigantic; 100 feet long, 10 feet high, and 30 tons. It was about a thousand times faster than the Mark 1 at multiplying numbers and 300 times faster at addition. [22] Another computer designed during WWII was the Colossus, by Alan Turing. This computer cracked the German Enigma code, helping us win the war against the Nazis. Germany themselves were designing a computer much like the ENIAC, code named the Z1. The Z1 project, headed by Konrad Zuse, was never completed. [23] Von Neumann Though the computers developed in the second World War were definitely computers, they were not the kind of computers we are used to in modern times. Jon Von Neumann helped work on the ENIAC and figured out how to make computers even better. The ENIAC was programmed externally with wires, connectors, and plugs. Von Neumann wanted to make programming something that was internalized. Instead of rerouting wires and plugs, a person could write a different sequence of instructions that changes the way a computer runs. Neumann created the idea of the stored computer program, which is still implemented today in computers that use the ‘Von Neumann Architecture’. [24]Like the ENIAC, the EDVAC was built for the U.S. Army's Ballistics Research Laboratory at the Aberdeen Proving Ground by the University of Pennsylvania's Moore School of Electrical Engineering. Eckert and Mauchly and the other ENIAC designers were joined by John von Neumann in a consulting role; von Neumann summarized and elaborated upon logical design developments in his 1945 First Draft of a Report on the EDVAC.[2]