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Helen & Harry Highwater's cranky weblog of news and opinion.
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"News that's not known, or not known enough." Helen & Harry Highwater's cranky weblog of news and opinion. |
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When greed turns to fear and loathing
So that is a big ouch for some people... And the FDIC assumed ownership of $1 billion in dubious mortgages, which is a potential ouchie for FDIC itself
The existence of derivatives allows brokers to take either side of bets and still make money. For example, they can buy your billion dollars worth of GM bonds and then go to a derivatives bookie and place a bet that GM will be bankrupt by 2012. That way, if GM does go bankrupt, they lose money on the bonds but make it back when GM goes kaput, and they take their cut out of each wager on the way. An interesting feature of derivatives is that the Players rarely close their positions. This is like, say, you placed a bet on Show Me The Money at the track and then decide you want to cancel your bet before the race. Not easy to do. It is much easier to place a bet that Show Me The Money won't win, to offset your first bet. So the bets just keep piling up, and now it is hundreds of trillions of dollars of derivatives. But what happens if JP Morgan bet that GM will go bankrupt and the person who took the other side of the bet goes bankrupt before JP Morgan collects? Well, obviously, the value of the derivatives contract itself becomes zero. And, if GM does go bankrupt, JP Morgan loses a billion dollars! And this can happen because of a phenomenon called 100 Year Flood Insurance. Assume that a river town floods only once every hundred years. Over time, as the memory of the last flood recedes, the competition to sell flood insurance increases. Eventually, tiny companies are selling dirt cheap flood insurance, collecting the annual insurance premiums and buying BMW's for their executives. As this happens, home builders arrive on scene and build huge tract house developments right on the flood plain...because they can get cheap flood insurance and the land is cheap! So many more homes are built, and more insurance policies are written, and the competition for the lucrative flood insurance business grows. And so on...until one day, the 100 Year Flood arrives. Maybe it happens in Year 95 when it is totally unexpected. What happens? Well, the tiny insurance companies go bankrupt and default on their policies, and the homeowners get sent to the Superdome to die, while Blackwater troops shoot survivors and sheriffs from neighboring towns prevent evacuation by black people. And so on... an unholy fucking mess. Because the tiny insurance companies go broke, the homeowners cannot rebuild, so they go broke. And the businesses that served those homeowners go out of business too. The existence of unregulated derivatives markets has stimulated the growth of wagers in other markets, which created the demand for more derivatives, and so on, and so on. 100% cluster-fuck! We're familiar with those by now, which is why Mr. Noland's warnings ought to be considered very carefully One final horror. After 6.75 years in office most of the members of the Board of Governors at the Federal Reserve are "loyal Bushy" appointees. A lot of the original crew members resigned without much in the way of explanation. When Greenspan receives his "Hero of the Peoples' Republic" medal and a pat on the back, "Heckuva job, Greenie!", you will want to look into the overall personnel situation at the Federal Reserve. (Hint: the policy of not preventing bubbles but only cleaning up afterwards has meant that the FRB ass clowns could collect their fat paychecks without actually doing anything. You would expect a levee engineer to plan ahead, to design levees that don't fail, and to maintain levees before total systemic failure. But responsible monetary engineers have been weeded out of the US government and its agencies. There is no *there* there. And there is no reason to have faith that we won't all drown when the US monetary levees fail.) P.S. Always read the weekly Credit Bubble Bulletin from bottom up: read the last paragraph, then read the last two paragraphs, etc. That way you have a chance of getting a clue WTF he is talking about before you drown in statistics. LINK Here, I'll get you started with the final paragraph of the Sep-28 essay:
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