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The Lifting of the Veil
Old 06-28-2008, 12:35 PM   #1
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The Lifting of the Veil

Kombat was lamenting about boomer-related debt and taxes here:
http://www.early-retirement.org/foru...rre-36438.html

A number of concerns about a coming financial crisis have also been aired, most recently here:
http://www.early-retirement.org/foru...ert-36469.html
http://www.early-retirement.org/foru...nic-36687.html
http://www.early-retirement.org/foru...ees-36673.html
http://www.early-retirement.org/foru...ars-36674.html
http://www.early-retirement.org/foru...ves-36726.html

I've been loathe to post my feelings in full, since I've drawn such harsh reactions; it appears I'm no longer virtually alone, so I will hazard sharing the following revelatory (to me) presentation.

Came across this linked in someone's post at The Oil Drum.. It's long (47 min.), slightly repetitious, and a bit hokey.. but what really caught my attention is the tone that's a bit different from many gold bugs/conspiracy theorists and other debt/fiat-money handwringers. To me the 'apocalyptic' (as in revelatory) idea presented here is that not just debt, but EVER-INCREASING debt (in our current system) is both necessary and fatal. The weakness in the system as presented in the filmlet is not the lack of "hard" currency, but the entire concept of interest.




Which made me view this interview with Bill Ackman in a new light:

Wall Street Journal Video - WSJ.com

Interesting that the people questioning excessive leverage get hit with Federal investigations... Also notice the way the WSJ interviewer talks about how "DANGEROUS" it is to talk about shorting any stock but esp. financials. This has been repeated by some commenters on the forum, where talk of objective material weakness is somehow the fault of the messenger.

"I would think the media should be interested".. says Ackman.. but he's not addressing the "Money as Debt" premise: the media CANNOT say that the emperor has no clothes. At best they can say the oufit is a little skimpy. Anything bordering on revealing the true financial structure of things risks that structure.


The cold undeniable logic of mathematics and exponentials stubbornly refuses to sustain any continuous growth argument. Another longish video here for anyone wanting a refresher on this concept, especially as it regards community economic development and resources:
Dr. Albert Bartlett: Arithmetic, Population and Energy | Global Public Media
or


Just to focus on the economic aspects over the physical/commodity aspects we are also facing, or will face (though I think currently commodities are just the next bubble pumped up by those fleeing financials):
However "sustainable" growth is (let's say it's more moderate and more drawn out at lower rates than boosters would hope..), it still would lead to an inescapable interest/inflation trap and at some point a "credit crisis". The "Money as Debt" revelation is that governments, financial institutions, and private individuals borrow more and more, not because they are particularly greedy or reckless (though that is also true in some cases), but worse -- they borrow because they CAN'T NOT borrow.

It's not just a temptation or an addiction as has been portrayed; it's organic. Blaming one political party or another, or blaming immigrants or outsourcing to China, or blaming SUVs or McMansions and those who don't or can't LBTM, or blaming hedge funds or speculators.. all that obscures what's been showing itself to me to be The Real Point: the entire system is not merely riddled with debt, waste and lies.. but REQUIRES debt, waste and lies in order to function. And it REQUIRES not just "some" debt, but ever-increasing levels of debt.

Now we are getting to the point where the cracks are too big to ignore. The bond insurers are kaput and the ratings agencies have essentially evaporated. There's no "there" there. There's a point where the numbers outstanding get so large that they are hard to even conceptualize (quadrillions) and for our stalwart J6P or retiree (like me) trying to get by on the same old $40k/year, the mind indeed is repelled, as per Galbraith:

Quote:
The process by which banks create money is so simple that the mind is repelled.
New vehicles were created with an eye toward "improving" the system:

Quote:
The credit derivatives market is booming because it meets broad needs and carries well-known benefits. Some benefits are microeconomic:
  • Credit derivatives enable lenders and investors better to take credit risks they want and to lay off the ones they don’t want.
  • Using them, we can price risk more precisely by separating credit from other risks.
  • They improve the intermediation process by enhancing market liquidity, efficiency and completeness.
There are also important macro benefits.
  • They may diffuse credit risks across markets and may tend to reduce risk concentration by putting such risks in the hands of those who want and are better equipped to hold them.
  • This evolving structure acts as a set of financial shock absorbers for the economy, making financial infrastructure more resilient than in the past.
More broadly, the growth of the credit derivatives market appears to have created a virtuous circle of macroeconomic and financial stability. As an observer of markets and a market participant, I believe that these financial innovations have contributed to favorable financial conditions and thus to strong global growth. In turn, that stable macro environment has legitimately increased risk appetite and willingness to embrace leverage.
Morgan Stanley - Global Economic Forum



Credit derivatives | At the risky end of finance | Economist.com

... Represented here in red, this is all new (supposed) liquidity.. which means it's new money.



These are new financial inventions with an incalculable range of impact. The traditional means probably did not have enough expansion room to handle the desired, necessary, exponential debt growth. Should we really believe it makes the system more stable? Does anyone feel the system is more resiliant, and that the shock has been absorbed, simply by creating ever-larger and more uncontrollable debt issuances? Does anyone feel that we're in a VIRTUOUS CYCLE?

A reduction in $100k of asset value means a reduction of $900k in play money to a bank, and now lately a reduction of $8 million in play money squared represented by derivatives IF limited to a 10% reserve scheme. There are also squarings (CDO2s) of these instruments (for an exponentially larger ulterior level of "stability"!!). This is all "money" that was conjured into existence and can be conjured out of existence equally easily. Forget "we are all subprime now".. more like "we are all LTCM now", no?

The risks are not contained to a few high-flying hedge funds, but have wormed their way into all financial institutions, pension funds and insurers. Only a small portion of these have been written down or 'sterilized', and I don't see where assumed levels of future corporate earnings and growth are going to come from in most any sector. I guess the market could rebound by sheer dint of willpower?

I've been accused of wearing the tired "tin foil hat" among other things. I hope any similar accusers choose, this time, to present cogent arguments, explanations or rebuttals instead of, or at least in addition to, mere scoffing. I would be happy to learn that my fears are utterly misplaced and that I misunderstand. Of course I am looking forward to hearing reactions from anyone who chooses to review the material linked here, or who is already familiar with the concepts and is open to discussing it in a productive fashion.

Is the current modern financial system sustainable? If so, why and how?
Is it doomed to break? Sooner? Later? Why sooner? Why later? When?
If it breaks will we start at the near-beginning with precious metals or oil-backed certificates, or perhaps just with a new currency (like the Euro, as they are planning in South America?), this only to re-trace history ending up at the same kind of point, or will a new paradigm somehow emerge?
If a new system were adopted, what could it be?

I'm seeing things that call into question all our assumptions about our political, social, and economic environment.
The entire concept of FIRE (especially through passive investing) requires sustained economic growth, which is difficult to imagine in our future.

Back in March, I posted a flip answer to newguy888, who asked for an explanation to the credit crunch in "plain English":
Can somebody explain this credit crunch in plain English
Quote:
To me it seems like:
There is no money.
We thought there was money.
But it's gone.
It may or may not have been there in the first place, but it's not there now.

Maybe Mr. Potter has it.
And the more I look into it.. the more that mere offhand cynicism seems to describe the true state of things. [I've also been reading Galbraith's "Money: Whence It Came, Where It Went".. and "Guns, Germs, and Steel"]

In talking about this with DH, he told me that the bulk of the Italian industrial boom of the 1960s was financed by a system of personal IOUs. There's even a film about it: "La Cambiale". I see some US communities are taking up systems of time swaps, so undeniable parallels to the Great Depression are coming forth. Remember we are in early innings, and what is happening is NOT inflation (increase in the money/credit supply) but deflation (contraction of the money/credit supply).

When you see what a turbo-charged Ponzi scheme it is (I don't make this statement out of hyperbole).. it really does pull the existential rug out from under you.


[P.S. I don't read/watch the MSM either. Maybe the NYT 1x week. I'm not in the US.]
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Old 06-28-2008, 03:45 PM   #2
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Old 06-28-2008, 04:22 PM   #3
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Ladelfina said:
When you see what a turbo-charged Ponzi scheme it is (I don't make this statement out of hyperbole).. it really does pull the existential rug out from under you.


I am impressed by your critique but feel like I need some time (and supplemental reading) to make a cogent response. Anyone that acused you of wearing a tinfoil hat is probably intellectually lazy and more probably intimidated by female assertive intelligence.
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Old 06-28-2008, 04:35 PM   #4
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I think Ladelfina is absolutely correct. Not from any logical, mathematical analysis (I'm not that smart) but just from the visceral certainty that The Piper Will Be Paid, just like all those people who assumed that housing prices would never go down, that Internet stocks would rise forever, and that tulips don't lose their value found out.

And the view that when the bill comes due it ain't gonna be pretty.
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Old 06-28-2008, 06:00 PM   #5
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still just barely half way through the cartoon (i love cartoons, thanx ladel, finally something in finance i can relate to), but already i can see just what it is about finance that i've never been able to put my finger on..because it isn't even really there. love it.

Quote:
Originally Posted by lazygood4nothinbum View Post
...to me it is such an artificial world with very few intrinsic qualities to grab onto, just a lot of hot air held within a thin balloon fabric which can be popped with a pin prick.
edit: ok, just finished the cartoon. this problem is easily solved. all we have to do is turn everyone against socialism. destroy every vestige of communism. introduce capitalism to a few billion more people--say in areas like china, india and russia--who can go into further debt to create even more money. there, problem solved. we can party for another 300 years. now would someone please replace the veil over the lampshade or this hangover will never end.
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Old 06-29-2008, 08:36 AM   #6
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When you see what a turbo-charged Ponzi scheme it is (I don't make this statement out of hyperbole).. it really does pull the existential rug out from under you.
Ladelfina, even in a barter system credit and hedging is necessary. Quick example: I am a farmer and need a barn. I agree with the carpenter to give him 2 bushels of grain and a side of buffalo for 20 years if he will build me a barn. This is a good deal for him as he can assure a flow of goods over 20 years that is independent of the barter exchange of all goods, which tend to rise. But he must be able to pay the entire barn raising cost himself in order to enter the bargain. So he either has an established goods flow that will allow him to barter for building materials and labor or he needs to find backers that can provide such a flow in return for a % of the grain and sides. This is no different than local banks pre-funding farmers for not yet realized crop percentages.

In my mind the difference lately is the appearance of air that is unrealizable growth and productivity. What happens when the backers use the futures of grain and sides to make claims of future values that are highly improbable or when they lie about the value of their grains and sides by secretly hiding crab grass barrels in the flow of grain and sides? Now the value of carpentry, grain and sides has not really changed but the futures of all are compromised by crab grass (air). In a barter system the purchasers of the futures would eat crab grass (air) but the carpenter and the farmer would eat the breakdown in the credit system. The backers (crooks) might even go unscathed but be put out of business.

When money is introduced it seems to me that another solution exists - devalue the money to the point of the true value which hides the fact that the crab grass (air) was there in the first place and spreads out the hurt among the future buyers, backers, carpenters and farmers AND the rest of the barterers.

Is this even close to what it all means? I don't know. It is the way I see it and I am not an economist or financial expert. All I know is that it does take a degree of oversight to keep the crab grass (air) out of the grain and sides.

I see credit and futures as necessary to the good flow of commerce but only when the crab grass (air) does not enter the system as a substantial percent. It dilutes more than the value of the goods in the trade when it is spread across the entire monetary system. Now the carpenter is afraid to enter into new deals with farmers since he can't be certain of the future value of the grain and sides and farmers are only willing to go into a barn project if he cannot get a deal for 2 bushels of grain and no sides.

When I started seeing the markets as full of air, I did not realize that there was air and crab grass both (e.g. CDO's) so I increased my cash position thinking I could put some of my savings in a safe place for awhile while things burst. Enter the FED and my strategy falls apart with low rates and devaluation/inflation. That was an education. So consequences are shared even by the trinket traders who didn't even know what the grain and sides future traders were doing. As long as value is gambled above it's future true value, a monetary system of any kind will have this result whether it is based on gold, dirt, or "dollars". The value dilution will be spread throughout everything that is in the economy if I am anywhere near right in my thinking.

But credit, debt and futures are still needed for economies to operate. I favor a "nip it in the bud" approach but am not sure the transparency necessary is achievable in the new paradigm of a global economy. I am also afraid that even if the transparency is achieved the regulation will overshoot the need for it. I am not too afraid of the later as I think there will be no way to enforce regulation; however, there might be a way to issue warnings (if anyone listens).
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Old 06-29-2008, 09:14 AM   #7
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Originally Posted by windsurf View Post
Ladelfina said:
When you see what a turbo-charged Ponzi scheme it is (I don't make this statement out of hyperbole).. it really does pull the existential rug out from under you.


I am impressed by your critique but feel like I need some time (and supplemental reading) to make a cogent response. Anyone that acused you of wearing a tinfoil hat is probably intellectually lazy and more probably intimidated by female assertive intelligence.

Wow, I didn't realize there were so many people intimidated by female assertive intelligence. Maybe some people actually suffer from a paranoia that there may be people who are intimidated by female assertive intelligence.
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Old 06-29-2008, 12:33 PM   #8
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Originally Posted by windsurf View Post
I am impressed by your critique but feel like I need some time (and supplemental reading) to make a cogent response
Read The Creature From Jekyll Island by G. Edward Griffin (G. Edward Griffin - Wikipedia, the free encyclopedia) to understand how the Federal Reserve System came about and how it works.
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Old 06-29-2008, 04:04 PM   #9
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Nice analysis.

From a national viewpoint, we are just on the upper end of a range of debt to GDP as a % that we've been in for the last 100 years:

U.S. National Debt Graph (just linking to the chart, not the hysterics around it)

I would look for an all time high in debt/GDP% to be a harbinger of a real problem as the players might start losing confidence in the system. If we start having problems servicing the debt, well...
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Old 06-29-2008, 06:05 PM   #10
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looking at national debt is not quite so simple as it appears. a very large portion of US debt is held by government agencies (social security, federal reserve). the portion held by the domestic public is simply $ we owe ourselves (postponed taxes). in the global context, we ought probably look at external debt. here you might be surprised (external debt per $ of GDP) ... a sampling:
ireland 7.58
u.k. 3.87
switzerland 3.00
france`1.73
germany 1.44
australia .93
u.s. .86
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Old 06-29-2008, 08:29 PM   #11
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Excelllent post Ladelfina, very thought provoking.

Lots of interesting points let me focus on two.
Quote:
These are new financial inventions with an incalculable range of impact. The traditional means probably did not have enough expansion room to handle the desired, necessary, exponential debt growth. Should we really believe it makes the system more stable? Does anyone feel the system is more resiliant, and that the shock has been absorbed, simply by creating ever-larger and more uncontrollable debt issuances? Does anyone feel that we're in a VIRTUOUS CYCLE?
My answer is the expansion of debt is virtuous cycle, but process we went through to expand debt by ignoring credit differences is not.

First lets imagine a world with no credit where everyone earns the same wage. Lets say you want to buy a house. Assume it takes a team of two man years of labor to construct a house and one man year of labor to make the materials for the house or a total of 3 man years. You manage to save 10% of your salary and after 30 years you have 3 man years of wages save up. In society like this you'd find that virtually all home owners are 50+ years, so just as the kids left the nest you can final move into a home. Actually we don't have to imagine society like this Africa much of Asia and even China a few years ago lived like this and of course various communist countries. Even a developed country like Japan without a strong credit system is like this.

When we look at these places and compare them to the US we find not only do they have much much lower levels of home ownership, but much lower overall ownership of consumer goods. Now lets change the system so instead of having to save 10% for 30 year you only need to save for 6 years and we will accept your word you will continue to save 10% for 24 remaining years. Viola we have created the American 20% down 30 year mortgage. Now instead of moving into house when you are 50 you move in your mid 20s just as you are having a kids.

Now it is obvious that it is better for society to have families in homes in their 20s as opposed to couples in their 50s. What is less obvious is that
you'll have a lot more home owners. Why? because it takes a special type of person willing to sacrifice 10% of his salary for 30 years. (e.g. see early retirees) Saving for 6 years is hard but obtainable for many people. However, once you are in your home you are willing to work very hard to not get thrown out. This is basic human nature losing a $1,000 is more painful than winning a $1,000 is pleasurable.

So to summarize debt/credit is virtuous because it increase the velocity of money in the system. This spurs economic activity. Once you get on the treadmill /rat race, you have to run hard to avoid falling off and if the cheese is within smelling distance you will run even faster. As long as the growth of the money supply is not so rapid that it kills the rats by causing them heart attacks in their scramble to get the cheese it is a good thing.

The problem we we are seeing is that penalties for falling off the treadmill which use to be terrifying are no longer viewed as being particularly bad.
More on this later.

Quote:
Remember we are in early innings, and what is happening is NOT inflation (increase in the money/credit supply) but deflation (contraction of the money/credit supply).
I think what we are seeing is inflation and reduction in leverage which results in the decrease in the value of leveraged assets. The money supply is continuing to expand M2 has increased from May 2007 to May 2008 by 6.3%, although the far smaller M1 has shrunk by .8%, the Fed no longer publishes the far larger M3 money supply but I have no reason to believe it shrink. The rise in the prices of commodities across the board not only in dollars but in Euros, 0% TIPs bonds, makes me believe that we have classic inflation caused by too many dollar chasing too few goods caused by easy money.

In our current enviroment, deleveraging of financial assets is what we are experiencing. Lets start with houses. There are two components of a house's value. The first is the utility function (i.e. a place to sleep.) this approximately equal to the tax adjusted rent. The second component is the financial or investment value. For example lets say you buy a $250,000 home you put 20% 50K down borrow $200K@6%. If you expect 4% appreciation that means you gain $10K per year. If you can rent the house for $1,000 /month which covers your interest payment. You will gain $10K per year on your 50K or 20% return. Since 20% is such a good rate you might even be willing to accept a modest negative cash flow say $3k/year which drops your return down to 14% which is probably historically average ROEs for real estate.

However, if we want to encourage the rats to run faster lets move the cheese closer, and require only 4% down. Now with 10K down a 10K appreciation equal 100% return on your a money a year, at this point you be willing to accept a large negative cash flow 7,000 or 8,000/year. This increasing leverage from 5x to 25x accelerated the value of houses and
led to raising expectation of appreciation. So if you are Honobob who thinks houses appreciate 10%/year forever and you can put down $10K and get 10% appreciation or $25K/year the rent you collect is pretty much irrelevant. A bubble is born.

Now days the 25x leverage is very hard to obtain and appreciation expectations have dropped. Thus we are going to see house valued primarily on there utility function and much less on there investment value.
That is the bad news, the good news is that raising commodity inflation increases the replacement cost of the house, and will set a floor on housing prices.

The other assets that is seeing deleveraging is financial institutions. It uses to be that bank got a $100 million in capital which they used to borrow a $1 billion from the Fed. They then took that $1 billion credit and made say $10 billion in loans. Now I have to say that the new world of securitization including CDOs, SIVs, and CDO squared etc makes it really hard to understand who owes what to whom. However, what is clear is that the underlying assets for many of these loans (i.e. homes) has decreased. The downside risks of being highly leveraged have also be made very visible. The result has been a collapse in the value of financial institutions as they have written off loans and bailed out of there most highly leveraged products. The good news is that Fed is pulling out all of the stops to bail out there fellow bankers.

The area that does greatly concern me is I am not seeing anything in the way of penalties for people who screwed up. In the old days if you saved 5 or 6 years to get 20% and then walked away from your mortgage. It probably took 10-15 years for you to recover. Now days you can probably get a new mortgage in just a few years and you aren't out much money.

Similarly the mortgage broker who encourage his clients to lie was possibly prosecuted and almost certainly barred from working with most banks. The overzealous banker, trader etc were fired and pretty much had to switch professions. At best we are seeing lib service to moral hazard and I think in general it is being ignored.
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Old 06-29-2008, 09:05 PM   #12
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Originally Posted by ladelfina View Post

Is the current modern financial system sustainable? If so, why and how?
Is it doomed to break? Sooner? Later? Why sooner? Why later? When?
If it breaks will we start at the near-beginning with precious metals or oil-backed certificates, or perhaps just with a new currency (like the Euro, as they are planning in South America?), this only to re-trace history ending up at the same kind of point, or will a new paradigm somehow emerge?
If a new system were adopted, what could it be?
I'm not sure what you mean by "the current modern financial system". The video seems to be talking about fractional reserve banking. Is that what you mean? As the video points out, it's been around for a long time.

Or are you talking about derivatives? (something that I don't recall seeing in the video)
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Old 06-29-2008, 09:14 PM   #13
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Originally Posted by windsurf View Post
Ladelfina said:
When you see what a turbo-charged Ponzi scheme it is (I don't make this statement out of hyperbole).. it really does pull the existential rug out from under you.


I am impressed by your critique but feel like I need some time (and supplemental reading) to make a cogent response. Anyone that acused you of wearing a tinfoil hat is probably intellectually lazy and more probably intimidated by female assertive intelligence.


No, they are in on the scam. They could not care less whether she has two X chromosomes. She is threatening to expose a corrupt game that is somehow benefiting them.

Many people are reluctantly starting to see how bad things really are and are quick to attack the messenger. Keep up the good work ladelfina.
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Old 07-11-2008, 07:05 PM   #14
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Independent... you prompted me on another thread to respond to what I was "talking about"..
Experiencing a lot of "fight or flight" feelings recently, I haven't taken up this thread again despite a bit of good feedback (encouraging) amidst the larger apparent holding-at-arm's-length.

Fractional reserve banking HAS been around a long time (not compared to human economic activity overall) so to give you the short answer: "yes". Derivatives I see as just a sort of nuclear version of that: taking the "power" of economic creation and destruction to another exponential level.

---
Tadpole.. I liked your analogy.. you are right (IMO) that
Quote:
.. the difference lately is the appearance of air that is unrealizable growth and productivity.
Yet here on the forum, and in many books, even the "pessimist" Bernstein's, there's an assumption of growth that is hard for me to see the origin of. Either we (especially the US) have some magic beans that I don't know about, or our assumptions about growth are going to be dashed.

You say:
Quote:
The value dilution will be spread throughout everything that is in the economy if I am anywhere near right in my thinking.
and that is what is scary to me, because I think you are absolutely right. We are trading air and crabgrass.

----
clifp also has an excellent analogy with his rats and cheese.
Quote:
debt/credit is virtuous because it increase the velocity of money in the system. This spurs economic activity. Once you get on the treadmill /rat race, you have to run hard to avoid falling off and if the cheese is within smelling distance you will run even faster. As long as the growth of the money supply is not so rapid that it kills the rats by causing them heart attacks in their scramble to get the cheese it is a good thing.
but I take a bit of issue with the "virtuous" part. In Europe (ex. England and by extension Spain) RE has not had the same sort of bubble as in the US. Their economies are slower, BUT, people are less likely to be foreclosed on or evicted from their homes; their love of "bricks" makes their economy have less "velocity" but at least in one aspect greater social stability, at the expense of slower growth.

The rapid growth in the CREDIT (read "money") supply is giving many rats heart attacks. And the energy expended in the running accrues to someone's benefit other than the rats'.

clif then says:
Quote:
The good news is that Fed is pulling out all of the stops to bail out there fellow bankers.
Ahem. That's the "good news"!?!?
Look at the schizophrenic attitude of the market to the rumors of a FNM/FRE bailout. To guarantee what now amounts to something like 80% of US RE loans might require 1/3 of the US GDP. Is that "good"? No. Is that "bad"? Only if you care about the so-called integrity of the free market.

------
I think barbarus gets it.
-------
and d, sure... it is not just the US.
----

To me, the fiction of capitalism has revealed itself for what it is. That doesn't mean I'm a Stalinist or Trotskyist or whatever.. it just means the veil has been lifted.

I'll explain: the lie of capitalism is that it is based on sound, transparent financial motives and coherent transactions between willing and informed trading partners.. when it is really only based on the principal of MAXIMUM EXTRACTION of WEALTH and maximum wealth transfer to the highest tiers. The premiation of partial ownership (stockholding) is a fiction, as "sound" practices not only enable but encourage the dilution of capital.

All the fine, noble, bromides we've imbibed since childhood are in many ways a sham.

What we capitalists are taught at our mother's knee is that WE provide the base of capital that someone else performs alchemy on to make it grow, they take off what they deem appropriate as profit for their alchemical gifts, and share with investors the remainder, in such measure as makes it appetizing for investors to continue the cycle. In the conventional modern American view, we, the providers of capital, are the heroes of the system. Maybe that actually was true for 3 or 4 seconds in time. Now (and not only now) what we have is firms grabbing capital hand over fist with no transparency, no accountability, and in complete CONTEMPT of investors. The new, untested universe of derivatives is unregulated for a reason, though it deeply affects every bank and every pension fund and every investor. The rise of derivatives, to me, can only be explained by the need of the system for exponentially more debt, given that the amount of already-highly-leveraged-but-regulated debt was inadequate for the desired expansion of the financial universe.

---
This sounds 'scorbutic'. Fine. Disagree with my bad attitude. But let's look at lay of the land: if you go to Wikipedia and look at the number of "millionaires" (as I was and still -barely- am) in 2006, you'll see that globally "millionaires" are 0.15% of the population. In North America in 2006, "millionaires" were 0.62% of the population. Various citations on wikipedia say that the US it's a number between 3-8 million households. About half these indicated large amounts of "investment real estate", again 2006. Whatever the exact number, it's certainly only a tiny fraction of the population. Ok.

Now.. for capitalism to be succeeding in the way that it is popularly imagined.. what effective problem should this 0.1%, or 0.5%, or 1%, or 2%, or even 5% of the population have in maintaining, from their CAPITAL investments... a middle-class lifestyle, keeping pace with inflation and a bit more?? They should have NO problem, yet they do. We are chasing returns that don't even amount to real price inflation. Which leads me to be convinced, looking at it from the bottom up, that the current system is an absolute scam. That the point of the machinations is not to encourage capital investment, but separate the middle class from their wealth, in a more subtle way than outright communism or confiscation or even garden-variety taxation, to be sure, ...but hardly less effectively.

We can invest in bonds at 2%-5% and not even be treading water. We can "invest" in securities that are overvalued, with little future growth, not even necessarily through any fault of the businesses or mgmt. We're better off than the people in arrears with their home loans and HELOCs, no question, but we are no less sheep to be shorn. Will we "survive"? Like the sheep, sure.. in one way or another for the most part. But the necessary and fatal aspect of the capital/debt system is that we continue to be harvested and shorn. What's required is merely that we, the sheep, cyclically forget the shearing phase, and misguidedly believe that the wool is our own to hold onto or to risk as we see fit. And should we see the shears coming, what can we do, effectively? Our options are held out as unlimited, but that's not really the case; it's the genius of the current system that creates the illusion of a free market, and the illusion that we can keep our wool.. with the popular onus being on the sheep to justify their own degree of shearing in one way or another.. staying "in the game" or "on the sidelines", bonds/cash/stocks, ..allocating assets here or there is NOT (when it comes down to it) as relevant as the larger issue of our all being in the same pen*.

*people are almost universally prevented from moving, while large businesses have more mobility.

The risk we are looking at these days is not some everyday business/recession cycle that we can take in stride. It's the cracks in the shearing mechanism showing. The sheep have little wherewithal left to contribute voluntarily to maintaining their own shearing machine, so the US gov. will take over the role of the private sector (investment banks, -even international investment banks, please note... and now possibly the bulk of the mortgage industry) to ensure that the shearing continues apace. The bulk of the recent, new, "liquidity" has been consumed, to orders of magnitude beyond our sheeply comprehension, and there doesn't seem to me to be anyplace to hide.
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Old 07-11-2008, 07:09 PM   #15
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"I've been loathe to post my feelings in full, since I've drawn such harsh reactions"

Come on. You really dont care. Stop the drama. Just post what you want to already I enjoy your all out posts.
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Old 07-14-2008, 03:36 PM   #16
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So what's wrong with being shorn? The weather is hot most places in the US and Europe (global warming and all ). I think these sheep look quite content. Personally, I hate to have wear a wool coat during the summer.

Same thing is true with money, before the bear market, I was burdened with trying to figure out what worthy causes to support. Now that I've been fleeced by the system. No need to fret over which charities are the best.

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Old 07-15-2008, 12:13 PM   #17
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Independent... you prompted me on another thread to respond to what I was "talking about"..
Experiencing a lot of "fight or flight" feelings recently, I haven't taken up this thread again despite a bit of good feedback (encouraging) amidst the larger apparent holding-at-arm's-length.

Fractional reserve banking HAS been around a long time (not compared to human economic activity overall) so to give you the short answer: "yes". Derivatives I see as just a sort of nuclear version of that: taking the "power" of economic creation and destruction to another exponential level.

.
Sorry for the slow response. I apparantly didn't check this thread on the right day. I'll give a long-winded opinion.

I'm going to define "financial intermediation" as "Borrowing money from A for the sole purpose of lending to B, with the expectation of making money from the interest rate spread". This is close enough to the Wiki definition for today. Ordinary banks are "financial intermediaries".

The way I interpreted the video you linked, it seems to say FI is inherently immoral. Furthermore, it requires a compounding level of borrowing. And, the bankers end up owning everything. I disagree with all those ideas.

However, I do think that financial intermediaries have the ability to produce one very large "negative externality". It's the classic run-on-the bank situation in which either fact or rumor destroys a bank, which cascades into other bank failures, which shuts down much of our economic system.

One difficult fact is that the higher the lending/capital ratio in the FI, the more profitable it can be. But high ratios increase the risk of the chain reaction failure above. Hence, we have this regulatory system that's supposed to prevent banks from getting too wild with capital ratios. They give up some profit, the rest of us get a more stable system. This works for me.

But, there are a lot of financial intermediaries other than regulated banks. Some are so new they probably don't even appear in economics textbooks. Some of them seem to be borrowing in order to gamble, not in order to make loans that increase productivity. Couple that with political leaders who claim to be theologically opposed to regulation (you may suspect that it's more a matter of being financially advantaged by non-regulation), and we've got a system that seems ready to melt down at any time. Obviously, the BSC bailout shouldn't have been necessary. We should have a system that heads off the problem rather than tries to invent a way of dealing with it after it happens. And I'm bothered that too many people walked away from BSC with too much money.

Still, I don't think the system is fundamentally unworkable. I do think there are some inherent instabilities, and the people who make a ton of money running certain FIs have the financial incentive to make it even less stable. It can be made to work with proper oversight, and we have made it work well enough in the past to see long term favorable results for ordinary people. (I'm sure I live much better than my grandparents, and the statistics say that I'm typical.) I know that the people at the top get more than I do, but if I keep getting ahead, I can live with that.

Maybe you're thinking the same thing I am - that the primary problem is the political will to make the system work correctly. But some of your comments seem to say that the system if economically unsound even with the best management. I don't see that.
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Old 07-15-2008, 05:03 PM   #18
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Independent, thanks for your response. It seems larded with a pragmatic "it all works out and we don't do so badly despite some flaws at the extreme edges". I appreciate that and understand that the world moves on, that we are not likely to be living like Mad Max in our lifetimes, etc.

But you have to look at the mathematical logic of capital and growth: if being leveraged 50:1 is unstable, being leveraged 10:1 is also unstable, though at a longer interval from crash, to re-grouping, to crash. The sheep get sheared less frequently, but they still don't control a stable market for their own wool.

Also, the difficulty of parsing "speculation" from "investment" is enormous. Witness the oil runup and people wanting to "ban" speculation; well, how do you do that? A whole slew of businesses - airlines, utilities, farmers- employ commodities futures to amortize market shocks.

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The way I interpreted the video you linked, it seems to say FI is inherently immoral. Furthermore, it requires a compounding level of borrowing. And, the bankers end up owning everything. I disagree with all those ideas.
I am more interested in the sustainability than the morality, although cultures developed moral strictures -with some level of reasoning behind them (often valid but not always)- that they felt sustained their quality of life. That our current system requires a compounding level of borrowing is before our eyes today; I don't think that is possible to argue against. That the "bankers end up owning everything" may or may not come to pass depending on the context. During certain intervals that is quite true. If most Americans have more debt than they can repay, the banks certain do "own everything" in that context. What keeps the banks from actually owning everything are the crashes where a partial re-re-distribution happens. Crashes, or revolutions.

--------
It would require another topic to explore the 'getting ahead' notion. I posit that we have not 'gotten ahead' due to the brilliance of our financial system, but thanks to the four basic inputs that drive all economic development and what we might term "wealth". One is human labor; the second is animal labor; the third is fossil fuels; and the fourth is solar (into which I will lump such things as crops, biofuels, wood for generating steam and residential heating, etc. .. even resources such as fisheries).

You can invent any economic system you want but the system itself cannot create something out of nothing; it can't magnify those inputs beyond what they are.. it might manipulate them in ways that are more or less efficient or destructive. While economic systems can destroy, they cannot Create at this level.

When wealth was obtained through slavery, that did not "create" wealth, but merely channeled it in a certain direction. The Renaissance was not a rich era because of banking so much as because of the 'windfall profits' of half the people in Europe having died due to the plague, leaving the survivors with twice the natural resources of before. Banking did provide for an increased concentration and expression of wealth, but not its general expansion.

The emergence of what we know as the middle class coincides exactly with the sudden increase in the exploitation of fossil fuels. We can't imagine the misery of the 19th-c. coal miners that gave us the railroads and factories of the Industrial Revolution. Now we are living in the petroleum era and expend vast resources to secure the Middle East in order to further fuel the American lifestyle. We don't know how long any of that will be sustainable. Why are we -really- willing to "nuke" Iran and why was the Iraq war waged? For the same reason that police and governments shot and killed striking coal miners. Pinkerton was the domestic Blackwater of its day. The beast must be fed.

But the beast's food is what it is: tangible resources that no purely economic system can just conjure into existence via leverage and abstractions of ones and zeros. Economic systems can only consolidate or allocate/mis-allocate, not create.


I haven't looked into this deeply, but I would even go so far as to guess that slavery would not have been abolished in the Western world had the nascent fossil-fuel potential not obviated the "need" for slave labor. If there hadn't been alternative emerging energy sources to hand, we wouldn't likely have felt we had the "luxury" of doing without slaves. The prospect of relatively cheap external sources of energy likely created the necessary room for Enlightenment philosophy to grow and fulfill itself.
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Old 07-15-2008, 05:11 PM   #19
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Also, the difficulty of parsing "speculation" from "investment" is enormous. Witness the oil runup and people wanting to "ban" speculation; well, how do you do that? A whole slew of businesses - airlines, utilities, farmers- employ commodities futures to amortize market shocks.
I won't try to comment on any of your points except this one. This one is relatively straightforward- the CFTC has been parsing traders into hedgers, large speculators, and small speculators for many years. Overall this scheme works. The same principle might be harder to implement for off-board trading, but likely it would be possible.

Ha
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Old 07-15-2008, 05:57 PM   #20
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Ha, I guess I was getting too specific. You're right that fine-tuning or being better at enforcing existing controls can limit short-term extremes. But I am looking at the whole over a long period. Leverage allows a small entity to control larger slices of "whatever" than they would otherwise. We are led to believe this is a universal good, whereas I see it as having sharp negatives (as we are now experiencing, much to the general surprise) and that it should be viewed in the best of lights as merely neutral. Getting blood from a stone is not a business model. Leverage allows for gross mis-allocations and equally gross corrections.

Note the recent semantic conflation of "liquidity" with "debt". Even if we assume that all debt is not bad, neither is all "liquidity" good. For practical purposes, when reading any financial article these days, you can pretty much always substitute the word "debt" for the word "liquidity". That's because there is such a tiny proportion of real assets in the system, and the new "cash" = debt. Which is the point of the video cartoon.

The definition of liquidity is assets one can sell. When so-called assets are themselves debt, it turns the concept of liquidity on its head (at least for me).
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