The (new) Financial Tsunami thread

[Virgil Showlion]

Old and gray
Message #1525 - 06/15/10 09:31 PM



One thing that should be realized by this time: when the folks working on solutions discuss reserves, currency, credit, risk, liquidity, none of it is mentioned in connection with consumers. This means that it makes no difference to the financial sector whether the general public needs cars, washers and dryers, refrigerators, etc. Those once primary concerns are now of tertiary importance, pushed to the background behind the derivatives and the infrastructure that supports that principle activity. Since consumers do not participate in that activity, they are of lesser importance than when our prime purpose was to manufacture consumer goods. The markets the financial geniuses are searching for are not populated by the type of consumers we once knew. They have neither resources, nor the understanding, nor the desire to deal in derivatives. Banks (led by Central Banks), Brokerages (which have become banks under the protection of Central Banks), and insurance firms (which now deal with the SIV innovations in the same manner as banks and brokerages), the entire financial system, has divorced itself from what was once considered to be "the economy".

This is the new "paradigm"! That concept, paradigm, means more than simply a model or pattern for behavior or procedure. The new paradigm for banks is money generation, acquisition and retention to degrees never before imagined. In this new structure, there is no room for the "general population" since they lack the resources to feed the collective hunger that drives the derivatives markets. Consider what this means if the financial sytem is catered to in the final version of the Regulatory Reform Act: every institution in our society will revolve around money. Focuses will change. No longer will government provide assistance to the nation's population. Regal words and emotions, such as ". . of the people, by the people, and for the people. . . ", or the idea of "serving" the population, all such thoughts will evaporate.

We're really in a transition period of great significance. This thread has tried to convey this idea through its recount of the recent historical events and recalling the written word of savants who preceded us, which had relevance to that issue. It comes down to this, the period of decision. The changing paradigm.



It's evident in the call for reform by a growing number of writers, economists and financial industry people, reform has a distinct meaning to each of them. They champion reform but they seldom agree on what that reform should accomplish. To a few, reform means suppression of the strategies and practices that delivered us to the current crisis. Others would prefer re-organizing dealers, markets and regulators so the activities can be conducted under controlled circumstances - in an even more shadowy environment with protection against intrusion that would interrupt the movement aimed at establishing the new paradigm. Too many of the papers end with moderating thoughts. A thinking reader is left with the idea that reform is not a matter of serving the general public, but that everything is smoothed out to protect and serve the industry.



I think of a paradigm as a nearly all-encompassing vision penetrating deeply into the culture, habits, mores, and ambitions of a society. In this case, the change encompasses not only the industry it addresses, but re-forms business tenets, political strategies, cultural and social makeup of the society. It is a massive upset. It appears to me that this is a rekindling of the social struggle that raged during the Great Depression. That was so much more than simple failure of business, it was the raiding of a culture, the attack on a society - the few against the many. In that instance the many won, but the victory was temporary. After WWII finished and the draftees and volunteers came home, it was still vivid for them.

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Old and gray
Message #1526 - 06/15/10 09:32 PM



The struggle continued for a couple of decades beyond the war, while the memories prevailed. But, then, new generations had less precisely defined goals or understanding of others' goals. The social dominance shifted back, not suddenly, gradual enough to be unnoticed until the new social order emerged, one with a sharper division between classes than the melded world that developed during the Depression, lasted through WWII and for a while, beyond. I honestly see today's situation as more threatening than when government employees were so ashamed of our heritage that they refused to send the Declaration of independence, the document that expressed the essence of our nation, overseas because it was "too inflammatory".

I wonder if they said that because they weren't afraid of the effect it would have on foreigners, but did fear that their own fellow citizens might be reminded of the struggles involved in building a nation and what those struggles represented.

Do they still teach history in public schools? How many of the readers here have read "History of the United States", an epic book by Charles A. Beard and Mary R. Beard?

Can people understand the big picture without knowing what went on before we each peeked out into the bright world and screamed in fright? Are we prepared to deal with an ever changing world? To accept the good or reject the bad? - To fight if necessary to preserve it? - even if it meant struggle among ourselves, class against class?



We're on the brink of that change and a lot of the complaints being echoed through these threads are based on the unexpressed realization that some of us don't want it changed to what's threatened.

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Old and gray
Message #1527 - 06/16/10 03:16 AM



Thoughts on Duff's posts. . . .



We cannot survive if our principal, dedicated national interest is preserving banks. Banks do not supply the essentials for continuing life. They do not contribute to our provisions, needs or sustenance. If we expend all our resources to save the banks, we have nothing left to save our citizens or country. And, least probable of all would be banks sharing their proceeds with our people to help overcome the burdens and difficulties their outrageous behavior brings down on us.



We could safely assume that teachers are the most highly educated group in the country. A high percentage of them need a minimum of a Master's degree to simply hold their job probably in a majority of our communities. I know they have business teachers in high school who must have some understanding of finance and investments and the problems derivatives have caused. I know a gentlemen, now retired, who taught economics in high school locally. Relatively small community at that. He has a fair understanding of economics. And, still, with that kind of educated, informed membership at their disposal, teachers have the wool pulled over their eyes by some energetic derivatives salesman?



Why are derivatives allowed to exist if they exert such an hypnotic influence that people handling them cannot resist the temptation to misapply, wrongfully guide investors, and end up undermining savings and eventually the global system? . . . And, still, the excuses cascade out in an attempt to justify their continued use for reasons that are completely false.

In terms of quantity, how much is too much? Are they trying to discover just how much will irreparably break the back of the world's system? When will regulators or overseers, or those responsible for lawful control of the papers recognize that they are allowing a proliferation which refuses to be controlled? There were too many derivatives distributed world-wide in 2007. The number circulating then was well beyond the supportable level, so far beyond as to have caused that massive crash. And, we're blithely on the path to generating more and turning them loose on the world before one corrective step has been taken.

An idiot should be able to deduce that releasing more derivatives will produce a larger crash next time. If an idiot can figure that out, that should be about at the grade level of the people in Washington responsible for promulgating laws in order to control the destruction.



The sums being doled out to the sales people responsible for distributing derivatives are in the nine figure bracket. There should be enough laying around loose to promise politicians help in financing their libraries, post-service ventures, etc. to help them decide to commit to produce the type of legislation derivatives market makers want. That would put the nation's future in the hands of willing puppets whose strings have been pulled before the money passes hands. So, promises will be showboated and staffs will be working overtime turning out tough proposed legislation that everyone knows will never see a vote, much less get passed. So, TBTF, "funeral arrangements". or whatever, "How much will you need to kill the proposal?" is more likely the issue.



Disappointment after disappointment is almost too much to bear for some people.



I think I'll dig out the Beards' book for another read to occupy myself for a spell. There were nobler times and grander heroes here in the good ol' USofA. It might help prompt a regeneration to be reminded of that.

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kman49
Message #1528 - 06/16/10 03:32 AM

I think I'll dig out the Beards' book for another read to occupy myself for a spell. There were nobler times and grander heroes here in the good ol' USofA. It might help prompt a regeneration to be reminded of that.

I have every confidence, that the next generation will not disappoint After all, I am the producer!!

[Virgil Showlion]

stonerdr
Message #1529 - 06/17/10 02:40 PM

That's where we should put our faith. If we do, and show it openly, they won't disappoint.

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stonerdr
Message #1530 - 06/17/10 03:10 PM

WASHINGTON·A key senator who has championed strict rules on derivative trading for banks has offered a retooled version of her plan that would allow banks to keep derivatives-trading businesses but could force them to raise billions in capital to do so.

During her well-publicized challenge, Sen. Lincoln appeared on TV with a supremely resolute attitude, vowing to go back to Washington and serve the people's interests. It apeared to me that her position was founded on The Volcker Rule. Even if her new conditions are stict enough to cause annoyance to banks' derivatives business, her new position, expressed in the above report, promises little regulatory restriction in banks derivatives activities. Banks have the power to pass the costs on to depositors, borrowers and other clients. So, gradually they will do so and conduct the derivatives transactions as usual with no more than a minor stumble that the TBTF can survive with little strain.

Which means little will change.

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Defining Quality
Message #1531 - 06/17/10 05:04 PM

An idiot should be able to deduce that releasing more derivatives will produce a larger crash next time. If an idiot can figure that out, that should be about at the grade level of the people in Washington responsible for promulgating laws in order to control the destruction.

Two kinds of people - those who steal and those who are stolen from!

We live in the most delusional unchristian of christian nations ever to exist, where the plutocracy, government by the wealthy, steals from the "little people" - all powerless and so delusional that they simply don't care.

10 years from now the whole thing will collapse under the weight of social Ponzi schemes all designed to favor the rich, who refuse to pay taxes!

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schrizo
Message #1532 - 06/21/10 12:06 AM

Or, maybe life is better being delusional. Isn't really about the quality of life no matter who leads or who is stolen from?? If we have good quality lives why should we be so concerned with who is in our pockets?? Were born , reproduce and die.

[Virgil Showlion]

bubblyandblue
Message #1533 - 06/22/10 06:24 PM



I have found a book that should explain the root of the financial sunami. At least, it should give service to discusion on common terms. That book should be read by all....decoy, old and gray, frank etc. It is worth the time. That book is "The Economics and Ethics of Private Property".

Anyway, back to the economy, I think it fair to describe that every depression this country has been the result of real estate/property. That econonmics, when argued as here, has not made the distinction between capital and labor as the only creator of wealth and that real estate/property is not a commodity as it is a completely confined and limited resource - one that existed before our human existence. Land does not have any value beyond what we humans give it. Land gains value that all people give it but it does not, by itself produce wealth. A person must work, extract, build upon land by labor and capital. When one sits on land and does nothing with it no wealth is produced no one works and no capital is employed. When one sits on land and, by the relocation of others or improvments by others near, your land increases in value all is fine. But when you sell you have not created wealth but have pocketed the value others have created through labor and capital. It is this increase above the natural value of land, created by the speculation and artificial low interest rates hoisted upon humanities natural tendancy to want things/money easy and gambling that created dispropotionate wealth to those scumb who produce no wealth themselves but steal it from the labor and capital of others.

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Old and gray
Message #1534 - 06/23/10 03:39 AM



Duff:



I'm leaving a link to the last opening testimony Brooksley Born delivered before the US Senate Committee on Agriculture, Nutrition and Forestry, prior to her being forced out of office by the triumvirate, 2/3 of which is back in the White House in one capacity or another, still championing the cause that moved them to pressure her to leave. Her speech can be found at



[agriculture.senate.gov/Hearings/Hearings_1998/born730.htm] agriculture.senate.gov/Hearings/Hearings_1998/born730.htm



I get a printout of 13 tight knit pages plus another 5 pages of notes, referrals to documents published by government agencies, private organizations, Congressional documents, the GAO, Treasury, the CFTC, transcripts of TV shows, The Fed. Reg. FRB of Governors, just enough to indicate she knew what awaited her at that appearance.



She cited the Commodity Exchange Act which, prior to the GLBA, prohibited transactions in OTC futures and options unless specifically excluded from the exchange-trading requirements of the Commodity Exchange Act. That was the reason for GLBA making derivatives invisible. She discussed the Market for derivatives, regulatory process, issues posed by evolving OTC markets, as well as the CFTC's concerns about the Treasury's proposals at the time, which culminated in the enactment of GLBA the following year.

It might fit in with the reference to Brooksley Born you inserted into message #1.

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Old and gray
Message #1535 - 06/23/10 04:33 AM



bubbly. . .



I appreciate your reference to pre-Industrial Revolution economics. In some emerging societies, those concerns and values still hold. In the US, except for the small farmers still holding onto a few acres, we've passed that stage by turning our attention to more involved situations. The principal pre-occupation of those setting the stage for our depressions and recessions since WWII have been to play with currency, bookkeeping, and "high finance". I'd grant that real estate has had a role in the games, since it's a means of depriving the general citizenry of their savings or committing them to turning their future earnings over to the major players via mortgages, land contracts, etc. And, a good part of what you present regarding land values still has validity to it, despite the games the big players have evolved.

However, since the Industrial Revolution of the mid-eighteenth century, people have been turning away from agriculture and the rural culture toward first, manufacturing production and urban living, and, since WWII, we've been turning away from manufacturing production, toward service industries and the FIRE (Finance, Insurance and Real Estate) sectors. Now, we're even turning away from that since it's been demonstrated there is a quicker means of accumulating uncountable wealth. BTW, the Real Estate in that FIRE group is not the same as tilling the soil. That has been replaced by megalithic conglomerates who have done their best to drive the family oriented farmers into bankruptcy and abandoning their land. More recently, that is, before the collapse of real estate developments, farmers still tilling soil that required 5 million years to turn rotting deposits into 6 to nine inches of rich arable soil, were turning their attention away from farming to selling their rich land off to the developers who scraped off the top soil and planted either housing developments, warehouses, or parking lots for shopping centers. So, if you'd like to think of that transaction as converting land to value which had at least a chance of becoming capital for some other venture, there's some validity to your contention.

I'm not rejecting the truth of your assertions, just that from the currently popular, prevailing point of view and the activity that I've witnessed for the past eighty plus years, emphasis has changed and the principal focus lies somewhere other than in farming and land values tied to what sounds very much like agriculturally oriented. The earlier economists, I'm thinking of John Law, Richard Cantillon, even on through David Ricardo and some still in the mid-nineteenth century spent much time describing the economy based on landowner, farmer, his hired help, produce and markets. Their language and messages sound very much like what you posted above.

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Old and gray
Message #1536 - 06/23/10 04:35 AM



Nowadays, economists work for banks, government agencies, think tanks, International Organizations, developing evaluations very often at odds with reality, often for the purpose of a posteriori justification of the innovations the financial world develops. Land ownership does not generate new money as quickly as OTC activity out of sight of regulators and supervisors. If land has value in our financial games, it's restricted to the strategy described above, still the basic source to some extent, but too slow in the turnover to yield a satisfactory return. . . and too limited in supply at desirable locations to be used over again and again. Instead, the Real Estate game has become a game of building large buildings, selling them off, tearing them down and building even larger buildings. The principal purpose there is to continue to turn the sight over again and again so that loans can be made, and the debt turned over to someone else so they could raise the selling price to recoup their commitment and go off to the next transaction. They have as little interest in land as the once all powerful industrialists have in manufacturing today. Manufacturing also has become a game of buy, build indebtedness and sell that indebtedness off to someone who intends to do exactly the same and pass it all off to the consumer.

Economists have developed systems to explain this in macroeconomics, financiers use "management finance" and "financial management" as has been pointed out earlier on this thread. They are more interested in questions such as, "At what point does my debt produce the greatest gain?" and then after contorted calculation, go about indebting the property so that their returns sound like a great growth in wealth, while it might be little more than accumulation of more money of less value. But, because they are able to move about in the atmosphere of large numbers, they can take on much more debt and live on that debt in trappings and surroundings much in the manner of royalty of hundreds of years ago. Talk to those people about land values and see how much recognition results. Not saying you're postulations are wrong, just pointing out that it no longer makes a difference to people with access to the main depositories of currency and credit.

One last thing, if you've ever spoken to these high flyers, they don't consider their manipulations as gambling or stealing; yet, as you point out, it is.

But, unfortunately, that was yesterday.



Today, well, maybe a little later in the day. . I'll try to get into precisely what has turned the financial world on its ear as I promised and have not yet delivered.

I have a doctor's appointment mid-day, I'll try to pick it up tomorrow PM. That might wrap up the last concern I have for the "Financial Tsunami". . .Tying loose ends.

[Virgil Showlion]

Virgil Syonid
Message #1537 - 06/23/10 06:50 AM

An idiot should be able to deduce that releasing more derivatives will produce a larger crash next time. If an idiot can figure that out, that should be about at the grade level of the people in Washington responsible for promulgating laws in order to control the destruction.

"Never attribute to malice that which can be adequately explained by stupidity."
- German Proverb

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reverendbarb
Message #1538 - 06/23/10 12:13 PM

Thanks for the early morning smile, Virgil!

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bubblyandblue
Message #1539 - 06/23/10 04:00 PM

Old and Gray; I do appreciate what you say, Indeed what I postulate does come from eighty years ago. However the book I recomend is recent and directly on point today. My postulate is to bring forth a connection long ago discovered as natural economics and apply them to today. Land was a given and all wealth produced comes from the employment of labor and capital in the production of goods and would be impossible without land for it is the earth we live on. CDOs, derivitives and all fancy manipulations of debt are artificial means of aquiring money (a medium of exchange) and cannot naturaly go on without real wealth being produced through capital and labor. The theft of real wealth (that wich was created by labor and capitol) is through the artificial or counterfiet moneys produced by non-wealth generating activities of CDO's derivitives and speculations that convert from the hands of those creating wealth through labor and capital to those that create neither. To create wealth from thin air is a magic trick which defies natural or physical reality. Monies spent on land do not contribute to but steal from that available for labor and capital for which real wealth is built (buildings/factories don't cost much more today than yesterday in real dollars). Much more is stolen when rents and land values are artificially high (real estate bubble). And when exotic debt instruments and ponzi derivatives are employed they don't destabalize a market they stabilize it to the point of freezing it beyond recognition. A frozen state that can't flow to normal supply/demand/risk. Its an unshuffled, stacked deck of cards where the dealers are the crooks using counterfeit money (fractional reserve, oligarchy) to lure the suckers to the table and redistribute the real wealth of labor and capital to those incappable of producing it themselves.

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Old and gray
Message #1540 - 06/23/10 08:27 PM



I won't extend the confrontation between Austrian School and our operating macroeconomic system, as strange as it is, other than to say that there is theory and there is reality.

Our entire financial system is built on matters of faith as your recount above indicates. That's undeniable. Consider how our banking system works: the Government commits its future revenue by going into debt; the Central Bank (the FRB) takes on Treasury bonds and bills founded on that debt; they then post those papers in their ledger on the asset side since they can claim that they will collect the secured amount some time in the future; since they then have newly acquired assets, they can credit that to the banks and increase those reserves which then allows banks to issue more credit and in doing so actually create more of your "medium of exchange". All of this is built on a foundation of debt, and when the fractional reserve multiplier is taken into consideration, it is theoretically 9.5 times greater when the cycle has been completed. All built on initial debt, with no foundation based on the value of land, gold, or any other tangible asset. . . nothing but faith that it will be accepted.

I have no intention of declaring such deception as either reasonable or stable. In fact, the cycle taxes the imagination. But, as Walter Bagehot wrote about 135 years ago, "That's what we have to work with." And, like Bagehot, I admit to the futility of trying to the system and constructing and instituting another.

About the Austrian School, I'll only summarize my view again, as it's been posted throughout this thread, every economist has something of value to contribute. So, there's something to be gained by reading Menger, von Mises, Jesus Huerta de Soto, F.A.Hayek, Bohm-Baewerk, Rothbard. . . and even Hans-Hermann Hoppe. But, that does not mean that what they propose would work in the cultural ethic environment of the US of A. To my way of thinking, their system depends too much on ethical and moral standards that do not dominate in the US. If you'd like to have those thoughts expanded, I'd suggest re-reading this thread.

When next I continue, I'll pick up on the second paragraph of this message and proceed.

[Virgil Showlion]

bubblyandblue
Message #1541 - 06/24/10 12:37 PM



Old and Gray,

I have to say that you have great depth and a true voice of reason.

I do look forward to your continued work.

I am indeed frustrated by our (governments) lack of investigation into the root causes of this financial disaster, given the 100% certainty that it will happen again. Indeed, our president in speaking about the gulf disaster, disclosed how industry had captured the regulators, how he was going to find out what happenned, find those people responsible for the tragedy, prosecute wrongdoers and make changes etc.. I was struck, during his speech, that what he said and is doing about the gulf disaster could have been said and done about the financial disaster....but it is/was not. We know of the housing disaster that huge amounts of deceit, omission, fraud, lapse of oversight and regulatory capture occured. Frustrated.

And now, without clear cause and effect we are attempting to cure that which we have not diagnosed....this is a shot in the dark and I don't know who is pointing the gun and I don't know if I stand in the path of the bullet.



Thanks so much for you time... really its an honour.

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bubblyandblue
Message #1542 - 06/24/10 12:53 PM



Old and Gray and others

I apologize for my interuptions and hope it does not divert your attention to what is a truly critical juncture in our civilization.

Just to expand on my frustration........ this is a shot in the dark and I don't know who is pointing the gun and I don't know if I stand in the path of the bullet. I feel as if my security in this country, a basic reason and product/service of our form of government has been ignored by and tossed aside by our elected officials who were elected to uphold our constitution. It is our duty to uphold the constitution and those we handed the rope to seem to have parted that line and sent us adrift.

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Old and gray
Message #1543 - 06/24/10 08:13 PM



bubbly;



No apologies necessary. This is a message board open to all as I understand it, for the sake of communicating amicably and civilly. You state your case and hold up your end well. Not the first time you've done so here and hopefully not the last.







Now. .



It's been a year and nearly four months since Duffminster first gathered together some isolated messages, tried to make sense out of them by steering us in a direction that might bear fruit. During that period, every global organization who could compress their aims into a alphabetic set has been hard at work trying to persuade every other organization or all other interested parties which is the proper way out of the mess created by exuberant financial experts. Most of these proposals were generated by people of the industry, and their hired help, to defend their right to continue doing the same and/or absolve them of any guilt in causing the crisis. Some of those proposals was referenced or reviewed here, linked and commented on sometimes lightly, sometimes, as in the case of Senator Dodd's first proposal for a Regulatory Reform, in probably too great a length since that proposal was dropped and another substituted. Even that second, then, was altered and until the final reconciliation is brought out to the light of day, we'll never know what has been decided as far as the new law of the land is concerned.

The IMF, BIS and its numerous committees, OECD, World Bank, SEC, CEPR, NBER, CRMPGIII, ISDA, FRB, FDIC, FRBNY and its SSR, FSA, FSB, FSM, and when we ran out of letters, numbers became involved with the G-2, G-7, G-20, and G-30. . . Those and more were cited, quoted or mentioned at some point through the life of this thread. One thing was common to them all - they defended the use of derivatives and tried to propose window dressing to make them seem less threatening or destructive than they proved to be last time around.

The most defensive of all documents may well be the "Unregulated Financial Markets and Products: Final Report" of the Technical Committee of the International Organization of Securities Commissions, or OICU-IOSCO for short. (I have no idea what the first four letters stand for, and there is no explanation on their website, though I suspect it may represent the same name in another language, probably French.) This organization has formed a Task Force on Unregulated Financial Markets and Products, or TFUMP (I'm not kidding!) which was charged with supporting the "G-20 calls for a review of the scope of financial markets and in particular unregulated financial markets and products". The Final Report is 48 pages long, and repeats just about every claim in support of continued use of derivatives and as few as possible of the more drastic and intrusive regulatory proposals mentioned elsewhere.

The September, 2009 document has very little new material to offer those readers who followed the development of this thread. Chapter Three, dealing with "Key causes of the global financial crisis; What has happened in unregulated markets generally?' Why have we chosen securitization and CDS as two examples of unregulated markets?; What are the issues with securitization?; and Wrong Incentives (it continues on beyond this - page 15 of 49) . . . it became apparent it was time to summarize what the securities industry may be willing to surrender and a final rejoinder.

Among the reasons given for defending the use of securitization (the bundling together and passing on to another party the risk responsibility of various instruments and documents) and CDS (Credit Default Swaps) was because of



"their contribution to the management of individual and systemic risks". (page 13)



Well, we've seen how effective they were in managing that risk when globally the larger banks were facing complete collapse and survived only because taxpayers were prevailed on to carry the burden for the next few generations.

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Old and gray
Message #1544 - 06/24/10 08:14 PM



Also, they claim: "Securitization allows banks to move assets and liabilities off-balance sheet and free up capital for lending and other activities". Additionally: "It creates competition in the lending market between banks and non-bank financiers resulting in reduced borrowing costs for consumers". (page 13) From what we've witnessed, it has done nothing of the sort. First, there was no movement of assets off the balance sheet. If they refer to securitization bundling and CDS as assets, that stretches credulity. An innovation was created to develop a market for speculative purposes and to generate income for bankers - "other activities"? Yes, it was certainly that, but lending? Let them supply a cogent answer as to why lending froze up in this "freer" environment. It became apparent that credit issuing was stretched well beyond what the market needed or was prepared to absorb. In that process there was little concern for the consumer who became an unsuspecting dupe in the scheme.

The strategy in unregulated markets is defended (pages 13-14) on the basis that "disclosure requirements apply whenever an issuer makes a public offering" or, "only when securities are listed on a regulated market or offered to retail or 'unsophisticated' investors". Requiring them to disclose their transactions "will impact consumers, banks, issuers and investors." "The price of credit is likely to be higher for the consumer and the availability scarcer. Banks will no longer have a tool to reduce risk and diversify their financing sources." And, that "tool" eventually became the taxpayers pocket. Forgotten is the US law, Gramm-Leach-Bliley, which made derivatives invisible to regulators. They were also safe from accusations of fraud, deception or manipulation by law.

Eventualities proved that the practice lead us directly to bank failure, which does not appear to be of benefit to the borrower, depositor or the taxpayer. This certainly is not a supposition in view of the inordinate debt accumulating to government and eventually the taxpayer. But it requires a tremendous leap of faith to assert that something which led us to the crisis and the need for rescue has inherent redeeming qualities.

The IOSCO does admit earlier in Chapter three that

"some believe that the complexity, opaqueness and risks embedded into certain securitized products and CDS have increased rather than decreased systemic risk in the international finance markets and that these concerns require a fundamental rethinking of how to structure and regulate those markets." (page 12)

They are quoting Paul Volcker, April, 2008.

Then, of course, they moderate this by claiming,

"Balanced against this is the view expressed by industry participants that, while certain types of securitized products and CDS were central to aspects of the global financial crisis, in general, these instruments have many benefits for the financial markets and the real economy." (page 13)

And. . . how many for the depositors and taxpayers? Or, are they no part of the "real" economy?

Securitization issues have been set into three categories by IOSCO:

"The three categories are:
(a) Wrong incentives;
(b) Inadequate risk management practices; and
(c) Regulatory structure and oversight issues." (page 15)

At the same location, the "originate-to-distribute model" was mentioned as a weakness in the securitization practices. It's suggested that there should be a "thorough reconsideration of the incentive structure in the securitization value chain."

[Virgil Showlion]

Old and gray
Message #1545 - 06/24/10 08:16 PM



It's been maintained in this thread that CDS cause damage to the currency function. It must be obvious that covering weaknesses in the lending process with a payoff in the event of failure will lead to less due diligence in the vetting of borrowers and the underlying reason for borrowing. When the procedure promises that a loan gone bad not only will be covered but may eventually turn into a greater gain than should the loan be repaid, incentive to make a loan to a stable company which nearly guarantees repayment is absent. Under such circumstances, why would a lender seek out reliable, stable borrowers when alternate applicants are a dime a dozen, particularly in booming times with blossoming prices. This of course, guarantees a collapse in a market treated thusly. It should never have been a surprise to those of us who consider ourselves "sophisticated" in finances to eventually suffer through the collapse of prices and severe retraction of the market. The concentration of investment in the real estate market alone is enough to alert enough of us that more than the market itself will suffer.

Bearing in mind the leverage multiplier involved in loans, namely the 9.5:1 ratio, a bank does not supply the full value of the loan offered. 5% is all they need to establish the account. . fiduciary media carries the rest. Timely repayment of the loan provides enough operating capital to cover lender needs. In effect the checking account established which allows the borrower to complete his transaction eventually ends up as a creation of money, 95% of the face value of the loan!, as it circulates through the financial system.

To be safe, we assume the 5% reserve will remain in place. But, banks are aware of a deficiency in placing the loan, they therefore seek assurance by bundling and peddling the loan and other similar loans through the securitization process. They have no idea where the bundle will eventually end up. Recall the quotation from the City of London Report presented by Mr. Lynton Jones which stated that OTC derivatives were eight times greater than exchange traded derivatives and they in turn were 25 times greater than the value of daily turnover in exchange traded cash equities? This gives you some idea of how predictable a derivative's, or securitized package's path will be. It also indicates how busy banks have been turning out derivatives (CDS covering weak securitizations undoubtedly among them) to make sure they would emerge from the coming collapse in good condition.

Except! . . . they turned out so many more CDS than needed and depended too much on the securitization process for the principal purpose of what they believed to be justified, so that they ended up underestimating the total commitment needed to back up their activity. This, of course, meant that they needed less reserves since they had fewer obligations. The loans were distributed to someone else and in the event failure occurred, the CDS would reimburse them more than they had outstanding in the securitizations.

What a lovely arrangement.

---

Old and gray
Message #1546 - 06/24/10 08:17 PM



Except! . . . when the pressure to retain reserves was alleviated, and the reserves were then deployed, either as compensation for keeping the wheels of the scheme moving, or to generate more derivatives, or, if the loans were returned to them and put back on the books, reserves on hand would be insufficient to cover the need. In the meantime there was another group suffering, perhaps through no fault of their own. Normal business loans were running into problems. Entrepreneurs were finding it increasingly difficult to start up new ventures. Shortage of reserves prevented banks from issuing more fiduciary media through the loan process and establishing new current accounts. They'd need more reserves to correct that. Existing businesses with temporary cash flow problems were denied help from normally helpful sources for the same reason. Now, the choke extends beyond circulating currency and loans because of the banks activities, no new capital is available. Commerce cannot survive without new capital.

You all know what happened following that. Asset values plunged, businesses contracted, jobs were lost, bailouts became the monetary policy, and debt plagued the global financial sector.

The international Organization of Securities Commissions singled out securitizations and CDS in search of corrections because their overuse had caused the massive problems which are not yet solved, even if all the proposed solutions were in place and served their purpose. The window of opportunity which would have served the purpose passed long before we even admitted that we were in trouble. It was obvious to some at the beginning of 2007 that the troubled moment had arrived. Some even saw the difficulties mounting as far back as 2005 and the international banking community was aware of difficulties in the late '90s.

The amount of derivatives held by domestic commercial banks has increased by about 16% since June 30, 2008. I would say that although we have no confirmation, it might be reasonable to presume the rest of the world has followed suit in that respect. Commercial Banks world-wide then might be holding as much as something in excess of $800 trillion. Brokers and insurance companies would add to that figure. Where these figures might be verified or debunked, I honestly have no idea. Even if brokerages now report as bank holding companies, where are insurance companies' activities compiled?

It's a massive amount world-wide. djrick not too far back proposed a figure of $1.3 quadrillion, and a counter of about $1.5 quadrillion followed. Those are derivatives. Add to this the securitizations and you might have an idea of the burden banks would have to re-assume if these commitments were returned to the point of origin. Can banks and lenders handle it?

Absolutely not!!

So, we're operating with a fouled up currency system on the brink of near total devaluation, a dysfunctional credit system, an impossible debt burden, value of our assets disappearing while we're expected to shoulder the burden, with a host of obstacles to prevent getting our industry back to work to help dig us out of the pits, all of it entrusted to the dear, dedicated souls who delivered us to what they called "the brink" of collapse from which we've "drawn back".

Turning back to the list of alphabet organizations at the beginning of this lengthy post, none of them are in agreement with what should be done, even if one group is serving the bidding of another group. And, judging from their confused approach of proposing, revamping, and going off into seclusion for a final decision, the people entrusted with legislating our way out of the mess have little comprehension of the nature or extent of the problem or whom to trust to get us out.

---

bubblyandblue
Message #1547 - 06/25/10 01:16 PM



By 'fiduciary media' do you define fiduciary as a special relation of trust, confidence, or responsibility in certain obligations to others as related to or consisting of fiat money.



It seems that the securitization process was infested by fraud as the underwriting guidlines and validation systems employed by rating agencies were ignored internaly and regulation was lacking in total because of years of regulatory and congressional capture resulting in laws crafted to privalege the 'financial' sector from spending time in jail.



I would go as far to say that the resultant products were thus Counterfeit as defined;

To falsify, deceive, or defraud. A copy or imitation of something that is intended to be taken as authentic and genuine in order to deceive another. To make a pretense of; feign.



As my only education has been through high school and then the school of hard knocks only; I tend to simplify things. Thus in my view, derivatives were 'insurance policies' for protection of 'legal counterfeit' products. However, 'insurance' implies those issuing same have reserves to meet the obligations which they (derivatives), by any stretch of imagination, do not have. As a result, derivatives were sold fraudulantly if indeed they were ment as a means of insurance.

---

bubblyandblue
Message #1548 - 06/25/10 01:34 PM



Fiduciary (trusted and duty) media (medium of exchange).

Is our government trying to re-establish trust in our money? - as they should! And therefore, they have a duty to regulate to establish this trust for the people of this country and not to the wants of a powerfull minority.

[Virgil Showlion]

Old and gray
Message #1549 - 06/25/10 02:02 PM



On a personal basis, US citizens are not doing as well as the government. The US National debt per citizen (per the US Debt Clock) amounts to $42K per citizen; personal debt, including among other items, mortgages and credit card debt, per citizen calculates to be $53K. We criticize the government's debt, often with the expression, "If I ran my personal life the way the government runs its affairs, I'd be. . . " Well, on the personal level, quick look, we're not doing as well as the government. But, things are getting progressively worse. In the last 2+ years (2008-2010), the bailout alone has added $5 trillion to the national debt and the all powerful chairman of the Fed is promising more of the same in our future. No matter what we do with currency, the trend is exponential, in the every deepening aspect, no promise of abating debt.



Nearly every undesirable listed in this recent long post (last four messages) is the result of debt/credit mechanism.

• Government debt is propagated through bonds, bills, notes;
  
• Securitizations are debt based on credit extensions;
  
• CDS are coverage for anticipated default on debt instrument generated through the credit turnstiles;
  
• Mortgages, repaying current expenses from future earnings, is debt;
  
• Personal charges are debt;
  
• Bank operations are promised accumulation of debt through fractional banking; and
  
• New accounts, by issuing fiduciary media (or, creation of money) otherwise referred to as leverage is credit resulting in debt.

[/ul]



All debt is gaining on us, accumulating at a rate rapidly approaching the tipping point, inability to maintain balance between real income and outgo, in our public and private lives, if it hasn't overcome us already.



Now, the transition to fantasy land, the dream we'd all like to see shucking off the credit/debt trap.



The question: How do we escape debt? The answer: By not charging. By balancing budgets. By paying as you go. By denying ourselves the luxuries unless we can pay for it in cash. Are we truly interested in avoiding debt? Realistically: it's so ingrained in us, we'd never be able to convert to a cash basis. How many of us could afford to do so, or be able to satisfy ourselves that life would still be full of meaning? (That meaning being possessions!) Yet, that's the origin of all our problems.



Remember, born just a few years after WWI, I was brought up on the concept of "If-you-can't-pay-for-it-you-can't-afford-it!" Married before WWII, my in-laws thought they were well-off and wanted desperately to help us, like many well-meaning parents would and, needless to say, still do. My mother and stepfather who were undoubtedly well-off even considering the times, I firmly believe, didn't offer to help because they knew two young people struggling to establish themselves and prove self sufficiency would consider it an insult. Both my wife and I wanted to prove our independence, and in this spirit responded to the well-meaning in-laws with more than one heated discussion. It resulted in temporary alienation while I was away during WWII, a convenient cooling-off period which allowed for abatement and a softer approach when I returned, fairly intact, from that trial. It must have proved something to them. But, it didn't stop. In our careers, both my wife and I each earned more then the in-laws every dreamed possible, but they still tried to help two stubborn, proud young people trying to bring up a family of four. They were insistent enough (and, we were stubborn enough) that the occasional confrontations never ended.

---

Old and gray
Message #1550 - 06/25/10 02:03 PM



The point is: in our little fledgling family, cash was king. If we didn't have the money, we didn't buy it. And, vivid memories of those early years at the tail end of the Depression often persuaded us to forego buying something which would have been no strain on the budget. So addicted to cash, we resisted charge cards for more than a dozen years after they were commonly used. We considered ourselves struggling financially when there was no struggle. Always with a view to future expenses as the family grew, we were saving to pay for never-ending college educations for six of us, through a period when that education was a fraction of what it costs now; for when the family grew and we knew we'd need a larger house; for the unpredictable which predictably came our way periodically. It's amazing how things are accomplished when you live within your means. We had a mortgage on our first house which was no burden and on our fourth, a rambling dream which housed just the two of us between social events it tolerated well, with only occasional visits from the family now spread out throughout the US with frequent trips beyond those borders. Matter of fact, I still have the outmoded mindset that cash is king. I've seen credit-damage and don't like it one bit.



What's the way out of our predicament and how do we avoid future catastrophes? All we need do is consider how this current situation developed with the accumulation of debt through the credit mechanism and resolve not to resort to credit again. Pay cash! Every person, every institution, government on all levels. . . pay cash. Don't indulge in what you are not capable of paying for. "Cash on the barrelhead!" That song should be our national anthem. Can we do it, or is that fantasy land? Probably fantasy, since our culture is so completely caught up with the concept of charging, mortgaging, borrowing, taking out second mortgages, gambling on continued increase in market prices, credit techniques which were established to help businesses until a smart Italian pushcart peddler on the west coast conceived of the idea of the charge card and started up a bank that eventually became one of the megaliths. Or, when banks began to look beyond current personal wealth and began factoring in potential, all in the distant future, maybe(!), when considering loan applications. Sure, it opened the world for a different life style, but, it was the beginning of the common, popular growth of debt based on credit.



We promise to pay future earnings for present use of goods. Ask me what's in the future and I'll tell you there are good times and bad. The good times will be expansionary periods when the credit cycle begins anew, and the bad times will occur when credit and debt inevitably overwhelms the system. It the same cycle every time. Something new appears, a new technology, a new market, another opportunity opens and money rushes into the void. This is the first wave, money sitting on the sidelines waiting for just such an event. The second wave doesn't have ready money, but they have the desire to profit. So, they rush into the void financed with credit and armed with debt. If they arrived soon enough, they'll prosper and repay their debt and become established. If they're too late, supply has already satisfied demand, or demand has slackened, leaving not enough opening in the new market to sustain them and allow debt payback. At his point, credit has been over-extended and the "crash" or "bursting bubbles" stifle the late arriving participants along with the thousands of other latecomers, and/or innocent bystanders.

---

Old and gray
Message #1551 - 06/25/10 02:04 PM



Cash doesn't fail the way credit does. It re-circulates through the system and sustains someone else, in this way used over and over again. The former possessor might have to step down in his lifestyle, but he's not headed for the debtor's prison. The blot of debt remains with the borrower, the loss shared with those who mistakenly extended the credit. One such incident is a shame; two or three, a trial; a dozen or so, a matter of concern; wide spread pandemic, a recession. All built on credit and debt which inevitably reaches an unsustainable point. Inevitably!!



When the current crisis was young, economists were busy assessing the situation, publishing suggested steps for resolving issues. One accomplished professor had a paper several pages long discussing limiting credit to prevent a repetition of crises. (This was on voxEU.org) It was an extremely involved process with controls, regulators, government policing, etc., etc. He received a short, unforgettable response from an Ohio gentlemen, who, after apologizing for the fact he was not an economist, asked a simple question, "Why can't the government auction off the right to issue credit?" Marvelous idea in it's simplicity and implications. Only a bank who sees an immediate profit, with the proper reserves could afford to pay for the right to disburse credit - and they'd have to prove this to the auctioning agency!. The auctioning agency, the Fed, the Treasury, or whoever, would have all they need to track the amount of credit available, and the supply of new credit can be shut off, before the market is saturated beyond tolerance. As to how much credit should be issued, I should think with all the math geniuses floating around out there, they'd be able to accumulate and analyze data to determine where stability begins to weaken and where it will break.



So, there you have it: Are we really interested in solving the problem of boom/bust once and for all? Want stability? Want to disprove Minsky's contention that stability is destabilizing? Do away with credit-mechanism generated debt. For the private and the public sector. Balanced budgets! Cash is king!



Reality, fantasy, or madness? Take your pick.



One certainty, bankers who extend credit and dream up innovations to tax the credit system even further than natural, to the point it threatens global systems, should not be supported by their mothers, much less by taxpayers. Theory of Natural Selection, survival of the fittest dictates: if a bank is blind or arrogant enough to get itself into trouble, it should experience, as Volcker says, "Euthanasia, not a rescue." Such a bank does not deserve to survive.



That's my opinion and I rest my case.

---

Old and gray
Message #1552 - 06/25/10 02:15 PM



bubbly. . .



The way our government and central bank is going about it, I say, they are trying to re-create money by placing stress it was never intended to bear.

We're following a path that goes deeper and deeper into the darkness of the unknown as if, once committed, there is no turning back.



Someone back in the body of this thread posted a Turkish(?) proverb: "No matter how far you've gone down the wrong path, turn back!"



Such sage advice is discounted by incorrigible egotists.



Also for descriptive passages referring to fiduciary media, see the following messages in the thread:





2, 4, 6, 157,360, 361, 364, 383, 384, 405, and 431.

[Virgil Showlion]

bubblyandblue
Message #1553 - 06/25/10 02:59 PM



Thank you.

It appears their exists many more people adrift in the dead horse latitudes than care to admit it. It appears the boat has sunk and we are now all floating about, some still shocked to hear that we are in lifeboats and not aboard ship. I pray that we all come to our senses, get to land, build a better ship and raise all boats to a more prosperous future.



Thank you again Old and Gray

---

neohguy
Message #1554 - 06/25/10 03:21 PM



Such wise words in paying as you go. I learned my lesson in the early 80's when the company that I had been working for over 10 yrs was no more and I was out of work during a recession paying for a car that I didn't need. It's also tough selling a car when what you owe is more than what someone is willing to pay for it. I landed up selling it for a loss and using my meager savings to make up the difference. That was the last time I bought a new car or even financed one. I bought my last car in January 09 and it was one year old.

I've made some bad decisions during my life that would have been a lot worse if I was in debt. The only things I've financed were my homes that we paid off in less than 10 yrs by prepaying against the principal. My wife and I were so tempted when the realty lady told us that we should be buying something that had a payment that was more than twice as much as we thought was prudent to pay.

Divorce, job loss, etc are hard but less hard if you are free of debt. I'm a tradesman, make a decent buck, and have saved more money than what most people I know have made that got higher returns from their stocks but were unable to invest more because they have debt for stuff that they don't necessarily need.

It's in our culture but I think that is changing. People in my neighborhood that make less than me but were always buying more than me, on credit for things they didn't need, are looking at things differently. At our neighborhood Memorial Day picnic I sat with a group of people that were discussing how much money they would need to get by if their employment situation worsened. The debtors were surprised by how little was required by a few of us older types that had little or no debt and a few younger renters that had not established credit. Sometimes it's a good thing to not be eligible for credit.

---

jma23
Message #1555 - 06/25/10 04:18 PM

It's too bad it has to take a bad slowdown of the economy to bring the woes of to easy credit to light. Didn't even get my first credit card till over 50, and only to buy items online for convenience. Even then, paid in full every statement. Every one I knew thought I was "eccentric". Maybe not so much now.

---

Scared_Shirtless
Message #1556 - 06/27/10 02:54 PM



Thank you O & G



And Neoh.



Something I've always felt and followed myself. If I could not "afford" it - I did not buy it. I had a strict definiton for "afford". While I haven't been as strict in cash as Neoh, I've never suffered what he has in his carreer. I made myself indespensible in mine right out of the gate. Its possible if you pick the right one. It does have its - sometimes heavy - costs. Usually personal in nature. But I have enjoyed continuity and am in my 40th year of my carreer.



My first house - in So. Calif. - was a 30 year loan - I assumed someone else's. I will never forget the day looking at the full disclosure - plus amortization - and the sick feeling I had at the interest I was facing. Many times the original loan amount. Oh and this was 14% 'cuz it was those bad times - early eighties? Fortunately I sold the house and made a few thousand a couple of years later. I was a renter for a long time. Two times my annual income was my rule and even then - limited my options because I was far from rich.



I moved to Pennsylvania. Spent 18 months establishing myself. Bought a farm but never took out more than a 12 year loan on property since. I had car loans. But I attacked my loans - usually the one with the highest interest. And I'd pay them off - kill them! - one by one. The loan interest was always higher than I could earn, so I always felt my biggest bang was attacking debt rather than accruing savings. To a point - I always had at least a small cushion - just in case.



And one day I woke up - and I'd made it to cash. It takes so much less to live on, life feels easier, I enjoy it more. I saw the stock fall coming and bailed in the first days of May 2008. 2/3's bonds and 1/3 cash right now - and watching bonds very closely these days. But most of my assets are in real estate - mostly farmland. And now the savings accrue. Fast!



So what you say is truth - at least in my book. And I feel I'm living proof. None of my friends has done what I did. And they all still struggle with debt and fear for their jobs - most fear for their next pay check. Unbelievable.



I've taught my 3 kids money. They all understand money - though one struggles with saving it. And I'm an active participant in their lives. They are our greatest gift to humanity. Save money. Try to live as close to a cash basis as possible. Attack debt. At the same time - differentiate yourself from the rest of the pack in your career - whatever chosen. Differentiation - making yourself looked to - or the one remembered.





Duff, O&G, and all others who have contributed to this thread... Thank you. This is - IMHO - the best thread I have ever read on the Internet.



All the best to everyone - still shirtless...

[Virgil Showlion]

neohguy
Message #1557 - 06/27/10 04:58 PM

You bring up a good point S_S. Although I pay off my credit card balance every month, I would probably spend a little less if I was paying cash from my wallet. I buy a lot less car when I write a check for it instead of financing it. And I pretty much keep it until it becomes a maintenance head ache.

---

Old and gray
Message #1558 - 06/27/10 05:30 PM



Duff jump-started this thread with a prologue in message #1. Most of those first 60 or 62 messages were transferred from his "Treasury Real Yields. ." thread which linked up with a Bloomberg article reporting, and briefly analyzing bond market activity at the time - February 2, 2009.

Having spent the next year and four months (+) on this subject, I feel it's time for an epilogue.



When we began, thoughts centered on banks and currency and the stress placed on them. Without probing into the nature of something, you'll never understand corrections when a system weakens. V_L was on top of the essence from the very beginning. That first day, he posted a short evaluation:

"As I've said before... it's a credit crisis and no experienced lender has been engaged to fix it. By lender I'm not referring to originators or bankers, I'm talking decision-makers who had to recover portfolios. These are the experts that should be engaging the crisis."

So, we began the exploration of the credit crisis by looking into the essence of money, substitute money, banking and eventually analyzed the system stress caused by excesses and abuses in those areas along with possible cures. The effect of the crisis was far-reaching. Not only banks were strapped, but their inability to operate in normal banking functions interfered with global trade which had not yet fully recovered and may suffer for years as the world struggles to disengage itself from detritus of the disaster.

Duff started us off by posting the issue of fiduciary media first. Couple that with the nature of derivatives and the stress that combination had on circulating currency and it indicates how universally disabling the mess proved to be. With such a beginning, analyzing bank operations was unavoidable. After all, they were responsible for the "innovations" that cluttered up the currency, altered the stresses it was subject to, devalued it and diverted global attention and resources away from the very essential business of normally providing goods for the consumer market.

Suddenly, currency was part of the game of building wealth at someone else's expense, not serving the needs of society. That "someone" eventually turned out to be the taxpayers and the newly unemployed and underemployed when the regular credit cycle was suddenly handicapped, unable not only to satisfy the predators appetites for "More!", but to serve normal needs. And we were off to slide into near economic paralysis.

The politicians believe they've kept "face" with the voters by offering half-hearted compromises that will settle nothing since their reform does not address cause, it treats symptoms instead. You won't cure the rot by painting everything white. As everyone knows, treating symptoms does not fight disease, especially pandemic contagion that quickly develops into plague. The industry, the lawmakers, and the theorists are all colluding to do the least they can to change the system, that means the least that can be done to correct or cure, which only leads us back into the same viper pit we were supposed to be confronting in order to escape.

From the final analysis, that the uncontrolled growth of currency and fiduciary media through bankings' credit cycle, flooded the global financial system with worthless, dysfunctional paper that needed sudden, "unexpected" and inordinate collateral support which stole directly from operating currency and shut down the credit system, we can feel confident that if we haven't led the parade in trying to alert everyone to the problems, at least we faced up to the challenge.

But, I believe we accomplished more than that. It wasn't until after the thread was underway, that its language began popping up in articles and conversations more frequently. Whether that was delusional or not is for someone else to judge. Still, it should yield a measure of satisfaction to those who contributed here.

---

Old and gray
Message #1559 - 06/27/10 05:31 PM



We've come full circle after diversions normal to community participation. In general, it was amicable, civil and productive - which is a tribute to the distinguished class of participants. It was also surprising to all, I believe, when it carried it's analysis into the proposed regulatory reforms which originated from all quarters - political, academic, institutional. They all seemed to have a solution. It helps us understand what the Tower of Babble was all about if nothing else.



Eventually, we did get back to the issue that started us off . . . and a restatement of thoughts originating from the mind of the most perceptive, clearest thinker among us, Veteran Lender, and to close the link provided by the finest, most industrious organizer, Duffminster, a proven leader.



It's been wonderful. Making new friends is always a rejuvenating experience and encountering folks who care helps reaffirm hope for the future.



A bientot. Hasta mas ver. Sayonara. Bless you all.

---

ASK
Message #1560 - 06/28/10 02:00 PM



O&G,



Thank you for sharing. I have enjoyed this thread from the start. Someone once wrote that they could almost see the twinkle in your eye through your writing. I agree, your writing has made a difficult subject interesting, understandable, and palatable. Thanks again and blessings to you as well.

[Virgil Showlion]

reverendbarb
Message #1561 - 06/28/10 02:29 PM

O&G, Thank you so very much for your in-depth analysis of various financial topics since the beginning of this financial crisis. The information and analyses you've provided have been invaluable to me and many others, I'm sure. You've been a true gift to us. I hope you will pop in whenever you can.

---

Silver Onyx
Message #1562 - 06/28/10 03:43 PM

"Ditto", and God Bless!

---

4-316
Message #1563 - 06/28/10 06:15 PM



Thank you, O&G, and all others who have contributed to this thread.

Over the past year or so, you have built on the thin foundation of my knowledge of the financial quicksand in which the world is enmeshed, and I am most grateful.

But, please don't let this be the end of a good thing. ...When you have additional edifying thoughts, please be quick to post them.

I'll be waiting.

4-316

---

Defining Quality
Message #1564 - 06/29/10 05:00 PM

"Life is of no value but as it brings us gratifications. Among the most valuable of these is rational society. It informs the mind, sweetens the temper, cheers our spirits, and promotes health. "

- Thomas Jefferson, 1784, in a letter to Madison

Derivatives, their creation, the market for derivatives, and the governments response and regulations of that form of cost shifting and risk avoidance is not "Rational".

Governments irrational reaction to their existence has destroyed our collective futures, as financial institutions world wide continue to shift their corrupt business models on to backs of the citizens.

[Virgil Showlion]

Duffminster
Message #1565 - 06/30/10 06:09 PM

O&G, thanks for the epilogue and you give me far too much credit. I simply saw the foundation of your thinking and the context of your experience as particularly well suited to comprehend, analyze and think about solutions from both within and outside of the various economic paradigms. Because of your detailed explanation and Q&A on the concepts of fiduciary media and how that all ties into currency and ultimately derivatives and debt is foundational to the modern crisis we face. Your willingness to act as professor to this community is an invaluable resource for my own elucidation and that of many here. Fortunately, there were lots of good questions being asked and such questions, supplementary material and so on help.

I believe that these discussions have helped a large number of people to get a much better handle on the cause and likely solutions to the problems. Unfortunately, I believe that the political system is now flowing with unlimited lobbying money (thanks to our Supreme Court) that the truly strong reform needed will not happen during this cycle as loophole after loophole are created for the too big to fails and other special interests and derivatives are not dealt with in a truly effective and protective manner. I think Mr. Volker probably feels the same about his contribution:
[www.bloomberg.com/news/2010-06-30/volcker-said-to-be-disappointed-with-final-version-of-rule-named-after-him.html] Volcker Said to Be Disappointed With Final Version of His Rule

---

Duffminster
Message #1566 - 07/01/10 12:09 AM

Since I am not allowed to link to Zero Hedge, may I suggest that you google the following great article explaining derivatives:

"Explaining Derivatives, And Goldman's Dominance Thereof, In Four Simple Charts"

---

flow5
Message #1567 - 07/01/10 12:41 PM



There are two legs to these trades:



[www.bloomberg.com/news/2010-06-30/bankers-who-broke-big-dig-financing-with-swaps-gone-awry-get-paid-for-fix.html] www.bloomberg.com/news/2010-06-30/bankers-who-broke-big-dig-financing-with-swaps-gone-awry-get-paid-for-fix.html

The same bankers who sold [www.bloomberg.com/apps/quote?ticker=STOMA1:US] Massachusetts interest-rate swaps that blew up the debt financing for the so-called [www.massdot.state.ma.us/Highway/bigdig/bigdigmain.aspx] Big Dig road and tunnel project in Boston -- costing taxpayers $100 million -- are getting even more money to fix what they broke.

---

flow5
Message #1568 - 07/01/10 12:48 PM

Do we have an 800 number for gambling anonymous?

[Virgil Showlion]

Silver Onyx
Message #1569 - 07/01/10 01:45 PM

Do we have an 800 number for gambling anonymous?

Wonder if this is similar to the Big PCB(environmental pollutants) mess in the Hudson (dumping by GE)??

..No surprise NY & NJ also have high tax rates...Hmmm....

---

kman49
Message #1570 - 07/03/10 01:46 AM

This just in O & G! Class action suites regarding Mass Mutual and derivatives going back 10 years. Just got the notice regarding my late mother in-laws estate. It's been a privilege to read your thoughts .

---

neohguy
Message #1571 - 07/08/10 11:53 AM



Thanks for everything Old and gray. I've learned much, and still learning, from your explanations and the reference material that you provided. My son, soon to be a philosophy professor, found yours and others commentary valuable in understanding economics from a philosophical stand point. I don't quite understand it but he's been providing me with commentary and reference material. He'll be visiting me later this month so maybe he'll be able to explain it to me.

Hope we cross paths again in the future.

---

stonerdr
Message #1572 - 07/09/10 08:38 PM



Duffminster:



A good trade assessment of the derivative situation and its undesired effects can be found in a publication by The Joint Forum, consisting of Basel Committee on Banking Supervision, International Organization of Securities Commissions, International Association of Insurance Supervisors, organized by the BIS. It's one of the few honest attempts to evaluate the trades' practices, where it went wrong and recommendations for recovery. Written early on in the crisis, July, 2008, it attempted an honest approach, something absent in the PR releases from the domestic banks, who treat honest disclosure as the deadliest of plagues. Some later results should be released in Q4, 2010, incorporating contributions from the industries involved in the attempt to deal with the problem which Europe identifies as Credit Risk Transfer, CRT.



The pub is relevant here because the first couple of dozen pages discuss in detail derivatives' purposes, how they were applied, how they grew, and what bad effects resulted from the bad practices which evolved. It's a more detailed study of the trades than is the Zero Hedge art work which concentrates on the money flow, but avoids the mechanism of the business itself. We have to be suspicious of a market which ends up with massive transactions which total many, many times the value of the underlying asset. Now, that is a bubble, par excellence!



The title of the pub is Credit Risk Transfer; Developments from 2005 to 2007, (about 90 pages) issued July, 2008 and is available from the BIS.org site.



Link to the pub: (guaranteed no advertising or encroachng on proprietary rights)



[www.bis.org/publ/joint21.pdf?noframes=1] www.bis.org/publ/joint21.pdf?noframes=1

[Virgil Showlion]

djrick
Message #1573 - 07/24/10 01:04 AM



[online.wsj.com/article/SB10001424052748703294904575385120617510164.html] Feinberg: Unfair to Ask Firms to Return Payouts - WSJ.com

[online.wsj.com/article/SB10001424052748703294904575385120617510164.html]


"U.S. "pay czar" Kenneth Feinberg on Friday declined to request 17 financial firms that doled out $1.6 billion in "ill advised" executive compensation to return the excessive payouts, saying to do so would be unfair to the companies and could trigger private lawsuits and additional Congressional investigation."




Corporate America, do whatever you want. Any consequences to you would be unfair. Some factions fear socialism when corporatism has been firmly entrenched for a long time.

---

frank the impaler
Message #1574 - 07/28/10 02:14 PM

Corporate responsibility needs a "re-set" button

---

neohguy
Message #1575 - 07/29/10 01:52 PM

My apology if this has already been posted elsewhere. A July 27, 2010 report from the Congressional Budget Office titled Federal Debt and the Risk of a Fiscal Crisis. Page seven and eight talk about the dangers of trying to inflate our way out of debt. The entire report is easy to read.

www.cbo.gov/ftpdocs/116xx/doc11659/07-27_Debt_FiscalCrisis​_Brief.pdf

---

Old and gray
Message #1576 - 07/30/10 04:39 AM



Thank you, neohguy.



The CBO report was downloaded and scanned. Interesting, I'll give it a closer read tomorrow.



Interesting coincidence - I was doing a little house cleaning of old papers and turned up a CBO report of a year and a half ago, their projections for the Budget and Economic outlook for fiscal years 2009 to 2019. They were optimistic on the outlook and underestimated the 2009 deficit by more than 50%. This despite an army of researchers listed on four pages. If that's to be used as a guide on their accuracy and they now claim that we run the risk of another fiscal crisis as a result of that debt, I'd be justified in escalating that promise into a fact that we face quite a hit.

The report carries through in places to 2020, 2025, and even 2035. That's a little too ambitious in my estimation. the report of January 2009 I have in hand was published when the effect of the bailouts was the topic of the day and projections for continued help to the economy over the next ten years was on everyone's mind. We had a fair idea of how much was committed to the clean-up. Going on into 2025 and 2035 is too much for me to accept unless the commitment for QE would extend that far. In which case, I'd judge that we really don't have a functioning financial system at all and there's no hope of its ever becoming operational again.

However, I'll give it a fair reading.

---

Old and gray
Message #1578 - 08/09/10 05:21 PM

neohguy's link to a Congressional Budget Office (CBO) Report in message # 1575 is worth a look to anyone interested in the macroeconomic workings within the economy and how government strategies effect us all.

The main issue is as the title suggests, Federal Debt and the Risk of a Fiscal Crisis, meaning not only where we've been but where we might go depending on which strategy Treasury and the Fed employ.

The wonderful thing about it? It's written for Congressmen. Everybody knows there is no literacy requirement for Congressional candidates, so the level of explanation is absolutely well within the reach of everyone posting here. It is basic economics, basic macroeconomics, and the interaction within those disciplines of certain choices which will place stress and burdens on us all shortly. Wrong choice and we'll be drifting downstream belly down, for a couple of decades. If you want to know why one or the other selection will be made, and what those choices are, this is a must read.

To demonstrate how readable the text is, here are the first two paragraphs.

Over the past few years, U.S. government debt held by the public has grown rapidly—to the point that, compared with the total output of the economy, it is now higher than it has ever been except during the period around World War II. The recent increase in debt has been the result of three sets of factors:

• an imbalance between federal revenues and spending that predates the recession and the recent turmoil in financial markets,
  
• sharply lower revenues and elevated spending that derive directly from those economic conditions,
  
• and the costs of various federal policies implemented in response to the conditions.
  

Further increases in federal debt relative to the nation’s output (gross domestic product, or GDP) almost certainly lie ahead if current policies remain in place. The aging of the population and rising costs for health care will push federal spending, measured as a percentage of GDP, well above the levels experienced in recent decades. Unless policymakers restrain the growth of spending, increase revenues significantly as a share of GDP, or adopt some combination of those two approaches, growing budget deficits will cause debt to rise to unsupportable levels.

No math, no charts, no mystic language! Straightforward and easily understood. I recommend it without hesitation. It may seem like we've heard enough of these issues going on for the past three years, but it's not over yet and we haven't been privileged to which path we'll be following from here on. Sooner or later the choice will have to be made, and regardless of which way we start out, there are consequences.

You can get more complicated.

For those searching for more detailed info and data, try on the CBO's ten year economic outlook which has been published each January except for this year. In 2010 we had a January pub, a June pub and then an August revision of the June pub. To my suspicious mind that means we are in a great deal of trouble and heavy decisions are in the offing - all with not-calming consequences.

Another indication of the seriousness of the situation - the 2009-2019 edition of the Economic Outlook was 50 pages in length; the 2010-2020 edition, 182 pages, with another edition mid-year and the following revision. Does that mean Congress is three times as concerned as they were at the beginning of last year, or the situation is three times as threatening?

To ease your access to the site, here's neohguy's link to the site.


www.cbo.gov/ftpdocs/116xx/doc11659/07-27_Debt_FiscalCrisis​_Brief.pdf

---

ASK
Message #1579 - 08/11/10 01:59 AM

Thanks Neo & O&G.

---

Scared_Shirtless
Message #1580 - 08/12/10 02:02 PM



O&G;



In regards to the CBO's Economic Outlook. Its the statistics you quote - regarding revisions - that are only derived from being so close to your subject. I get early warnings in my profession from obvious things in front of everyone - but I'm so close to the subject matter I see what it means earlier.



Thanks for pointing out the CBO revisions - it does portend significance worth watching.



Best wishes

---

Old and gray
Message #1581 - 08/22/10 04:11 PM



It's been well-publicized that European Union Banks recently submitted to stress tests. They passed the tests. Reassuring except if the question is asked, "Exactly what was measured?"

The OECD (Organisation for Economic Co-operation and Development) since 1961 has attempted to establish guidelines to assist corporations to contribute to the improvement of world living standards, international trade and economic development by setting standards for corporate operations and ethics which they should observe.

This month a report composed by two OECD associates (Adrian Blundell-Wignall, Special Adviser to the OECD Secretary General on Financial Markets and Deputy Director of the Financial & Enterprise Affairs Directorate and Patrick Slovik, an economist at the OECD) was released which reveals some disquieting facts about the recent EU stress tests.

Just as the US stress tests were manipulated by allowing future earnings expectations to be counted in as available assets, thereby making the banks appear sounder than they are, the EU banks resorted to a little trickery of their own.

In the words of the authors (the standard disclaimer declares that the work is the opinion of the authors and does not necessarily reflect the opinion of the OECD)

This working paper·s quantifications show that most sovereign debt is held on the banking books of banks, whereas the EU stress test considered only their small trading book exposures. It discusses why sovereign debt held in the banking book cannot be ignored by investors and creditors, because of: (a) recovery values in the event of individual bank failures; and (b) fiscal sustainability and structural competitiveness issues which mean the market cannot give a zero probability to debt restructurings beyond the period of the stress test and/or the period after which the role of the European Financial Stability Facility Special Purpose Vehicle (EFSF SPV) comes to an end. How the SPV could operate to shift sovereign risk from banks to the public sector is also an important part of the discussion.

I added the bold for emphasis.

Not mentioned in the abstract quoted above is the possibility of default, full or partial, and the attendant loss of value of bank assets in that sequence. The complete results would then be invalid.

Which only proves that bankers are bankers the world over and have allegiance to the industry first, and secondly to . . . I don't know. . . take your pick! Their motto may be: Regardless of what kind of brittle swiss cheese underpinnings we operate on, it is safe. And, if an outright declaration does not reassure the public, we'll lie statistically.

I suppose they can add that it is not really a lie. "We reported what we measured!" could be their response. The public's expectations as to what would be measured might not have been met. But, then, who's running the banks? And, can the public ever understand the intricacies of banking?

It's only proper that the slight discrepancy be pointed out from inside the OECD since ethics is a linchpin of their guidelines for corporate governance, which applies to banks just as readily as any other corporation.



Which then lends more credibility to the two authors of the paper than to the entire EU banking system which conducted the tests.



The title of the publication is

The EU Stress Tests and Sovereign Debt Exposures,

and can be found at this OECD site.



[www.oecd.org/dataoecd/17/57/45820698.pdf] www.oecd.org/dataoecd/17/57/45820698.pdf

---

Old and gray
Message #1582 - 08/22/10 04:19 PM



BTW, the conclusion of the paper is short and might have some interest for readers. It's offered without comment.

At the Pittsburgh G20 summit it was proposed that the new capital rules·Basel III·be completed and quantified by the end of 2010, after completing the Quantitative Impact Study (QIS). The new reforms were then proposed to be fully implemented by the end of 2012. Since then there have been some considerable changes that weaken the original intent, and the time period for introducing the leverage ratio has been extended out to 2017. At the same time, banks have not been lending and markets continue to perform poorly. The EU stress test on the other hand showed banks in the benchmark case to be very robust to 2011, and even if subjected to a significant adverse macro shock and a sovereign debt haircut, most would come through intact.

This study has shown that most of the sovereign debt is held on the banking books of banks, whereas the EU stress test only considered their small trading book exposures. Sovereign debt held in the banking book cannot be ignored however. First, individual bank failures would see latent losses on the trading book realized, a fact that creditors and equity investors need to take into account. Second, and more importantly, the market is not prepared to give a zero probability to debt restructurings beyond the period of the stress test and/or the period after which the role of the EFSF SPV comes to an end. The main reasons for this are: the very large job ahead for fiscal consolidation in a period of weak economic growth; and the apparent difficulty of achieving structural/competitiveness reforms in some countries in a short period of time. The paper also showed that excessively exposed banks in principle can reduce their exposure by not re-financing maturing sovereign debt, with the government funding gap being met instead by the SPV. This would have the effect of transferring sovereign risk from the bank concerned to the public sector.

---

frank the impaler
Message #1583 - 08/24/10 05:30 PM



The lack of disclosure by foreign banks is telling you watch out here we go....again





Corporations (that have sound accounting) are getting ready to issue 100 year Bonds...first time since the 90's



Look for the 40 year treasury to make an appearance as I am informed is getting ready for indoctrination and dissemination to the US market

---

reverendbarb
Message #1584 - 08/24/10 05:41 PM

Geez, I won't eve be ALIVE in 40 years - most likely!!

[Virgil Showlion]

Old and gray
Message #1585 - 08/24/10 07:38 PM



Don't say that, Barb.

When I was in high school, I was convinced I wouldn't live to see 35. The army, Hitler and Hirohito set up an alliance that

almost saw to that. But, then, look at where I am now. Despite everything, more than fifty years past due!

You never know.

---

frank the impaler
Message #1586 - 08/26/10 01:09 AM

Entities have a life of their own...so trusts, guardianships, endowments and such would find a stable long term rate attractivereverenbarb...think legacy

---

frank the impaler
Message #1587 - 08/26/10 01:11 AM

O&G-my mother died when I was sixteen...it wasn't until I reached the age of 41 that I started taking care of my self...I thought I would die young too

---

kman49
Message #1588 - 08/27/10 03:26 AM

O&G-my mother died when I was sixteen...it wasn't until I reached the age of 41 that I started taking care of my self...I thought I would die young too

I still have my mother.. and she has a plate of cookies with your name on it. She knows about you. That goes for you as well O&G... Hope you guys like Italian cookies

[Virgil Showlion]

frank the impaler
Message #1589 - 08/31/10 01:18 AM

Rainbow cookies?

---

kman49
Message #1590 - 08/31/10 01:59 AM

meatball, fig, almond paste. I highly recommend the meatball cookies

---

Old and gray
Message #1591 - 08/31/10 04:58 AM



The IMF is now taking a leadership role in re assessing the global financial crisis and, in consort with G-20, either prescribing steps in the corrective acts needed for recovery or ironing out the details of G-20's wider views of needed policies or programs. If you find the April, 2010 IMF reports, the World Economic Outlook and the Global Financial Stability Report a little too lengthy (most of us do have a life to live outside our concern for the nation's, and the world's, stability), you might be interested in the original press meeting video on the April, 2010 Reports and a subsequent press meeting for the Updates 3 months later.

The press meetings are not short: 45 minutes for the April reports and 48 minutes for the updates. But, then, each report runs several hundred pages with extensive charts, graphs, and appendices which can add up to several hours of heavy reading - depending on reading skills or reader interest.

The videos are found at this link



[www.imf.org/external/mmedia/view.aspx?vid=110908679001] www.imf.org/external/mmedia/view.aspx?vid=110908679001



Just a few minutes into the first press meeting in April, which is basically a summary of conclusions to indicate the depth of the report, it's mentioned that

• the recovery has been established with massive assistance (stimulus);
  
• The Recovery is modest by historic standards;
  
• Unemployment is still very high; and,
  
• significant risk remains in housing and the European situation.

• Downside risk remains;
  
• The recovery is still in jeopardy;
  
• Major effort is needed to stabilize systems in terms of GDP by 2015; and,
  
• It is critical to prove the financial systems can support growth.

In April, too, in summary, the first of the three speakers, all Deputy Directors of IMF, pointedly noted that other nations will have to pick up the burden of being the world's market. He said, "The US is no longer going to be the consumer of last resort" for the global community. And, the next breath brought out the proclamation that the USD is "somewhat over-valued with greater depreciation" in the offing.



This is the report that moved Professor Kotlikoff to proclaim that the IMF pronounced the US bankrupt. His assessment, if you missed it, was announced on another thread dedicated to his evaluation in which the link for the three IMF reports was posted. I'll repeat that link in a post below, along with the link to the thread commenting on Professor Kotlikoff's assessment.



To those who might find the maze created in this thread difficult to traverse, the original assessment of the problems we faced was gathered together by Duffminster and posted back in March 3, 2009. That effort carried through to about message # 63. Everything following that was original to this location. So, it was prior to that when the first diagnosis was offered (see message # 15). The prescription for recovery was offered beginning in message # 51 and carried beyond that. Had it been known that this would be such a lasting thread more care would have been exercised, and the presentation could have been clearer in places, in particular where the details of the prescription are concerned. Words will remain the same.

In that particular instance, if recovery depended on clarity, I believe the patient would have succumbed before sense could be made out of the jumbled presentation. The clean up will consist of inserting bullets and such to separate the steps. It might make for a better presentation and easier reading.



I'll rework the text offline and one night when you're all asleep I'll sneak in and effect the substitution.

---

Old and gray
Message #1592 - 08/31/10 06:09 AM

For those who would prefer access to the the IMF publications directly, this link takes you to a general entry page for their publications.

www.imf.org/external/pubind.htm


Near the top of the right hand column are links to the two globally oriented reports:

* World Economic Outlook, and
* Global Financial Stability Report

Much further down in that column is the lead to the Article IV reports which deal with individual nations. Among them is the IMF's assessment of the US condition.

The Article IV consultation series covers quite a bit of territory from banks to selected issues. There are ten pubs which are listed at this location.

www.imf.org/external/country/USA/index.htm


The MT thread referencing the IMF reports and Prof. Lawrence Kotlikoff's summary is located through this link

moneycentral.msn.com/community/message/thread.asp?board=MarketTalkwithJimJub​ak&threadid=1792237&boardname=Hide&header=SearchOnly&footer=Show&linktarget=_parent&pagestyle=money1

[Virgil Showlion]

Old and gray
Message #1593 - 08/31/10 08:44 PM



Duff



Should you happen by this way - Just realized you entered messages # 51 and #52. Unable to revise as promised at the end of message # 1591.



Wanted to change running text to a bulleted format to separate the suggestions for better legibility; like this:



(Message #51)



What is the first order of business?

• Retire that funny money (derivatives) that banks and brokerages have circulated world wide. Stimulus won't do it. Bailouts won't do it. Accountants know the way out. What we need are some people willing to put their ear to the heartbeat of the world and listen to what's being said out there and heed advice. It's out there and it is circulating. Good advice is available.

(Message # 52)



Second order of business is to

• chain the wild·eyed drunken cowboys to restrain their impetuosity;
  
• then, provide strict regulations preventing them from issuing unsupported and unlimited fiduciary media;
  
• establish stringent reserve requirements;
  
• force off·book accounts onto the books (let's don't go on kidding ourselves about this serious matter, look it square in the eye like honorable people);
  
• make strict licensing requirements for upper echelon bank and brokerage management; train directors in the strategies crises can be dealt with (if they're uneducable, get rid of them!);
  
• enable agencies with the strong power to regulate effectively;
  
• (here's a tough one) regulate markets to prevent the contamination from spewing out again;
  
• communicate and coordinate our efforts as near as possible worldwide to prevent those "international entities" with branches worldwide from escaping local regulations too strong or restrictive for them to accept;
  
• if the amalgamated corporations are too big to be handled effectively during crises, break them up again;
  
• change the accounting standards (in particular for the larger institutions) to prevent them from putting the world system in jeopardy;
  
• establish ratios and benchmarks which flag danger points and have the institutions report on those standards on a regular basis;
  
• empower agencies to examine, more frequently and more thoroughly the status of the institutions unannounced;
  
• lay out a plan for support or shut down of banks that show weaknesses which if too pervasive and banks are too weak to manage their way out of their difficult, admit they are mismanaged and allow them to die;
  
• exercise strict risk management controls to prevent instruments like the derivatives from appearing again under any name or description;
  
• establish and enforce vigorously the safe levels of minimum reserves;
  
• every issue from any entity that popped up during the crisis should be addressed and assessed for any needed corrective action.

Could you accomodate me in this? The effort would be much appreciated.

---

Scared_Shirtless
Message #1594 - 09/07/10 11:06 PM



Hi O&G;



Hey - a site I sent you too once - had Christopher Whalen on it...



I have to ask!!!! I asked in another thread - but I had to ask here!



What's your thoughts on EU Article 122a being kicked about?



Huge it looks to me.



just shirtless...

---

Old and gray
Message #1595 - 09/08/10 04:51 AM



Do you think better with your shirt off, SS?



Very observant for you to pick up on Article 122a.



Back in posts # 77 and # 81 the terms "originate to retain" and "originate to distribute" were introduced and discussed. In fact, #77 began with a reference to a speech by one of the members of the Board of the ECB (European Central Bank) Dr. Axel Weber (also president of Germany's Bundesbank). I was not particularly impressed with his endorsement of the securitization process since, as it was then constituted, it removed any responsibility for risk from the originator, simultaneously removing any responsibility for due diligence in qualifying the loan to begin with. We've read all kinds of reports and presumptions since, one including Goldman, Sachs' issuing derivatives favoring the failure of Greece after they conspired with Greece to issue reports which did not include certain debt that was temporarily removed from Greece's books. . (a wholly legal move, it was contended.) . . Then, the debt was re-entered on the books after Greece was granted entry to the European Community. At that, point - or possibly prior to that, Goldman, Sachs took out the derivatives. An accountant would lose his license for such behavior.

Back there in # 81 there was also a lengthy discussion of precisely what flaws and dangers were involved in the issuance of derivatives for the "originate to distribute" process. If memory serves faithfully, somewhere along that line, a position was taken that it would be to everyone's advantage if the originators of the loans were forced to keep a certain percentage of the loan on their books. It might promote a little more integrity. Matter of fact, vividly in mind is the mention of 5% retention ("skin in the game") somewhere along the tsunami thought line.

Well, the EU must have taken us up on the suggestion. That is precisely what they are proposing! Our thoughts on that were posted back in early March, 2009. That was in the midst of a long discussion on the various risks banks were subject to. IMO, 5% should be considered the minimum portion retained; 10% would insure more stability.



Also, according to a report from the European Commission on the impact of Article 122a, forwarded to the European Council and the Parliament, there is a call for investing only in securitizations where credit institutions in the European Union have exercised due diligence in all loans since a "root cause" for the distress of the financial system "can be identified as a lack of sound loan underwriting practices on the part of the issuers. ." (This is quoted directly from the Commission's report before me.)



Overall, the report admits (as we have contended) that neither the market participants nor the banks themselves understood the nature of the securitizations. As they express it ". . .it turned out that the degree of risk dispersion fell far short of ideal." It also presented a case of "severe principal/agent problems of misaligned incentives between issuers and ultimate investors." Which should be no surprise to us if we had faith in the evaluation we subjected the destructive nuisances to during our study.



One section of the report that surprises is the claim that since 2006, "volumes [of securitizations] have dropped off sharply. In fact, U.S. private [as opposed to government sponsored] mortgage-backed securitization collapsed almost completely." But, they feel with Article 122a there's a new "comfort level" which "could largely be due to the believe [sic] that structures and performance dynamics are better understood and the fact that issuers are seen to have substantial "skin in the game", ie, retain a portion of the risk of the exposures they securitize."

---

Old and gray
Message #1596 - 09/08/10 04:53 AM



What I have noticed is the increased participation in derivatives by our banks from what was supposed to be the high point, Q2 or Q4, 2008 (depending on which FDIC reported figures are used) to 18 months later, there was an increase of 16.7% notional value of derivatives reported in the FDIC - SDI ongoing report. In the 6 months since that reporting, banks have added another 5.7% total notional amount! They haven't let up at all in overall derivatives!



The Article 122a stipulated procedure includes - complying with a list of due diligence measures; originators must provide necessary information so the investor can conduct his own due diligence study; and, issuers of securitizations must retain no less than 5% interest in securitizations issued.



The US has its own set of new proposals in the Dodd Frank Act Under Title VII - Wall Street Transparency and Accountability, which runs about 180 pages and I am not about to undertake that study again. However, suffice it to say that it is more detailed than the original Dodd Proposal, but not as effective as an idealist might want. I'm not sure of the limiting rules of proposals, so I won't comment on them. Except to say -

Above, somewhere, I may have mentioned that Bernanke objected to the inclusion of Section 716 of the act (which is in the middle of Title VII). I referred to section 716 of the Dodd Senate working draft, which proposed reporting in order to bring the off-balance sheet work out into the sunshine. I was mistaken; the sec. 716 Bernanke objected in the final Dodd-Frank Act is entitled "Prohibition against Federal Government Bailouts of Swap Entities". I don't recall what his objection was to the complicated wording on the prohibition. Under certain conditions, according to the wording in the document, government bailouts (which equate to Fed activity I'd presume) can be allowed. I won't say another word about this.



At any rate, to follow Shirtless's original reference, this concept of limiting participation by all firms unless they meet minimum qualifications is to be expected when all nations are struggling to protect themselves while they're in the current vulnerable state. The great fear of a number of economists is that nations will turn to protectionism as a first resort, which will lead to tariff and trade wars, price manipulations and all manner of alliances and favoritism, generally disrupting international trade at a time when new markets and new trade are essential for many nations struggling to overcome the difficulties dumped on them by this credit/money/illiquidity fiasco.

I can't cite how many documents and studies which came into my possession from too many sources to count. They could range from three pages to 300! And, all of them are attempts to inform world leaders how and why protectionism should be avoided or averted. Not a few of them were pointedly directed toward the EU and now here we are with Article 122a, which is needed as a cooperative effort, but, if adopted unilaterally, could be the first sign of a trend toward protectionism.

Self-sufficient nations (which are in the minority) have nothing to fear from tariff or trade wars. On the other hand, nations like the US where the principal occupation (40% financial) is releasing the toxic papers on the rest of the world, and abandons the responsibility of providing for itself, will be in trouble should trade war develop in earnest. Other nations will protect themselves and we'll be forced to pay more or do without. What do we have to pay with? Our population is growing and we in the counter-productive process of shutting down what production we had - which was insufficient to supply our people when we reached 250 million population. We're now closing in on 310 million. This is not the time to develop insolvency or insufficiency.

[Virgil Showlion]

Old and gray
Message #1597 - 09/08/10 04:54 AM



The economists from other nations mentioned are as concerned about their own nations well-being as we should be. If the EU intends to go it alone or combine efforts to persuade G-20 to back their move (this coming November, no less), we may end up in the minority with no options. . . Or, with no more than the hope that the rest of the G-20 participants have a soft spot in their heart for the US of A.



This is how my thought process works on Article 122a, Shirtless. It's an indicator as much as an obstacle.

---

Scared_Shirtless
Message #1598 - 09/08/10 11:39 AM



Quote:

Do you think better with your shirt off?



Good question O&G! I love it!!!



I just try to inject a tiny measure of humor in what I do.



As you so well know - if we don't also take time to enjoy life - what the heck are we doing???



Thank you for being here - I've learned SO much from you!



still just shirtless...

---

Duffminster
Message #1599 - 09/13/10 05:37 PM



[jsmineset.com/2010/09/12/in-the-news-today-648/] Jim Sinclair’s Commentary

Eliminate OTC derivatives or all else is meaningless.

Regulators meeting in Switzerland agree on new global rules to strengthen banks
By Howard Schneider
Washington Post Staff Writer
Sunday, September 12, 2010

Regulators meeting in Basel, Switzerland, on Sunday agreed to take new steps to immunize the financial system from the sort of crisis that pushed the world into recession two years ago.

The new rules would make banks roughly double the amount of capital set aside as a buffer against possible losses, slash stockholder dividends and executive pay if that stockpile falls short, and limit lending during economic boom times. Combined, those measures are intended to shape the behavior of bank managers and investors in unexplored ways · trying, for example, to have them curb lending in good times in the hope that asset bubbles won·t give way to a costly bust.

The standards could have broad implications for the amount and cost of credit available around the world, as banks adjust their balance sheets and business plans to comply. Banks will have two years to meet the basic requirements proposed by the committee, though some of its provisions will not be implemented for up to eight years.

[www.washingtonpost.com/wp-dyn/content/article/2010/09/12/AR2010091202292.html] More…

---

Old and gray
Message #1600 - 09/13/10 06:54 PM



Good lead, Duff!



For those interested in a time table for the enactment of the proposed Capital ratios, see the 7 page press release from BIS.org. The Phase-in Arrangements are on page seven, a table outlining the Min. Capital Ratios, the Tier 1 Capital % and total Capital % and the Min. Total Capital plus conservation buffer. Implementation of which will begin Jan 1, 2012 and to be completed by Jan 1, 2019. The link for the press release:



[www.bis.org/p100912.pdf?noframes=1] www.bis.org/p100912.pdf?noframes=1



FDIC also sent out a press release to their subscribers Sunday Sept 12, 2010.

It may be surprising to know that one or more of the G-10 participants have reserved acceptance of the new framework pending resolution of some conditions they question. Remains to be seen how that will be resolved. But, if one holds back commitment, others will be slow to adopt the principles set forth by the agreement. Reticence by other than the one party would be prompted by refusal to yield competitive advantage to anyone. If a weak link results, forget the proposal weaving a stronger financial system. Everything they could handle would gravitate toward that weak spot.

[Virgil Showlion]

Old and gray
Message #1601 - 09/13/10 10:00 PM





A few excerpts from the FDIC PR statement might fit here to demonstrate not only the FDIC's outlook but that of the two other US Regulatory groups - the Fed Board of Governors and the OCC - who joined in the endorsement of the BIS efforts.

The U.S. federal banking agencies support the agreement reached at the September 12, 2010, meeting of the G-10 Governors and Heads of Supervision (GHOS).

The U.S. federal banking agencies actively supported the efforts of the GHOS and the Basel Committee on Banking Supervision (Basel Committee) to increase the quality, quantity, and international consistency of capital, to strengthen liquidity standards, to discourage excessive leverage and risk taking, and to reduce procyclicality in regulatory requirements. The agreement represents a significant step forward in reducing the incidence and severity of future financial crises, providing for a more stable banking system that is less prone to excessive risk-taking, and better able to absorb losses while continuing to perform its essential function of providing credit to creditworthy households and businesses.

The GHOS agreement calls for national jurisdictions to implement the new requirements beginning January 1, 2013. The GHOS announced that the new numerical minimum requirements would be phased in over two years beginning on January 1, 2013, and that certain capital deductions and the phase-in of capital buffers would occur over time from January 1, 2014, to no later than January 1, 2019. This transition period is designed to give institutions the opportunity to implement the new prudential standards gradually over time, thus alleviating the potential for associated short-term pressures on the cost and availability of credit to households and businesses. Consistent with this objective, supervisors will be evaluating an institution's capital adequacy on the basis of the then-applicable standards as well as the strength of an institution's plans to meet future standards as they come into effect.

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires the establishment of more stringent prudential standards, including higher capital and liquidity requirements for large, interconnected financial institutions.

We've been speculating about how high BIS might peg the Tier I capital requirements, often referring to something in the 10-12% range. Well, it depends on which heading you refer to. Annex 2 of the BIS PR is the phasing-in of the proposals. Some of the requirements jump more quickly than others. Some show no movement for five years. And, there's an introduction of a couple of new requirements which won't even be introduced until 2014 and 2016.

The purpose of course is to avoid placing too much stress on banks in their search for capital sources. There is capital available, but the question is, how prepared is that capital to jump into long term investments needed to fund the new requirements at the current rates?

Too many people have already pointed out the folly of buying into long term treasuries at current levels when we realize that interest rates must rise, and when they do, the bonds issued at low rates will lose value since new buyers will be looking for terms commensurate with those future higher rates. And, you'll lose if you intend to or are obliged by unforseen circumstances to dispose of the treasuries. Even holdingthem of course is a form of sufferage which no investor is willing to tolerate when rates rise and he realizes not enough gain to deal with inflation. The same mindset applies to almost any long-term investment. Convince me why I should invest my money at prevailing. low rates and lose principal if I were forced into liquidity. Rates will go up, inflation will occur, and those two alone will work against my interest and devalue my current investments. As an investor, should I simply say I'll sacrifice for the good of the country? While those in charge of the banks have no intention of doing anything of the sort? Who's sacrificing for whose benefit?

---

Old and gray
Message #1602 - 09/13/10 10:02 PM



We do have ourselves in a bind and the agreement of the BIS committee, although noble and needed, is not the only need for rescue we have.

The job has just begun. Dodd-Frank is only a partial answer as Sheila Bair pointed out during her long September 2 testimony before the committee. Her presentation was direct, unambiguous, analytical and pro-regulatory, unlike that of Ben Bernanke which preceded her. His I thought was placid, studied, evasive, protective of the industry and not a little defensive.

Jim Sinclair, in the Duff post above, suggests there can be no resolution without addressing the issue of derivatives. Of course I agree. In view of the continued straight-line increase in derivatives values unleashed since the height of the crisis, June 31, 2008, at a rate of about 5.5% additional per half year, banks and brokers are hard at work contaminating the markets again, all in a decidedly legal fashion since nothing has been done yet to eliminate the effects of the Gramm-Leach Bliley Act and its sheltering of derivatives. That may be some time in the future, all depending on how the regulators work out their schedule.

I still see no evidence of banking demonstrating their commitment to responsible management. Same people in charge, same tactics at work, with the same outlook promised that we had four years ago. Banks are simply Too Big To be Managed! And, derivatives are simply too wild an instrument to be allowed to pollute the global currency scene!

Unless there is some double speak in the labels found in this latest agreement by the G-10 which are concealing exactly what the BCBS is promoting with the new regulations, we're heading back to the same cycle we experienced through the last four years. Banks will be generating more paper which will dilute more currency and we'll still be casting around in search of replacement for the capital being extracted from circulation as well as strangling needed growth as the population increases and the need for international trade expands.

Stretching the schedule for implementation of just part of the demands we face is not the answer to our needs. Dodd-Frank Act offers only a partial treatment, BIS offers only a partial treatment, and the regulatory agencies generally offer an analysis that does not acknowledge full responsibilities. Everybody is walking on egg shells.

Just a couple of days short of two years ago, September 16, 2008 to be exact, Joseph Stiglitz, in an interview published by the LA Times syndicate, pronounced our economy "in desperate shape". His words were specifically:

"Even if we weren't looking at the financial turmoil, but at the level of household, national and federal debt there is a major problem. We are drowning. If we look at inequality, which is the greatest since the Great Depression, there is a major problem. If we look at stagnating wages, there is a major problem."

What has been done to change any of that? All the factors contributing to the enormous ugly, stunted growth brought on through the "shadow banking" world, which has now been redefined as some entity or industry outside the banking sphere, not the off-balance sheet activity or the conduits, or the unrecorded, unreported, OTC activity, are still there, still in operation, still poisoning the system. It does have to go. There should be serious doubt that if the same operators and regulators in place, we can expect different. I'd like to think that the UK's fining of Goldmand Sachs is a forerunner of things to come. The UKmay be more conscientious than we are in that respect.

---

Old and gray
Message #1603 - 09/13/10 10:04 PM



Stiglitz in his 2008 interview stated

"Clearly, we need not only re-regulation, but a redesign of the regulatory system. During his reign as head of the Federal Reserve in which this mortgage and financial bubble grew, Alan Greenspan had plenty of instruments to use to curb it, but failed. He was chosen by Ronald Reagan, after all, because of his anti-regulation attitudes

"Paul Volcker, the previous Fed Chairman known for keeping inflation under control, was fired because the Reagan administration didn't believe he was an adequate de-regulator. Our country has thus suffered from the consequences of choosing as a regulator-in-chief of the economy someone who didn't believe in regulation."

So, we have new laws which in effect allot the discretion of phrasing and enforcing the letter of the law to an organization whose leaders are essentially unchanged from those who delivered us to the need for the changes. And, if you care to read Bernanke's September 2, 2010 speak, he studiously evades any reference to the absence of capital as a result of the misdeeds of the banks. What can we say? He does so because such concerns are above his pay grade? Or, that is precisely what his pay grade entails?

We still come back to the question of the "Tier 1" institutions, as the Treasury has labeled them. are they too big to manage? Is there a limit of how much a person or a group of people can organize, direct and lead to proper, productive, honest function?

The two winners of the 2009 "Nobel Prize in Economic Science" were Elinor Ostrom of Indiana University and Oliver Williamson of Cal, Berkeley.

Williamson maintains that large institutions and corporations subsist because they are efficient. Their very existence, I'd suppose, indicates that they are so, otherwise they'd disintegrate. On the other hand, how many examples can we think of where enterprises or movements have outlived their usefulness? I venture we can all think of a couple that should have been put to rest long before they dissolved, thier prolonged existence placing a drain on the society they looked to for support. Williamson did acknowledge that large corporations could abuse their power. That in itself is recognition of the fact that efficiency is not always obvious in the operation of large corporations or institutions.

Prof. Ostrom is also interested in operations but from the regulatory aspect. She maintains that the management and regulation of organizations are better handled by insiders than outsiders. I'd taek exception tot hat. All of us have seen evidence where, allowing free rein to organizations or corporations results in abusive treatment of the market, outsiders, the public, clients or customers. There is even a little more than abusive treatment of the insiders at the hands of some corporate leaders or managers.

What is being pointed out in the foregoing is that we have three Nobel Laureates, two on one side of an argument and one on the other. Which should we place our faith in? That argument is: Is big necessarily good? Or, from another aspect, can corporations do no wrong?

A few posts back I mentioned Moshe Adler of Columbia University and his book Economics for the rest of us. Prof. Adler consistently argues that most economics theory is posed to favor the upper classes, the investors, owners and directors. And, he gives a number of arguments, half of which deal with the role of government and half addressed analyzing wage structure. It's not too far into the book that we discover where Prof. Adler's sympathies lie. Before the Table of Contents or the Introduction, Adler offers this quote from FDR:

"But while they prate of economic laws, men and women are starving. We must lay hold of the fact that economic laws are not made by nature. They are made by human beings."

(to be continued)

---

Kwame G Jones
Message #1604 - 09/16/10 02:09 AM

financial day of reckoning is coming soon

[Virgil Showlion]

Old and gray
Message #1605 - 09/17/10 08:24 PM



Economists speak in a coded language unintelligible to most people. I have no idea if that·s to conceal or elevate the ·science· of economics.

My prime, current example of this is the speech delivered by Mr. John Lipsky, First Deputy Managing Director of IMF, at the Jackson Hole gathering August 28, 2010. The topic was the International Monetary System. Beginning with a quick oversight of the current system, he then addressed the systemic problems we·re faced with, ·the most serious global economic and financial crisis since the Great Depression·. After referring to the ·important systemic flaws· he had this to say:

I will highlight today three interrelated problems: (i) the system lacks an automatic and orderly mechanism for resolving the buildup of real economic and financial imbalances that are indicative of systemic fragilities; (ii) the rapid and unabated accumulation of international reserves has reflected the buildup of imbalances, but also the desire of individual country authorities to self-insure against potential international market disruptions, and (iii) the large capital flows that finance the imbalances, and that have the potential to put financial markets under significant pressure.

[the italics are his]

We·re led into a labyrinth of veiled meanings. There·s the ·systemic fragilities· which include the ·buildup of real economic and financial balances·; the ·rapid and unabated accumulation of international reserves· including the ·desire of individual country authorities to self-insure against potential international disruptions·, followed by ·the large capital flows· with the ·potential to put financial markets under significant pressure·. Notice he points out that they are interrelated. What is he referring to? Currency? Balance sheets? Current accounts? Deficits? But, then, there is this ·desire to self-insure· which is not a function of any of those.

He exposes another piece of the puzzle a few paragraphs later:

Another central lesson of the crisis has been that the IMF·s economic and policy surveillance needs to be more rigorous, including enhanced coverage of financial sector issues, and a better recognition of systemic risks and spillovers. Shocks can be transmitted rapidly by interconnected financial institutions pursuing complex asset and liability management strategies across markets and settling on a real-time gross basis. These interconnections can cause systemic risk to rise, and even relatively small events can have systemic ramifications.

The ·financial sector issues·, ·systemic risks and spillovers·, again, could be any of the four aforementioned elements except for the introduction of the ·interconnected financial institutions pursuing complex asset and liability management strategies·. There·s suspicion brewing here. We·ve been addressing these same issues in a little more down to earth language for a year and a half. Calling a spade a spade is better communication, is it not?

The label ·spillovers·, which Mr. Lipsky later enhances with the expanded label of ·international policy spillovers·, sounds suspiciously like some device intruding into another nation·s sovereign rights. Especially when he tells the audience that the IMF has been working in collaboration with the Financial Stability Board (FSB) on a ·biannual Early Warning Exercise· which intends to examine ·potential risk scenarios for the global economy· and suggest ·possible policy responses·.

Then, his references are clarified when he says:

In particular, we are working to expand the Fund·s set of insurance-like instruments in order to respond to the heterogeneity of countries· policies and circumstances. In addition to the FCL --that is available only to countries with strong policies -- the Fund·s Executive Board is discussing the creation of a Precautionary Credit Line (PCL) that could be made available to countries with sound policies that nonetheless do not qualify for the FCL. The PCL would carry strong qualification criteria, but also streamlined ex post policy conditionality.

---

Old and gray
Message #1606 - 09/17/10 08:26 PM

(The FCL is the IMF·s Flexible Credit Line, established in 2009as part of their ·crisis prevention capabilities·.)



Note the phrase ·insurance instruments·, not insurance itself, but ·instruments·. It finally becomes undeniably obvious. . .derivatives! Yet, in the total of five tightly knit pages, there is not one use of the word itself, no matter how little the chance of mistaking his intent. Not only does he not use the word, but there is no mention of the most effective means of neutralizing the toxic effect, ban them! What Mr. Lipsky is embarked on is joining the crusade to preserve them. The dark side of Finance now has the unrestrained endorsement of the IMF.

All of which proves, in that elegant, elevated language Mr. Lipsky and economists prefer, Politics do not rule the world, Finances do. So if any of the readers have objections to watching their assets devalue, their wealth disappear, their pensions evaporate in a repeat of the last four years - in Ross Perot·s descriptive language - in a giant sucking sound, complain away. Guaranteed you can come in no worse than second place in a one entry race. . . and that is guaranteed that you will not come in first . . And that second place finish will grind to a halt perhaps within the time span of less than one more generation.

This is really the news carried by this economic double-speak. It beats about the bush but only carries one message. . . and, more importantly for the purpose here, one side of the story. Grand dad was right. I gave him a long overdue posthumous write-up in the MT thread ·Hussman: Bernanke·s Quantitative Easing. . .· at the end of August. I wrote: . . . . ·his opinion of economics was that with few exceptions, throughout its entire history, it was never designed to serve anyone other than the very rich·. We have discovered a couple of exceptions, Professors Stiglitz and Adler, and a few other sympathetic souls who nevertheless are hampered by the educational process economics has erected.

In the Introduction of his small book, ·Economics for the rest of us: . . .·, Adler points out that economists waffle on decisions because predictions may get them in trouble. And, he expands on this thought with:

·Why is economic theory so one-sided? Is it because anyone who devotes her life to investigating how the economy works inevitably reaches the conclusion that what·s good for bosses is good for everybody? Not at all. For every critical economic issue there are competing concepts and theories that lead to different conclusions. The problem is that when they are not missing from text books altogether, these theories are almost summarily dismissed. This would have been of no consequence if the only victims were economics students, but unfortunately most citizens are familiar only with textbook economics, and the economists who influence government policies are, by and large, textbook economists. (Nobel prize winner Joseph Stiglitz was an exception, but his term as senior vice president and chief economist of the World Bank lasted only three years, from 1997 to 2000).

I believe had Moshe Adler shared no more than this one view with my Grandfather, they would have gotten along very well.

About 60 years ago an economics book met Senator Joe McCarthy. If some of the younger readers haven·t heard of Joe McCarthy or been exposed to his shrill, psychotic rantings, count your blessings.

I was wandering through a book store and discovered a new economics text book by a professor from somewhere in the mid-west, last name Ise, first name forgotten, unfortunately. It was eminently readable, seemed to be complete, and it became mine. I liked it and read through it several times.

---

Old and gray
Message #1607 - 09/17/10 08:28 PM

Enter Joe McCarthy. He put it on his list of books inappropriate for honest to goodness, blue-blooded American citizens. Why? It had about a page and a half or two (maybe more, but still a limited general overview) of how communism differs from our capitalist system and another few pages devoted to the Socialist System. McCarthy, always the champion of what he determined to be defenseless, formative minds made his move. People should not be exposed to contaminating information. They may never recover! The book was banned and disappeared, unable to withstand the attack from the grating, psychopathic cries of the man who eventually was shot down after too many embarrassing years for the US Senate.

I don·t believe an economics textbook would suffer such a fate today. There·s another guardian of the faith at work. Peer review! If the subject matter doesn·t meet with prescribed approval, it doesn·t get published. So there·s no need for another Joe McCarthy, the discipline takes care of itself. I have a suspicion that·s why Moshe Adler·s book is published by The New Press,

·a not-for-profit alternative to the large, commercial publishing houses currently dominating the book publishing industry. The New Press operates in the public interest rather than for private gain, and is committed to publishing, in innovative ways, works of educational value that are often deemed insufficiently profitable.·

Adler·s theme is the other side of equilibrium experienced by ·the rest of us· but never studied by the trade. There·s a reason for this, not necessarily commendable.

If a budding or full-grown economist has any hope of landing a good paying job, he/she can·t be exposed to preaching from the other side of the gospel. As a matter of fact, you might pick up a text book of 700+ pages and thumb through the index, and you may find one or two references to individuals as the base for markets, or demand, as consumers or laborers, but when you look up the specific sections, you·ll find that the mention is no more than a page or two (sometimes no more than a paragraph, or sentence or two) in passing. Macroeconomic textbooks are more likely to have that sparing treatment, others avoid the stain completely. Having a mind exposed to such contamination might disqualify both the possessor of the mind or the teacher who corrupted it, from serving the system adequately, according to its strict demands.

We dealt with the matter of conflict of interest back at message #122 when we addressed the issue of Credit Rating Agencies. The same restrictions apply to economists. The tangled web of self-servicing for economists also was mentioned previously, at #229 and #230.

Which then brings us to the point where we ask, in view of the fact that economists are not taught to think about the status or role of the individual in our system built for a select few, how could they adequately represent another sector of the economy. In view of the bias and identity of potential employers, would an economist be interested in studying individuals? There is no high paying position waiting for economists in a mom and pop operation. Labor unions don·t normally hire economists. I know of one economist, very sympathetic toward unions, who volunteered his services, but he was also a teaching professor at a large eastern university (and he stole one of my papers!)

Consider the themes of the Nobel laureates mentioned above: their specialties might have been of interest to businesses as crutches, ammunition for defensive arguments, no doubt.(This doesn·t include Stiglitz, of course.) Can you imagine someone specializing in proving large corporations were the epitome of efficiency? Or, another carving a career out of the view that corporations are better regulated from within than by external regulators, public or private?

---

Old and gray
Message #1608 - 09/17/10 08:33 PM

The truth, as Adler points out, is that economics is not all about the business aspect of life. I mentioned Marshall and the beginning of his Principles of Economics (1890), for a long period, the unchallenged basic text. His very first sentence, Book I, Chapter I, section 1:

Political Economy or Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing.

We don·t use that kind of book anymore. We·ve been emancipated!

Unfortunately, these new, greener pastures where we can roam free are not operating under rules that put us, the general, taxpaying public, in a favored position. Data indicates we are around 70% of the economy, but economists allot us just a fraction of 1% of their attention. Do they lead the way, or are they following dictates?

Aristotle·s treatise on Politics begins by referring to the household and the housewife·s role in seeing that it functions well. . . thus, the very name for the discipline, which translates as ·household·, as was pointed out. Once this understanding is established, he moves on to fit the politician·s duties to those of the housewife. Most early economic writers were fully aware of the classics. It was the starting point for their education. That persisted for centuries until the middle of the nineteenth, possibly early twentieth, century when it was probably decided that economics then had sufficient history of its own, enabling it to break free from the classic past. It no longer needed support from the Greeks or Romans. The jury is still out on whether that was an improvement or not.

At that time it was already a study of the privileged for the privileged and has not changed since. We might ask what happens to the other 70% of the economy that doesn·t hire economists? That seems too large a portion of the system to neglect and hope to enlist as willing participants for any appreciable length of time. Unfortunately there·s no movement in the offing for representation nor is there much likelihood of a fight for an idea that it isn·t profitable. So, there will be no non-employers included in the study.

That being the case, the result is a study of half or some part of the discipline. This makes it a ·wannabe· science. When something goes part way, it·s not true. Being not true, how can it be considered a science? Being honest, we can·t look on it as anything more than a manipulation; but to grant it some standing, let·s say it·s an ·art·. Could propaganda be honored with such a title?

The cadre that impelled Economics toward becoming a science was small to begin with. William Stanley Jevons (1835-1882) whose The Theory of Political Economy (1871) spent the entire first chapter justifying economics as a science since it ·measured things· might have been the prime mover. Apparently, before this time economics was no more than a philosophical study. In that first chapter, Jevons entreated everyone to consider economics a science because, to quote him directly:

To me it seems that our science must be mathematical, simply because it deals with quantities.

W. S. Jevons, The theory of Political Economy, Chap. 1, 1.5

(That·s his italics.)

By the way, the topic of Jevons·s second chapter was The Theory of Pleasure and Pain, Pleasure and Pain as Quantities. He intended to expand on Jeremy Bentham·s pleasure/pain with the aid of mathematics. That second chapter includes some rudimentary charts diagramming incremental pleasure and pain. His ultimate intent, never realized, are found in his words:

The algebraic sum of a series of pleasures and pains will be obtained by adding the pleasures together and the pains together, and then striking the balance by subtracting the smaller amount from the greater.

[Virgil Showlion]

Old and gray
Message #1609 - 09/17/10 08:36 PM



The intent, never realized, may (or may not to some) seem ludicrous today. However, Jevons was looked on as a brilliant light in his day and his early demise at the age of 47 was lamented.

There was arithmetic in economics prior to that. Nearly two hundred years earlier, 1690 was the posthumous publishing date of a treatise by Sir William Petty, The Political Arithmetick. It was no more than that, a long list of quantities, trade, exchange and so on. Jevons was obviously aiming higher.

Under Jevons·s impetus and accompanied with the entire field of economists anxious to be accepted in academia as scientists (and probably gain a pay raise in the process) it didn·t take long to have economists lined up with mathematical formulae, many of which have yet to establish relevance other than punctuating a sentence with mysticism. Krugman referred to it as gussied-up economics. But then, why knock it if it elevates the scholars into another tax bracket?

What does all this have to do with this thread?

At message # 585, Paul Krugman·s lengthy Sunday, September, 2009 article was reviewed. The article was entitled ·How did economists get it so wrong?· I admire him for his pithy but direct titles. For me the memorable line in the article was:

·As I see it, the economics professors went astray because economists as a group, mistook beauty, clad in impressive looking mathematics, for truth.·

Mistaking Beauty for Truth! All for the willingness to accept William Stanley Jevons·s goal of elevating economics beyond the realm of philosophy into the rank of science.

Distinct from Krugman is Professor James Galbraith, of Texas University , who, appearing before a Congressional committee, opened his address with an apology with something like,

·I come before you from a profession that·s been disgraced.·

This was in reference to the ineptitude the discipline displayed in relation to the corrupted markets and the stunned financial industries due to the toxic effect of the derivatives. Economists should have been able to analyze the situation and at least warn the world of the danger and the extent of damage promised in the process. As if they cared about the total effect at all. It·s fitting that Galbraith is based in Texas; he·s something of a maverick. And no one appreciates a maverick as Texans do, God bless ·em.

What Galbraith acknowledged in his apology was that economists are over-reaching for the sake of prestige.

It·s my belief they·ve been trying to ensconce themselves at a level which may be beyond their reach and as a result they are totally off-balance. And, now, that same group is sitting on top of the crisis they helped generate, trying to steer the ship of state to solid ground.

Economics,if a practitioner brings nothing else to the scene, is a forced science. I say ·forced· in the sense that following Jevons·s lead, they began to concentrate so much on mathematics to make the study respectable in academia that they forgot about the common sense so vital to understanding the economic world. Instead, they catered to one aspect of the system and compromised the study into disrespect.

We·re here now, having our system analyzed, described, prescribed and handled by inadequately trained people who acknowledge only part of the story. Think about that a little. If an analyst does not acknowledge your role in society can you expect fair treatment from him? Or, any treatment for that matter? If he never studied your role or contribution in depth in his inadequately perceived community, can you expect him to consider or recommend a plan or program that would represent your side of any issue? If he brushes aside any recognition of your dilemma, do you feel confident he is the person whose opinion you should respect?

---

Old and gray
Message #1610 - 09/17/10 08:38 PM

And, yet, this is the best we have to offer to diagnose and prescribe for our rescue from the mess they helped create. Who can we depend on to deal with joblessness, homelessness, devalued assets, lost pension plans, vanishing savings, and the evaporating American Dream? Politicians?



I would understand if my Grandfather pitched Bernanke·s pap-smeared September 2 testimony to the Crisis Committee. I know I have little respect for it. Most of that may well result from his teachings.

And, to follow the lead of James Galbraith, I write this as a member of a profession that is disgraced.

---

Scared_Shirtless
Message #1611 - 09/18/10 11:33 AM



I can't help but point out O&G, that some members of your profession are much more disgraced than others.



Thank you - for being one of the shining lights.



Maybe economists don't realize they're really a service industry.



After all they supposedly perform a service for others - that's their mission.



Maybe they forget that in service the others are called customers.



Or maybe they forget the maintenance aspect implied upon them. For instance - I work in computers and everyone's first reaction is - ugh computers - just handle it.



So I do.



But I'm talking about the "minding the store" aspect. While my profession grants me significant flexibility I am also very aware that I MUST ALWAYS mind the store - so to speak. Because if I'm not - nobody is. Maybe they've forgotten the implied responsibility that comes with flexibility and being a service.



You haven't.



Wishing everyone the very best.

---

Old and gray
Message #1612 - 09/18/10 12:49 PM



Scared



You're too kind.



After finishing the above, I couldn't help but picture economists as the star sprinter with one leg shorter than the other running on a straightaway course, so all he could do was run in circles.

Won't win many races that way.



As you point out economics is a service industry. Trouble is, they've discovered which end of the spectrum pays, that's the end they service, and they've neglected the rest of the economy. How can they do otherwise, when the privileged can buy and shape an entire science to suit their whims?

[Virgil Showlion]

MI_for_me
Message #1613 - 09/20/10 09:46 PM

Old and gray,
I wish to thank you for all of your insight and contribution on this topic. I will admit that most of it is still way over my understanding but you have built some basic building blocks for me in this subject matter. I will state that at first I disagreed with some earlier post and points but as I later built more understanding in this topic that my views have been changed in what I first conceived were correct but now is very flawed. I still have a hard problem understanding just what money really is. Although definitions are easy to understand, money in itself or stored value of wealth still mystifies me in a fiat world. Even if money is backed 100% by hard currency, this still complicates the issue. To me, it's more an issue of about control of the populace but should not be by fiat or hard currency if controlled by bankers such as the FDR or IMF. I just ran across a new clip that might be of interest to others and hopefully related in some ways to your postings here. If not related, then I will gladly delete this post. This is about a 2 hour clip. "The Secret of Oz."


May your tomorrow
Be better than today.

---

Old and gray
Message #1614 - 09/21/10 02:35 AM



MI-for-me



Don't you delete a thing!



The concept of currency or money is not a simple thing to grasp. People memorize the "medium of exchange" phrase and since it's easy to repeat, they believe they have the entire concept. It's barely an introduction. I've been working on expanding the concept for more than 60 years and every time I'm convinced I have it all included, another substitute or supplement is introduced. Just recently, I almost resolved to call money as currently used, nothing more than a portable accounting system. Yet to do that would compress the concept to the point that all the variations of money in use today would then be nothing more than script in the nature of a bookies betting slips, with doubtful intrinsic value until it's put to use. So, that's not it either.



You can read about money in just about any language you choose: English, German, Swedish, French, Spanish, etc., etc. All of them have something worth adding to your personal store of knowledge if you have the time, curiosity and drive to dig into it. Several of the standard theories have been mentioned herein. Banks and corporations exchange different paper with value attached and never think of it as currency, yet it is widely accepted and passed on without a second thought and is respected the same as money. It has value attached.



We dealt with derivatives in this thread and labeled them fiduciary media. That means that the paper circulates backed by belief that the issuer has attached value and the market will accept that assertion because they trust the issuer. The derivatives turned out to be a false media because the faith was misplaced. The issuer never intended to support the paper he generated and passed on with his integrity and honesty as the market expected. Nevertheless, they continue generating it. Just consider the amount in circulation world wide and anyone who ever heard of the name "derivative " should be suspicious of its value on the basis of quantity alone. Butt, the trades continue.

Considering that worldwide GDP has been pegged somewhere in the neighborhood of a little more than $60 trillion, if we were to say the total value of all property worldwide was three or four times that, it would place dollar value of total property in the neighborhood or $180 to $240 trillion. Derivatives, which are backed up by the currency of the originating nation, are now nominally in excess of $1.25 quadrillion! And, still multiplying! This is the total issued by banks, brokerages, and insurance firms, who do not cross lines to inform each other how much is in circulation. Why should that be. . . .? They may frighten themselves with the magnitude of what they're doing.

Then, too I mention economics books dealing with the theory of money; derivatives as used today have a different function than similar instruments issued twenty or forty years ago. No one has yet composed a cogent theory of precisely how not only derivatives but other forms of paper fit into the spectrum of currency that's indisputably accepted by the economics trade. Trying to fill the void, I have my definitions. As it stands now, there are about four or ten different different theories floating around, being disputed. And, then there is the government with its own arbitrary categorization. Every so often, something happens to change the perception of money and what was a viable definition ten or twenty years ago, suddenly becomes woefully inadequate. . . sometimes overnight!



Derivatives are currently referred to by some as "contracts". They are drawn up and agreed to in the form of contracts. And yet, they are traded on and off exchanges, billions of dollars' worth daily, as if they had solid value. Any time I hear of something being bought and sold on a market, I feel there is value attached. And yet they are just pieces of paper until something described in the "contract" happens. Suddenly, the value pops up like a blooming flower after rain and the morning sun. On the other hand no rain or sun for a week and that flower dries up and dies.

---

Old and gray
Message #1615 - 09/21/10 02:36 AM



I've chosen to address them as "fiduciary media" because they fit the definition and function of fiduciary media as described by more than one economist. And, they have produced a monetary crisis from excessive indulgence, just as excess fiduciary media would. If it looks a duck and quacks like a duck, . . .

---

bubblyandblue
Message #1616 - 09/22/10 01:29 AM



It is, therefore, a duck. Old McDonald had a farm, E I E I O and, on this farm he had an economist, with a crisis here an indulgence there, here an indulgence there a crisis, everywhere and indulgence and a crisis...E I E I O. Old McDonald lost his farm E I E I O.

Contracts mixed with fiduciary media....it can't be rite. I thought a contract imparted a duty upon both parties....money was meant to standardize the contract for value within the contract. Money enables the contract based on known value. I am not going to sell you a goat based on the goats great grand kids....it gives me nothing for the present. Hey, I'll reimburse you Tuesday for a burger today. It looks like a bunch of claims on property that have been over produced. If everyone decided to settle up at one time, there would not be enough assets/money to settle-up....so, somebody is stolen from and, somebody else did not contract with good faith. That counts as fraud in my book.

As far as humans are concerned (I am one), they can figure out the most complex problems known to man....it is those unknown problems that stumble him. I mean heck, we figured out how to open Pandora's box but, we ain't figured how to get it closed. I figure that, if we continue to add so many claims to property, it'll be worth nothing after a time, so, we might, after a time, not have to pay anything for it. ....maybe Pandora's box ain't so bad after all.

So do we control our ability to trade with each other (keeping in mind that everyone wants a more fulfilled existence) or, do we let trade (fiduciary media, contracts, money money money) control us? Please ask yourselves, who is in control of our 'money'?.

So here we are, perplexed by that which we have created, under it's spell and still trying to figure it out. In addition, we are still trying to figure out what has been happening to us since our discovery of thinking. Someone would have to think it funny, to view our confusion from the hindsight of future history.

Ahhh, a free market, what comfort I have in thee; it will take us to a better place, like, horses un-reigned, pulling our chariot of history to destinations unknown. Let them run free, for soon, they will trample the evil from this world.--- - comment - 1)where the heck does that belief have a foundation. 2) Them horses seem a little frightened by pulling a bunch 'civilians' yammering and cajoling down the path of history - what a drunken mess this ought to be --poor little innocent horses.

We here, haven't received much information from those folks we voted-in, in part, to guard our gates against the rampart of injustice and oppression and, further, to keep us informed.

Well, from my view, it looks like that chariot of yammering and cajoling humanity is going to crash, unabated, into the gates of injustice and oppression - I only hope we can revive the horses.

Note: Old and Gray; you hit on the very serious nature of our understandings and, its implications for us as a society in regards to money. I apologize for taking some liberty with my comments. We are political animals and, seem to exhibit some short-sightedness these days. I hope it sinks-in, we must make major changes or we will, in our lifetime, not realize the better life to our future generations. After all, that's what we are supposed to do.

[Virgil Showlion]

Old and gray
Message #1617 - 09/22/10 04:41 AM



If we recover from this. . . not recovery to the extent it would put us back in the condition we were at the start, say 2006. . . but, if we recover to the extent that we can still go hobbling along at quarter speed more or less, say at the level of the Great Depression. . this would be a positive sign to the players that derivatives are not really "weapons of mass destruction". Harmful perhaps, but, not the terrible, ultimate mass destruction preached by those alarmist non-players. However crippled we might be, however our ability to go on is impaired is of no consequence. At one speed or another, we can go on! - with crutches, prosthetic aids, crawling on bloodied hands and knees, however. We have not been buried, no one has been prosecuted, nor has any of the proceeds been confiscated, or any of the operations shut down. In other words there is nothing tangible to indicate disapproval! This is all positive assurance to the main players that the trade - no matter how many others are put out of work, or lose homes, or whatever the additional damage to the nation's, wealth, prestige or stability - what remains, no matter how miniscule - is all evidence that the world can still tolerate more of the destruction our bankers unleashed on it. So they intend to continue. And, rest assured, the people in charge of the supervision and regulation will assess the situation looking through the same pair of glasses, using the same standards.

When we finally arrive at a state of impoverishment wherein it is absolutely impossible to hold the US economy together without assistance from the rest of the world, when all the resources to which we have any claim present or future are committed and will still be insufficient to lift us from the destitution the bankers intend to lead us to, Keynesianism will have succeeded, will have reached its Nirvana.* Then, perhaps, the wise solons of Washington will see that this is more than just an innocent method of enriching a very few of us, enabling the lucky billionaires to buy in to anything they please. And, of course, at that point, the privileged classes will see there's nothing worthwhile left in the destitute country worth buying or laying claim to and relocate somewhere more suitable to their tastes and stations in life.

Anyone care to place a bet that in another decade or two there will not be twice the $1.25+ trillion derivatives circulating? And the dollar, unless it is reminted in much less than half its present value, will not be accepted in international trade? In which case they'll need another name for it, because of the stigma it's acquired.

The only thing to stop the degradation would be if a completely new, concerned pack of leaders appeared on the scene who cannot be bought or intimidated. There's no hope those leaders could be found in the present crop or its successors. A case could be made that the ethics and vision required to help the nation are no longer found in our constitutional makeup. Anyone who believes that the system should operate for the good of all, or that wild behavior should be regulated or supervised is ridiculed, ostracized, excommunicated or deported - if they are not now, they soon will be. The common greeting to critics will be the time worn: "If you don't like it here, go back to where you came from."



Well, its crowded in Philadelphia, too, nowadays. I wonder if it's still the City of Brotherly Love? It may be; but, operating in a more restricted way. I'll have to talk to my brother about that. Of course, there's always Newburg. One branch of the family moved east to Boston in the first half of the 1700's.



* stonerdr had a quote from Keynes, "General Theory. . . " on another thread, which finished up with this sentence:

". . . This for a society such as we have supposed, the position of equilibrium, under conditions of laissez-faire, will be one in which employment is low enough and conditions of life sufficiently miserable to bring savings to zero. . . "

This is supposed to create conditions ideal for investors and entrepreneurs.

---

Duffminster
Message #1618 - 09/23/10 08:19 PM

The only thing to stop the degradation would be if a completely new, concerned pack of leaders appeared on the scene who cannot be bought or intimidated.

With the recent supreme court ruling that now makes it perfectly legal for corporations (foreign or domestic) and anyone else accept maybe terrorists to spend as much as they want financing politicians campaigns without any kind of disclosure and with the continued efforts of the GOP to block new transparency legislation I think the corruption will only get worse before it gets better. There is a vote up today on the subject of campaign transparency:

[www.google.com/url?sa=t&source=news&cd=1&ved=0CC8QqQIwAA&url=http%3A%2F%2Fwww.theatlantic.com%2Fpolitics%2Farchive%2F2010%2F09%2Fdemocrats-likely-to-fall-short-again-on-campaign-finance-bill%2F63433%2F&rct=j&q=republicans%20block%20campaign%20finance&ei=9q2bTNGpF5SosQOnrdDvCA&usg=AFQjCNE83CSSI1CAtg4AO5b8yKVaYGbkTg&cad=rja] GOP to Block Campaign Finance (Again)

The Senate will vote today on the DISCLOSE Act, a measure that would increase disclosure requirements for corporations contributing to political campaigns. In July, Democrats fell two votes shy of cloture, which would have made the bill immune to a Republican filibuster. Since then, they have gained the vote of Sen. Joe Lieberman, an independent who was not present at the last vote, but remain one vote shy of the cloture-ensuring 60.

They were hoping to rope in moderate Republican Sen. Susan Collins, but Hotline On Call's Jeremy Jacobs [hotlineoncall.nationaljournal.com/archives/2010/09/collins_likely.php] reports that she is most likely not on board. With Massachusetts Republican Scott Brown, whom the Democrats targeted in July, also a no, Majority Leader Harry Reid is left to nag the usual swing vote: Collins' colleague from Maine, Olympia Snowe. While it's possible she'd flip, just as it's possible the District of Columbia could be struck by an 8.0 earthquake today, it is unlikely.

Since the Supreme Court ruled on the First Amendment right of corporations to engage in political speech in its Citizens United decision this past January, Democrats in Congress have been scrambling to pass a campaign finance bill that would increase corporate disclosure requirements. Obama has invested heavily in the effort, from chastising Supreme Court justices during his State of the Union speech to [www.whitehouse.gov/the-press-office/2010/09/18/weekly-address-president-obama-castigates-gop-leadership-blocking-fixes-] plugging the necessity of the DISCLOSE Act -- and lamenting that damage has already been done -- in his weekly radio address on Saturday:

What is clear is that Congress has a responsibility to act. But the truth is, any law will come too late to prevent the damage that has already been done this election season. That is why, any time you see an attack ad by one of these shadowy groups, you should ask yourself, who is paying for this ad? Is it the health insurance lobby? The oil industry? The credit card companies?

As the Washington Post's Ezra Klein [voices.washingtonpost.com/ezra-klein/2010/09/obama_on_corporate_advertising.html] points out, "a lot more people will see ads funded by corporations this November than will ever hear or read a word of this radio address."

Already, the airwaves have been flooded by ads from advocacy groups registered as nonprofits, which are subject to less strict reporting requirements than political action committees. Just last week, the conservative American Future Fund made a [blogs.cqpolitics.com/eyeon2010/2010/09/american-future-fund-on-the-ai.html] $2.3 million TV ad buy across seven House districts. Though the group has a political action committee, this PAC [images.nictusa.com/pdf/088/10931295088/10931295088.pdf#navpanes=0] reported a mere $12,572 in 2010 disbursements as of September 19.

---

Old and gray
Message #1619 - 09/23/10 10:14 PM

. . . And, it's been blocked!

---

Scared_Shirtless
Message #1620 - 09/23/10 10:36 PM



Aaaggghhhh!!!!



Of course!



Will it ever end O&G?

[Virgil Showlion]

Scared_Shirtless
Message #1621 - 09/24/10 11:54 AM



O&G?



Something has always bothered me through this whole mess. And that is the home mortgages and their associated documents / documentation / diligence / etc. through their respective closing processes. It is widely regarded that fraud has been committed on the mortgages via, misstatements, missing docs, not properly signed or witnessed doc, and any one of a myriad a reasons we can all come up with.



The bottom line is it is widely regarded to be a rampant problem amonst all the home loans before the bubble popped. And all those loans are now part of MBS packages. But don't virtually all the MBS packages contain iron clad legal verbage that ALL loans in the MBS MUST BE properly documented, conveyed and al those other nice words and conditions they must meet.



And yet MANY loans were not! And isn't it also true that as these loans default, and the deficiencies proved - practically any deficiency - they can be PUT BACK on the financial institution that created them? We could be talking trillions. And now I see court cases to that effect.



An associated thing is occurring. Banks are trying to enforce foreclosure when they can't even come up with the required doc's! So they've been committing perjury or whatever signing affidavits that they DO have proper docs. And this has now been turned on a couple of banks. They say the docs problem is also huge. And then of course there is MERS...



Is this the tip of another iceburg dead ahead on my radar screen?



AS ALWAYS - I appreciate your thoughts.

---

Old and gray
Message #1622 - 09/24/10 04:12 PM



Scared

An associated thing is occurring. Banks are trying to enforce foreclosure when they can't even come up with the required doc's!

Banking is incredibly complicated. Not that it need be, but when you're busy trying to conceal what you're doing, and how you do it(!), all kinds of impenetrable screens become necessary.

Bagehot's Lombard Street was quoted a number of times, but one of my favorite ideas, loosely reworded, is "Banking done correctly is easy; if it becomes difficult, it's wrong." To which I would append, when it's done wrong, it becomes immediately obvious in the resulting complexity!

Considering how long banking has been around and how many times it's been shut down for a couple of centuries, bankers have had ample time to develop strategies to allow themselves to circumvent what most would consider ethical banking business practices or the accompanying regulations. And they do that up in spades.

It's not necessary to go back to 15th century Italy to resuscitate the ideas. Banking in the US has employed just about every trick of the trade. And, each generation firmly believes they have developed the clever new technique to evade regulation and avoid prosecution. Of course the leaders strut from mansion to mansion, corporation board rooms to board rooms, and look on themselves as the cleverest of all tycoons. In truth, most of the things they do are just old tricks found in the attic, dusted off, and brought back downstairs into the light of day polished to a new sheen and sent out to attack the system all over again.

A clever French woman, Mlle. Bertin, once remarked, "There's nothing new except what's been forgotten."

Banker's are counting on that. They hope we forget all about the way they've run the global system into the ground the last time and the time before that, etc., while they bought that third or fourth mansion at one of the world's premiere sites and plunged the last bonus into the obligatory 100 foot yacht parked in the three foot deep Jacob's Creek just as a reminder of what they can accomplish to whatever witness happens to pass by.

You're aware that the trick with the mortgages you bring up has been discussed in this thread. It crept in when we discussed the redirection of the loan function from "originate-to-retain" to "originate-to-distribute". (See message *81) The outcome could easily have been, and was, predicted by some alert observers. There is a normal way to conduct mortgage loan business (See #83 and #90, et. seq.), then, there's the current bank technique. The first assumes responsibility, the second dumps the responsibility off to some nameless entity off in some obscure gambler in a far-off land. The first requires head's up work, the second rewards people for doing nothing. So, laziness, sloppiness and inordinate profitability became the name of the game. (Ask V_L!)

With all the shuffling, of course, a tremendously complex system was set up, not organized in one fell swoop with all procedure well-defined, responsibilities and obligations all in place and the sequence channeled to operate with all the smoothness of an expensive Swiss watch. Rather it became a hodge-podge of "interconnectedness" and the banks dealing with the "originate-to-distribute" became a maze defying description, using every tactic in the satchel brought down from the attic. All the concepts, conduits, intermediation, risk transference, shadow banking, "synthetic" credit liabilities, were called into action to serve one end, let's get our hands on the money floating through the system be it real or something we generate in the process, namely through the loan granting procedures. . . more specifically, the fiduciary media (current accounts). . . And in the meantime, to tidy things up, we'll go into an ancillary business - self-insuring ourselves at someone else's expense. That was the severance of the last tie to respectable banking.

---

Old and gray
Message #1623 - 09/24/10 04:20 PM



Years later, some smart people have been able to sit down and draw up incredibly complex charts showing the inter-relationships of the various elements of the process. That was not in the minds of the perps from the outset. It's doubtful they are capable of such thought process. They were interested only in the pot of gold, lying unattended. Organization was the furthest thing from their consciousness. The sequence was just as F. A. Hayek described in reference expressed in the first message Duff chose to begin this thread. (See #2)

It may not be widely recognized but two agencies, rather, one agency of the government and one "non-agency" agency (The Fed) were instrumental in allowing the banks to do this. The ambitious bankers were counting on the deposit insurance facilities of the FDIC and the Discount Window of the Fed for assistance when things went wrong. In other words, it was not entirely unexpected that the scheme would collapse. The government went them one better. When the scam fell apart, the government concluded that the FDIC even in combination with the Fed were not up to the task and had the Treasury pitch in and offer up the resources of taxpayers for sacrifice to the great god of banking some call Mammon.

Mortgages? The convenient excuse on which to base all the mechanics, nothing more. Had mortgages not been there the bankers would have found some other convenient device as a foundation for their scam. . . which they eventually did when they discovered how convenient and profitable the process was.

Banks were getting cocky, and still have not had that knocked out of them. They look back on the eighty years since the US has had a real bank run and proclaimed, "We've got it licked!" Of course, they did. . . But, they did not acknowledge that the success was largely due to the conscientious work of a Congress back in the thirties who resolved that it should not happen again, withstood the opposition of the trade and the players, shouldered responsibility expected of legislators with a nation's health foremost in mind, and, frightened by the enormity of the destruction and suffering unleashed, proceeded to set up a system of controls, restrictions, regulations and supervision that kept us healthy for seventy years until the final crowbar pried loose the last of those old regulations in the late '90s. When the bankers proudly pointed to the fact that we had not experienced a run on the banks since the thirties, they failed to point to the reason why: They were restrained by laws and regulations that kept them honest. For seventy years they worked at dismantling the system so they could return to the same tricks of the trade that delivered every bank run in the history of banking. . . all gathered together in the minds and bodies of greedy bankers.

You'll find all manner of convoluted explanations of what and how it happened. . all developed after the fact. And by the time you stagger out through the maze, you're head will be swimming. Most of the travels through the alphabet of devices, agencies and techniques are not meant to explain, but to provide excuses and show how legal and logical the system is. It is both only because bankers can buy the allegiance needed to prove they are ethical, trustworthy and loyal. What they bought is an unbelievably monstrous stack of literature that in its attempt to describe the complication only ends up creating complexity that never existed, and serves to conceal complicity, guilt and the ravaging appetites still waiting for more of the same.

Nobody has enough time to read it all. Banking itself in the normal sense is a lifetime's work. In this hybrid style, it's at least twice that much work. To pour through the literature and understand the process is nearly a 24/7/365 project. Bankers are seeing to that. And, if there isn't enough out there to obscure the process at this time, they'll have more out there soon enough.

---

bubblyandblue
Message #1624 - 09/24/10 08:50 PM



Thank you O&G.

Finally, the reason why I feel utterly stupefied. The complexity just invites fraud. An informed citizenry is the only defense for a democracy. What you describe is a wall of trash that can not be understood - just manipulated. Sunshine laws were made to shine a light on things so the cockroaches would run and hide. Anytime a fraud has been committed there has been deceit or omission. Fraud requires the mechanism to be hidden from those it is committed against.

I always thought that money was an enabler of a contract i.e.: If you do the cleaning, I will give you shelter and food for the night. Money was brought into the equation, so, that you have a choice to seek shelter and food elsewhere or, to give me the option of giving money for value, instead of housing and feeding a stranger. Both expanding choice and were good.

So now we have money used for things beyond human comprehension - we are trading in flying elephants for all anybody knows. We are now creating multiple units of value, each equal to the original value (thus debasing it), instead of using money as a measurement of value in exchange. - I certainly can't explain it.

My brain just explodes. I will drive myself nuts trying to figure out something that can't be figured because, somewhere, at sometime, others just wanted to confuse the whole mess so they could 'get-over' on someone else. Sort of like bumping into someone to distract them from getting their pockets picked and, quickly doing a pass-off in case someone was looking. It sounds like common theft, wrapped in an air of artificial sophistication.

So, I am glad my stupidity is somewhat justified and, the people who know me (and tested me).. call me a genius - -I keep insisting that hey are wrong - and now I can prove it.

[Virgil Showlion]

Old and gray
Message #1625 - 09/25/10 02:23 AM



Bubbly

So, I am glad my stupidity is somewhat justified

Most of us develop on our own. A very select few have someone looking over them, providing guidance and pointing out important events. Obviously, doing it on your own is not debilitating though it may be a hindrance at times; some have accomplished a great deal despite the unfavorable odds. But, it's much easier when you have experienced helping hands and are made aware of the advantages.

Living through an event may or may not be helpful to us next time around; it depends on whether we have our eyes open and pay attention to the right thing. Otherwise, we might believe an experience to be of no more than brief passing importance, never to be encountered again. The truth is, most of us are like the economists with one short leg running around in circles, doing the same thing over and over again. Either we didn't see it the first time or don't recognize it the second, or we don't consider it to be important.

When it comes to the 1930s, how many folks do we know who witnessed the period? Or saw the Jazz Age? Or, even know what the Jazz Age was? In my family, no one has survived to this point other than me. I consider myself the receptacle of the accumulated memories of those who were there when I was growing up. How utterly fortunate! I was the observer always, but fortunate enough to have been taken to spots and introduced to people where I could observe.

I was spared no experience, and it was all explained to me as it happened with such gravity, there was little doubt of its importance. So, that this time around, and all the lesser events in between, there was no mystery, nothing diverts my attention, and the truth is self-evident. My recollections and assessments may have meaning to some readers only because they don't have to sit there and listen to a voice that sometimes grows thin, and watch an elderly person fumble trying to fit words to memory and relate it to today's events. Doctors are encouraging, pronouncing me physically sound enough to make it into the tenth decade of my wonderful life experience. I can't wait to see what happens in the next ten years, . . . good Lord willing.

What that long life span does for one is demonstrate there was useful and rich life before TV, the cell phone, the PC, four car garages filled with imported automobiles and trips to Europe in less than five days on the ocean or to the orient in less than two weeks. It also provides lesson after lesson of human folly. Observe and remember. Accept it as a learning experience and you can be the richer for it. "What's next?" should be your battle cry

For one thing, you can appreciate the irony with a touch of humor in a phrase such as "There's nothing new except what's forgotten." And, if you are appreciative enough, you can joke about the irony of repeating the same mistake over and over. You can also see that people are too young to have experienced the unfortunate outcome the last time it was tried or missed the consequences of the failures. At my point, I feel there are still new events to see or experience, no matter how they echo the old.



Don't have any idea how old you are, bubbly, don't know who might be handy to lean on; but, if you have one quarter the luck I did, there are people galore out there who are worth knowing, and can be leaned on for all kinds of support. Whatever you do, keep that brain under control. It's amazing what you're storing there as you go along. All of a sudden one day, it clicks, and you marvel how that organ managed to store all that info and bring it out on call when needed. When you put it all together, there's absolutely no stupidity to be found. . . just a lot more curiosity that needs to be satisfied.

---

bubblyandblue
Message #1626 - 09/27/10 02:01 PM



O&G - thanks.

I have been pretty much self-taught since high school - even in HS I was a bit less than stellar....a big bit. Later, I discovered that I had no reason for shame - it opened up my eyes and curiosity - I have studied more textbooks than my walls can hold. I have been working in the disaster field (political/natural/construction) for two decades - I am 50 and, how I got here... I'll never completely understand.

I have lived poverty and rich, seen poverty, seen and smelled death, destruction, destitution, pain, sorrow, greed and the host of ills this world faces in some truly dark corners of this earth. Through it all, however, in the worst of times, people at odds shine in brilliance and character and so does the best of their culture. I believe everyone, without exception, has a Phd in some subject matter other than their own life - just a matter of listening and asking to get an education but, you have to be curious. If one is fearful to one's own emotions (the whole spectrum, good and bad) one will block knowledge, through fear, that is showering us all .

This point in our nation's history is currently testing those most affected. The foreclosure and job crisis have combined to tear our character/culture apart. For decades, I have felt an erosion in our cohesiveness via the marketing and implementation of our 'service economy' and 'free-market' paradigm - our isolating from eachother.

I have hope, but I do not see the coming together of folks regarding this crisis - I have not seen it regarding these crises - wars, politics, economy, global interaction and conscience. It will happen but, we seem anesthetized to this long march we have set out for ourselves. In my travels (in and out of the US), I have not seen this level of confusion, apathy, dis-unity, disagreement and inaction - ever. Are we all to ashamed to act?

---

reverendbarb
Message #1627 - 09/27/10 02:21 PM

Bubbly, I don't think it's a matter of being ashamed to act - the problem is not knowing what to do, where to turn, how to organize, etc. I do like that Jon Stewart of the Daily Show is forming a Washington rally for a "Return to Sanity" - I support that totally! Also Steven Colbert of the Colbert Report is leading a rally in DC...I just LOVE those guys. They get their point across, but in a satirical, funny manner.

---

bubblyandblue
Message #1628 - 09/27/10 02:32 PM



Just wanted to add. Since, the inception of the homeland security department (HSD), I have noticed the most, in my view, destructive trend.

In my experience, when going into a disaster zone, the most important aspect for cure is harnessing the power of the people in need - invariably they knew what action and resources are needed and, have taken the best actions to date and, were far ahead in self-mobilization / self-cure - I just had to chip in some pieces to the puzzle.

After HSD, it's an attitude of taking over and securing (security), not listening, pre prescribing the medication, treating the patient as if they are unconscious and/or incapable of intelligence and, preventing self-mobilization and rescue - it's god awful and, has reared it's head in all disasters since.

If anything is bad, it's when your doctors/leaders treat everyone as stupid and, with disregard. Those are incompetent doctors/leaders, particularly in times of crisis. They cause more harm than the alleged good they say they are doing.

[Virgil Showlion]

Crying Tree
Message #1629 - 09/27/10 02:32 PM

Obviously people who worked hard day and night to bring you these communications backed the wrong country. Dishonesty has taken over business and people. What a shame and disgrace America is making of herself by her people's actions in business and at their residences. Bad endings are the norm for countries lacking decent morals.

---

bubblyandblue
Message #1630 - 09/27/10 03:18 PM

I suppose, the extraordinary intervention, to avoid the collapse of the global financial system, prevented an actual crisis from happening. In effect, it removed our (victim) ability to self-mobilize, self-help and, rendered us unconscious to our elected representatives. Our innate motivation to help others has been usurped by the intervention, implemented to protect us from disaster. I don't think the response to the 'meta-disaster' has been going well - it's placed a burden to high among to few and, misallocated resources needed to prevent a reoccurrence.

---

Crying Tree
Message #1631 - 09/28/10 01:51 AM

Well at least red alert, yellow alert and green all clear isn't going on much now. Were better off leading ourselves and let the politicians howl in the back ground. One flaw. They got the money machine and printing money like crazy. Disaster, disaster - roll the presses - no breaks for anyone. Must be big pay days somewhere? Any excuse to use the money machine can become an addiction. We need intervention as politicians are hooked. Money machine rehabilitation ward, Symptoms? - Sticky Fingers.

---

Old and gray
Message #1632 - 09/29/10 12:08 AM



Four members of the Federal Reserve Bank of New York have put together a paper entitled "Shadow Banking". It put the wheels of curiosity in motion and moved me toward the pubs available through the Bank of England, the Banque de France, and back to the Fed again. I discovered something which I warned against early in this thread and Duff saw fit to include in his introduction, namely, that if you specifically name a technique or practice in setting up new regulations, the banks will manage to circumvent the intent. Well, they've specified in the Dodd-Frank Act and the banks are now hard at work - with not even a year (is it a half year?) since the bill became law.

Also, somewhere back in this thread, not yet traced down, was a reference to banks having a den of lawyers hard at work trying to unearth methods to evade the new prohibitions or restrictions. They're always at work doing that even before the legislators commit their thoughts to paper.

It's gone beyond that stage already. The three central banks mentioned above, plus others not yet traced down undoubtedly, are busy setting up a new sequence and system to use the same technique in a slightly different application. Derivatives, it was claimed were insurance for credit risk. They failed at that miserably and we all suffer with job loss, asset devaluation of all kinds (homes, pensions, investments, equities, etc.) as well as significant loss of homes, a dysfunctional credit system and an unpromising future. Since that crisis, banks, including the central banks, are committing to another process, setting up a new go-round at establishing this new market with another version of the same type of destructive "investment vehicles".



It shouldn't surprise those who took this thread seriously. It might be appropriate to follow the development of the new possibilities from ground zero. It might prepare us for the oncoming let down and additional suffering in order to satisfy the bankers who have not yet drained enough out of the system.



However, there's a problem.

At this site -



[www.newyorkfed.org/research/staff_reports/sr458.pdf] www.newyorkfed.org/research/staff_reports/sr458.pdf



the .pdf report has some art work that might illustrate more vividly and precisely than verbal description what the Fed is up to. I tried to download page three of this working paper, but was unable to do so. It's apparently beyond my expertise to post the item here. I have been able to isolate it as a bit map, JPEG file through MS Paint and several other programs, but I cannot import it to Market Talk - specifically this thread. The text comes up, but not the artwork which makes it an incomprehensible mess.



If there is someone out there willing to help in this little project, (which must be a piece of cake to the skilled among you) I'd be grateful. It was and still is a starting point for the train of thought regarding the future intent of the banks to continue attacking the system, stripping anything of value still left in it and redistributing the wealth to their advantage.



The paper itself is in process. Only one third of it - 74 of a projected 230 pages - in presentable draft condition. It's entitled, Shadow Banking, composed by three vice presidents of the FRBNY and a fourth contributor, Zoltan Poszar, I have not yet been able to identify other than by name. It is Staff Report No. 458, which is obvious from the link above, dated July 2010.

If someone can accommodate us, the thread will continue after a short discussion of the elaborate chart. We could and will proceed even if we cannot post the chart here, but it would be a great deal more convenient to have it handy without having to switch back and forth between this and the FRBNY site.



Any volunteers?

[Virgil Showlion]

saldeck
Message #1633 - 09/29/10 09:38 AM



[www.bbc.co.uk/news/uk-england-dorset-11417204] www.bbc.co.uk/news/uk-england-dorset-11417204



This man had the right idea.

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bubblyandblue
Message #1634 - 09/29/10 12:09 PM

Its one large PDF poster in the link you provided. I don't think you can download it without someone reformating the PDF - even then you will have screen problems in reading it. I would have to take this to a print shop to get it full size - 36"x48" - thats a blueprint size document.

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Old and gray
Message #1635 - 09/29/10 01:41 PM



bubbly;



Thanks for responding.



I'm not interested in posting the chart in anything but at the size printed in the working paper, hoping of course that a reader may be able to enlarge it on screen to a legible size, then scrolling through the layout at will. I have personally downloaded and printed two sizes in sections: 2x the size the authors presented for inclusion in a notebook and the 36" x 48" version, both without any problem whatsoever. From my perspective, printing is not an issue; posting it on this thread is. It may have something to do with the PDF file format and PDF security. BTW, the chart s still sharp and legible at 6400% enlargement. . . A warehouse might be needed to spread it out at that size!!

It's quite a technical accomplishment if you discount the message it attempts to convey.

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bubblyandblue
Message #1637 - 09/29/10 02:56 PM

The whole paper is quite an accomplishment although, it somehow avoids the whole moral-hazard thing and, control-fraud issue. I will be printing out all the charts and, the big one also - it serves as a good follow the bouncing ball chart.

[Virgil Showlion]

bubblyandblue
Message #1638 - 09/29/10 03:44 PM



Not to over-simplify things, but this reminds me of the Dot-com bust. The dot com-ers were pushing products that were supposedly more efficient and cost effective for the end users...very few were. What they were pushing, through their "specialized products", were copies of other systems, only modified by the labels or vocabulary found inside the package.

One fellow said to me "we are cutting out the middle man in your process" and "this will save you money". To which I responded " It seems to me that I am just substituting one middle man for another...you". Well, in fact, over my many objections (the salesman top-sold it), the product was implemented. It resulted in increased costs, data manipulation (financially destructive), fraud, data loss, control of process loss, inventory whiplashing, production shutdowns and more adverse outcomes. In short, it lived up to my expectations.

The fact was the dot-com-ers were only floating regurgitated crap to exploit the lottery (at that time) of the IPO market without concern over product quality or end-user anything - they were just following a script. Seems the entirety of the current crisis is just following the old gimmicks path to riches.

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Old and gray
Message #1639 - 09/29/10 04:27 PM

Not to over-simplify things, but this reminds me of the Dot-com bust.

We've been on this track for over 35 years. Introduced by the Japanese through their "just-in-time" system, the burden of inventory and the accompanying financial ball of wax was transferred to the small supplier who assumed all the expense and trouble of production, warehousing and distribution, seeing to it that the goods would be delivered when, where and in specified qualities to specified locations. . preferably to the production line on the day of assembly. The major company then cut out all those same expenses of warehousing, distribution, stocking, tied up resources, etc. etc. From this start, the burden for the supplier (and the cost of doing business) grew.



Today, large companies are realizing how they may have compromised their own business in the process. Supplies are taking longer to deliver, the suppliers find it more difficult to finance goods in transit and the process ties up the limited capital available to them. The "Supply Chain" network concept is being studied, hopeful that it will work out problems their suppliers (particularly of the third world variety) face.

BOE for one, is in the process of defining the process and establishing a dedicated facility (aimed at helping the companies who make a "significant contribution" to the British economy) tied in with its Asset Purchase Facility and Secured Commercial Paper Facility, both part of the Bank's proposed extended structure. (Anyone interested in this concept might google Demica.com, a company on the leading edge of the Supply Chain movement. They must have helpful descriptive literature.)



It all ties in with credit and capital being diverted by the banking industry's dalliance with off balance sheet speculation, the brokerage aspect of banking as it's developed. The dot.com bust was another in a long string of early warnings of what was yet to come. No one was interested in hearing about it then, either. Their principal interest was a quick band-aid, which does nothing to set the patient on the road to recovery, it simply hides the wound. . . Out of sight, out of mind. That is the mindset, however ineffective.

---

Virgil Syonid
Message #1640 - 09/29/10 05:57 PM

Not sure if this has already been posted. If not, [dealbreaker.com/2010/08/other-than-that-i-have-no-concerns/] Mr. James Blaine's opinions on fair derivative valuation are now a matter of public record.

Other than that, I have no concerns.

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Old and gray
Message #1641 - 09/29/10 08:12 PM

Hadn't seen it before. . Thank, you, Virgil.

[Virgil Showlion]

Ultima ratio regum
Message #1642 - 09/29/10 11:13 PM

The U.S. federal banking agencies actively supported the efforts of the GHOS

Why aren't the old regulations thrown out in 2000 reinstated instead of writing new ones,or will we keep credit default swaps hanging over the economy forever?

There are no simple answers anymore

ahh you answered my question already

·As I see it, the economics professors went astray because economists as a group, mistook beauty, clad in impressive looking mathematics, for truth.· Paul Krugman

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Old and gray
Message #1643 - 09/30/10 06:15 AM



Ultima



Yes, the answer is in the Krugman quote, but more significance is in Message # 1639, 1st sentence paragraph #3:

It all ties in with credit and capital being diverted by the banking industry's dalliance with off balance sheet speculation, the brokerage aspect of banking as it has developed.

Bankers have discovered the road to riches for them and poverty for the rest. That may sound sarcastic, but I mean it as a sober comment.



The crisis we're experiencing was due, without doubt, to the stress derivatives placed on the currency system. Credit is now part of the normal financial system but it reached the limit of its elasticity. In the credit granting process, accounts are created and declared to be funded with "accounting" money. "Accounting" money because it is not currency printed and distributed by the Fed, the Government or any other source. You've taken out an auto loan or a mortgage, or a loan for a refrigerator or whatever. Does a borrower ever see the money? In the process, money doesn't circulate, but the credit attached to the loan does. The borrower writes a check to fund the purchase, the credit is transferred. The vendor then pays the manufacturer with a check and the credit is transferred again. The manufacturer then buys more material to make other refrigerators, or autos, or build more houses. . all by transferring credit. No money is circulating and, in the meantime, the credit is expanding business activity.

However, there is a limitation in that reserves are required by the loan originator to cover a certain percentage of the credit extended. So, the limitation on credit is a brick wall. It becomes a factor when credit reaches a certain point relative to the amount of reserve assets banks retain in the vault or in their credit accounts with other banks, the Fed, and so on.

Bankers discovered a way to get around that limitation by moving some credit off the balance sheet. Once gone from the books, that credit need not be backed up with reserves; or, in other words, those reserves are freed to be applied in other ways. In the process, accounting proves that the bank no longer carries the amount of credit it issued. Which then allows them the leeway to issue more credit. That in turn is passed on to some other entity and again cleared from the books to provide room for more activity.

The device which passes the responsibility for the evaporating credit to an outside entity is a derivative. As long as there was a market for more derivatives, the banks could continue issuing without running into accounting trouble. Once the market dried up or was saturated beyond the point it could accept more derivatives, banks found themselves in trouble.

Derivatives were gambling chits placed with other gamblers on the other side of the bet. The two sides to the derivatives were the guarantor or the beneficiary. (Those words, I suspect, were chosen to give the bet the ring of insurance, which they were not.) Suddenly, players found the market loaded beyond endurance and folks began to call in bets rushing to be first in line. In bank parlance, that's a run, or better yet, a panic!

Since early 2007, the world has been struggling to right itself from the crisis the banks created. True, in the mix was the normal business cycle.

---

Old and gray
Message #1644 - 09/30/10 06:17 AM



The normal business cycle is built on credit in which supply feeds demand. While the market flourishes, that is, while demand is building, credit can help the supply grow and balance the beam. When the demand is satisfied, credit is a useless thing, hanging out there as debt with no need to serve. So, people find themselves in a situation where production is curtailed and things cool off for a while, through the process we know as a recession. Depending on how severely credit has exceeded need, the recession may be milder or more severe. Depending on how the debtors are able to service their debt obligations, the duration may be longer or shorter. Depending on how much surplus inventory the manufacturers, warehousers or retailers have, unemployment may be more or less severe; and, depending on the entire spectrum of activity, or lack thereof, the duration and severity of the recession will determine if it will end as a recession or depression.

This is the playing field. And those are the moves of the players in the game.

Banking has learned how to manipulate the game through the use of those nasty devices not designed to bear the weight placed on them the last time around. It failed: the market failed, the players exceeded the limits of what the system could tolerate, and underlying values caved in.

You'd think there was a lesson to be learned in the experience. This thread is all about just that, what was wrong with the game and what needed to be done to correct the situation. It's all back there, all 17 pages of 100 messages apiece. (That's how I have my display set up.)

Also, back there was the prediction - repeated uncounted times - that the banks had found a good game and would not give it up willingly. Several posters have reminded us of the golden rule. . . Those who have the gold set the rules. And, the bankers have collected the major share of the loot. True to type, their new rule is let's do it all over again, but since we might find resistance in trying to issue more derivatives attached to credit, let's try attaching them elsewhere.

The mention of an attempt to attach derivatives to life insurance came out somewhere in the body of the thread. They tried it, were found out and a slight hue and cry rose and the attempt was quashed.

In message #1632, a link was provided to an article originating from within the NYFed Reserve Bank (NYFRB). Three VPs and one other person set out in an attempt to explain banking. It was a continuation of a project to explain "Shadow Banking". . . to whom is a matter of conjecture. It may be that the industry needed some ammunition with which to face off against critics of the current banking fiasco or it may be an attempt to whitewash the banking system and call the entire derivatives process "normal" to the system. The paper linked in message #1632 claims that the seed for the "shadow banking" system has been around for eighty years. To some degree, that's so. In the 1920's banks, brokerages and insurance companies all combined into the same parent holding company attacked desperate Wall Street Gamblers, sent them to the brokers who referred them to the lenders who extended loans to purchase equities which the patrons could then pledge as collateral for the loans.

[Virgil Showlion]

Old and gray
Message #1645 - 09/30/10 06:19 AM



But then the supply of stocks began to run out (really!) and the brokers began an elaborate game of selling interest in trusts and entities on the grounds that they held stocks and the participants were entitled to an interest in those. Only problem . . . there were no stocks in the vaults of those entities. Suddenly, since there was no value, the entire scheme collapsed. It's the same as the derivatives scam. There is easily over a quadrillion dollars of derivatives floating out in the world which are supposedly insurance for assets. Very generously, I have suggested there MAY (more likely, doubtfully) be a quarter of a quadrillion dollars worth of assets on the face of this planet. How can an asset be insured four times over. That means that three out of every four policies are held by people who have no personal interest in the assets. In market parlance that is a "naked" holding. . . such as in "naked" short sales - selling short something you do not own. . . something frowned upon by legitimate investors. For one thing it cheapens their holdings, for another it undermines their holdings' values.

So, the scheme failed. But the bankers are enamored of the beauty. What are they planning now? They tried life insurance and dropped that quickly. Not entirely, though. You might be surprised to know that some employers carry insurance on low level employees, unknown to the employees. Should they pass away while employed by a firm, the firm collects. Actuaries work out the premiums and the companies negotiate favorable terms. It's not an entirely new move. It's not unusual for a firm to have insurance on key executive personnel whose passing would place a considerable burden on the firm short term. however, this is not that type of insurance. It's nothing more than a gamble that the person might die. Same proposition as a derivative: if the interest rate goes down, I collect; if the exchange rate dips, I collect. . . and,so on. The holder doesn't own the interest rate or the exchange rate and need not own anything subject to the change, but that's a matter of no importance.

So, bankers love the attraction of the concept and do not want it dead. Since long before 2007, the idea has been circulating that it's possible to take out derivatives on any event. The classic case that's been cited here before is the Goldman, Sachs/Greece situation; where GS helped Greece move debt off their books prior to applying for membership in the EU, then moving the debt back onto the books after acceptance. In the meantime, GS bought derivatives betting that Greece would fail.



So, what are banks up to now? Watch the development of a thing called Supply Chain Finance. The name may change if the idea gets unfavorable publicity, but that is the current name. The claim is that manufacturers are interested in protecting their supply chain, from key suppliers off in distant lands. . . or next door for that matter. Should something happen to the supply line and the manufacturer not be able to receive his parts on time, the Supply Chain Finance construct will pay off. Or, from another point of view, should something happen to demand, and shelf inventory suddenly stagnates, or parts on hand grow, or should a new delivery be en route before the market slowdown is perceived, the manufacturer is stuck. Whatever the event, the Supply Chain Finance will save the company.

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Old and gray
Message #1646 - 09/30/10 06:20 AM



But, collateral is needed to secure the protection, what's to be offered? Inventory is one thing, of course, but what is being proposed with a serious face are invoices and receivables/payables. Nothing new in the concept, anyone familiar with manufacturing processes and work in progress or in the pipeline has heard of factoring. Cash is running low because too much has been committed to a large job in progress and the bank is unwilling to extend more credit to a company; the company applies elsewhere and pays a little higher percentage rate, and receives the money they need to continue. Sometimes that can be a touchy situation. The bank is refusing to extend additional loans for a sound reason, one would suppose.

So, now it's suggested that the old trick be applied to a new situation (which is referred to as "reverse factoring"): ostensibly, the object is to insure the supplier or work in transit or in the pipeline. What then is to prevent taking out three or four policies on the same thing? Insurance companies, of course, frown on the practice, BUT! what if the Supply Chain Finance system is run in the shadow banking system, not through an insurance company, the same as derivatives were run through the same shadow banking system?

There is a bright up and coming expert on the shadow banking system who has been working on spreading the gospel relating to a definition of the Shadow Banking other than what has been used on this thread, and generally throughout the community which has been addressing the issue of derivatives. He's moving up rapidly through the ranks at the NYFRB. One year he was a research officer, the next an assistant VP, the next a VP. A few more steps and he'll be on the board of governors. Bright lad. He must be writing the things his superiors want to read. . . not only his superiors, but the Banque de France. . . he was given the lead article position in their 2009 Financial Stability Review Pub for what else but an article on Shadow Banking. He is among those who point out that the seed for shadow banking was planted eighty years ago, he must mean that seedy bank/broker/insurance construct that drove the nation to more than ten years of ruination, the Great Depression. And, was quickly legislated out of existence until the next five or six generations of politicians slowly decided that "We know better now". So, the constraints were relaxed until we're back to about where we were eighty years ago. My advice: Prepare for the next round. It will be much less than eighty years.

The diagram I was so anxious to have pasted here is a marvel following Hayek's dictum that organization comes first and description follows. But, I'll save that for tomorrow.

Promise: I have no intention of going through that diagram line by line and block by block. It's too complex and also too ambitious to reflect reality. Besides, it doesn't deserve such detailed attention. However, it is interesting how they intend to switch roles and definitions to justify continuation of the banks' concept of derivatives.

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Ultima ratio regum
Message #1647 - 09/30/10 11:58 AM



I am a old swamp yankee who has paid cash for everything that I own,trained from birth that credit was the downfall of all mankind,your 17 pages of credit simplified is reinforcing my basic beliefs . Enjoying the education on what the economy is facing,the whole concept is much more understandable.I will try to finish before I blowhard anymore.Well done

One more question,why are a few people pointing out unions as the most destructive element in the economy?

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Old and gray
Message #1648 - 09/30/10 03:32 PM

why are a few people pointing out unions as the most destructive element in the economy?

One oldster to another. . . it's called a scapegoat. Someone has to be blamed for our state of affairs. . . and we don't necessarily all agree on what the problem is or who should be blamed.



The other leg: those who do so are mostly too young to know about the oppressive working conditions before unions came along. They had a function to fulfill. They'll be back in favor again. Sooner than most people believe.



But, then, if you're old enough, you'll remember the physical violence between the "pro" and "anti" union forces during the thirties; the intrusion into personal lives the tycoons thought themselves entitled to, rousting people from saloons on Sunday nights to assure that the workers would show up at the plant Monday morning. Those were not easy times. Early production line stress was indescribable in terms of today's work place. A lot of lives were cut short because of it. Pace was unendurable. When the limit was discovered, production line management pushed it further to enhance their bonus. Labor was expendable. If the body didn't show up one morning, a replacement was at work before noon.

In that respect, we've come a long way. But, you can't ignore history. That will lead you into another trap.

The critics know nothing of the meaning of "Load sixteen tons and what so you get? Another day older and deeper in debt."

[Virgil Showlion]

bubblyandblue
Message #1650 - 10/01/10 02:53 AM



I have loaded 16 tons but, I had to do it out of financial need. In fact I loaded 80 tons in 6 days but my motivation was my own. To do sixteen tons on someone else's motivation is grinding....the hand of another pushing one's nose to the grindstone. Another day older and deeper in debt. The deeper ye go, the further ye know, the drowning of ye soul. To compromise one's labor and dreams to another, is a heavy load to yo-ho heave-ho.

I write freeform here and request your patience.

The strictures of mathematical purity, applied to supply chain management systems, is intolerant of human interaction and real world entropy or, at least, mathematics has not been employed to capture those dynamics. The human mind is much more advanced than any math or science known, it leads the progress thereof.....it has always lead (Don't get me wrong, I do enjoy surrendering control in matters of the heart).

We muddle about, trying to come up with tools that establish benchmarks, so that, we no longer have to revisit the past's learning. We do it in order to free-up our minds for more progress/knowledge/insight/exploration/advancement....based on our commons foundation.

It's no surprise then, that when we have made effort down a round path and, even though it has mistakes, we will try to fit the square future into it. It's the old "there's no turning back now" excuse. That excuse is not applicable to our situation for the following reasons: 1) we have not progressed as a species beyond some imaginary half-way point - I mean really, look at us. 2) we have not figured out why our money treats us so badly over and over again and, not made any progress in alleviating the harm it causes us. 3) We still think that; complication, convolution, sophistication is somehow better than simplicity - who would of thought that mankind, for so long, underestimated the amount of energy in our physical systems for so long.. E=MC2 (simple)

So, now, do we continue down a path proven toxic...again? Do we figure out a better way...for the majority? or, because we created such an intricate edifice, bejeweled and adorned, will we refuse to waste all our hard effort, no matter the cost, to effect positive change?

Dropping the (the seedy bank/broker/insurance construct) mathmatical derivatives bomb on the, superior human art of supply chain dynamics and trade will certainly lead to global contractual conflict and, real physical conflict.....if we continue our wanton disregard for the common global good.

I have run out of steam and, seam to be drifting in my thoughts.

I apologize

---

Old and gray
Message #1651 - 10/03/10 09:10 PM



In any study, definitions are essential for several reasons. Among those are (1) avoiding ambiguity and (2) setting up the limits of the study. It helps the reader understand the intent of the author(s). The present paper begins with uncertainty. The title is Shadow Banking which is explained on page 4 in part one as it's been defined by Paul McCulley of PIMCO. Two paragraphs later, the authors apologize that the title is "incorrect and perhaps pejorative". Nevertheless nothing is done to change the labels or redefine the scope of the paper. On page 5, the term "parallel banking" is introduced into the text and ambiguity sets in. At the end of the Part I - Shadow Banking introduction, we're further confused by the statement that "parallel" banking system encompasses "large segments" of the shadow banking system.

We're also left with no precise distinction between "traditional" and the "shadow banking" elements of normal banking.

But, before this confusion, we're presented with the massive layout that includes just about every step of the process of "shadow banking" in the schematic on the third page of the paper - before the table of contents.



It's unclear if or where the "shadow banking" term was introduced into this thread (message # 96?) but the idea has been central, at least in my mind, as the issues of banks' involvement with derivatives and securitization were discussed. But, for one thing, the sequence was never approached from the point of view as a "system"; "process" might be more appropriate. If the subject diagram is considering the elements of the process, fine, that's acceptable. . wide-ranging subject matter but acceptable. On the other hand, I agree heartily with the idea that there is another system providing financial help to individuals and commerce which runs parallel to the banking system, but not in or of it. Until the Fed and Treasury saw fit to re-label investment houses as bank holding companies, they had no access to the Fed's discount window, or protection under FDIC rules or procedures. Neither did they cater to the general public in the manner of commercial or community banks, encouraging clients in off the street to open accounts, providing checking and loan services to the general public. That full service was also not within the operational makeup of Insurance or Finance companies. And all three of them were thought of as private firms which, should they fall victim to mis-management and/or bad times, were entitled to nothing more than dissolution, bankruptcy or a quick demise of one kind or another. Nothing at all like the traditional banking support from the government agencies. Nor, did they face the stricter conditions of regulation and supervision that could be considered advantages to banking customers.

After Dodd-Frank Act and the new rules that may result, the situation may differ, but still it's difficult to consider finance companies, hedge Funds, Money Market Mutual Funds and Insurance companies (among others) as banks in any sense of the word. I may have been around too long to manage such an abrupt change of view and redefinition.

In the case of the banking systems, traditional and shadow, I think of open to the sunshine and the opposite - hidden from view - for less than honorable reasons. Banks do have a traditional function to perform which we're all familiar with - and they knew how to do it honorably for the most part. What they did outside that scope is so much in the grey area under the protection of GLBA, which shielded them from fraud, manipulation or insider trading charges (see message # 840 for GLBA wording), that were they not so protected, jail terms would have resulted. They were all presented with a "get out of jail free" card before the game got underway seriously. After the law was enacted, the sky was the limit. The understanding here is - that part of banking protected by GLBA deserves the label of "shadow banking"!

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Old and gray
Message #1652 - 10/03/10 09:11 PM



In other words, what banks did was bring in some external (or "exogenous" as American economists like to say - which term may be superseded by "idiosyncratic") techniques and processes and incorporate them in banking procedures not in the interest of their clients, customers, depositors, or creditors. This eventually elicited the Volcker Rule which was watered down in the final version to the point that the originator of the idea was discouraged or, at the very least, disappointed by the result.

That was shadow banking: pejorative? yes!; commendable? by no means!; part of banking? not in my world! A good part of this thread is spent condemning the practices that ensued and also lamenting the wreckage that resulted world-wide. The management choices that led us to the present situation, of course, will prove to be instrumental in not only the US losing its position as the financial leader of the world; and, not to be entrusted with the care and financing of the global growth in the offing; but, responsible for the financial devastation of inordinate growing debt from which we might not recover for generations, if at all.

That is the payback for shadow banking. If it had been conducted in the open, subject to supervision, the fraud and deception would have been obvious. It did not seek the assistance of participants; assistance was not their intent. It was an open attempt to corrupt the system.

Of course, the authors of the paper, if they saw this beforehand or discovered it during their study, could not present their case this way and continue in their careers. There might have been a little more integrity involved in their study, but, sometimes integrity does not provide food for the family.

So, lumping everything together in a massive schematic does not really address the issue of shadow banking as it's viewed from this thread's point of view. From this point on in the paper, too much is included in areas and under a purifying light it is not entitled to. What may be attempted by the bank employees they are, is fostering confusion so that the industry may be able to discuss the soft spots in way that the odor is not noticed. From the perspective of FRBNY executives, that may be the preferred path; from the viewpoint of the taxpayers saddled with the expense of the disaster, not so.

Breaking down the seven steps in the credit intermediation is an artificial ploy. It's doubtful that the procedure was so clearly processed. Not when it results in over a $1 quadrillion overall market, unregulated, unsupervised and eventually supported by no less than the taxpayers of the world. There isn't or wasn't enough time to lay out such an elaborate scheme the authors present. It could be questioned whether the perpetrators had the talent to do so beforehand. This is nearly proved in the current court cases where process was so rushed, required legal procedure was not followed and cases are being thrown out of court. Now, foreclosures have been stopped in 23 states while the supposed current mortgage holders back peddle and verify that procedure has been observed. If it were in my power, I'd freeze-frame the entire process to make it impossible to rectify if there is oversight or error. In effect, it smells like deception to me, with no other intent but to defraud the mortgagees. If the participants overlooked the simple, basic procedures in transferring documents, does it seem possible that they would have laid out the elaborate seven step procedures with the wide variety of market entities through which the instruments could be forced (under cover of darkness, yet!)?

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Old and gray
Message #1653 - 10/03/10 09:12 PM



The more elaborate and more descriptive a procedure the paper presents, the less likely it is authentic or relevant. There are mind-boggling passages describing the operations, difficult to follow, some of them included government culpability tossed in for good measure, as in the phrase

". . . mostly "originate-to-distribute" model of the government-sponsored shadow banking sub-system and the credit intermediation process of FHCs and DBDs." page 39.

Does it seem likely that the government sponsored shadow banking sub-systems?

Some of the conclusions drawn, beginning on page 65, have value to them, including those constructed on caveats much in the manner of building an early warning system. Number 9 on page 72 is worth noting:

(9) Regulation by function is a more potent style of regulation than regulation by institutional form. Regulation by function could have ·caught· shadow banks earlier:

Regulation and innovation will to some degree always force and lure, respectively, the three bank activities of credit, maturity and liquidity transformation out of banks. Regulation by form alone, that is regulating banks, will almost always be arbitraged away by banks via shadow banks.

Banks and shadow banks perform the same function, however, which will never change. Credit intermediation by banks, and past, present and future forms of shadow banks will always involve credit, maturity and liquidity transformation·the classic functions through which returns on credit intermediation are earned. Regulating these ·timeless· functions of credit intermediation is a more potent, harder to arbitrage form of regulation than regulation by institutional form. page 72.

It might help to read this 8 page summation first (beginning on page 65) to determine if it's in your interest or worth the time to proceed through the maze of the document. That would require more than a little time, and the conclusions might be enough to satisfy your curiosity as what the young people over at the FRBNY are thinking.

From my own wrinkled point of view, it may not be fair to the authors. I think in terms of the empty spaces yet to be filled with experience, the process of building memory that provides a platform for analysis. That process can't be hurried.