Killing Corrections Can Be Fatal To Economies

10/9/8

Elaine Meinel Supkis

Global interest rates drop towards 1% or less. Savings glut is gone with the wind. The US has been in a savings dearth for years now. The Derivatives Beast continues to make headlines. The New York Times has some big, big stories about Greenspan and how he is the father of this monster. And I explain again, why this is not a credit crunch but a CORRECTION. And explain the obvious: why we call these events, 'corrections.' It seems, our leaders don't understand basic English.

First, from an email sent by C.G.R. comes this bit of dictionary humor:

BULL MARKET -- random market movement causing an investor to mistake himself for a financial genius.

BEAR MARKET -- 6 to 18 month period when the kids get no allowance, the wife gets no jewelry, and the husband gets no sex.

VALUE INVESTING -- The art of buying low and selling lower.

P/E RATIO -- The percentage of investors wetting their pants as the market keeps crashing.

BROKER -- What my broker has made me.

STANDARD & POOR -- Your life in a nutshell.

STOCK ANALYST -- Idiot who just downgraded your stock.

STOCK SPLIT -- When your ex-wife and her lawyer split your assets equally between themselves.

FINANCIAL PLANNER -- A guy whose phone has been disconnected.

MARKET CORRECTION -- The day after you buy stocks.

CASH FLOW -- The movement your money makes as it disappears down the toilet.

YAHOO -- What you yell after selling it to some poor sucker for $240 per share.

WINDOWS -- What you jump out of when you're the sucker who bought Yahoo @ $240 per share.

INSTITUTIONAL INVESTOR -- Past year investor who's now locked up in a outhouse.

PROFIT -- An archaic word no longer in use.
******************************************

I would add 'CONGRESS-- A collection of cons who vote.'

Paulson Says U.S. to Use All `Authorities' in Crisis

(Bloomberg) -- Treasury Secretary Henry Paulson said he's considering plans to pump capital into U.S. financial institutions and pledged to use everything under his power to stem the worst credit crisis since the Great Depression.

The Treasury, Federal Reserve and Federal Deposit Insurance Corp. will ``use all their authorities to promote the process of repair and recovery and to contain risks to the financial system that might arise from problems at individual institutions,'' Paulson said at a press conference today in Washington.

Paulson stressed that the legislation Congress passed last week to rescue financial institutions gave him broad authority that he intends to use, beyond buying mortgage-related assets on banks' balance sheets. He indicated that an option available may be boosting bank capital with federal injections.

``It is the policy of the federal government to use all resources at its disposal to make our financial system stronger,'' Paulson said. ``We will use all of the tools we've been given to maximum effectiveness, including strengthening the capitalization of financial institutions of every size.''

Paulson said the U.S. rescue program won't save all banks.

Throughout much of the last decade, I have been immensely irritated when the very same people who are destroying our economic base say, 'We are making our financial system stronger' when they are actually making it much, much worse. This is alongside their constant declarations that our economy is 'the strongest on earth', etc. Anyone, anyone on earth looking at the last 35 years of our basic statistics can clearly see that our collective economic condition has only gotten worse and worse, not better. And we are losing more and more ground vis a vis the entire planet. Far from strengthening, we are weakening.

Until this hideous fact is faced honestly, we will continue this decline. Whether it be market share, industrial manufacturing base, native ownership of industries, systems and infrastructure, finances or budgets: everything from trade to spending is all very deep in the red. The only times this contracts or gets less worse is during big, global recessions.

Instead of understanding that these recessions are the natural result of these same red-ink situations, we are told that we are strong and the remedies...usually meaning 'add more red ink!'....are making us stronger since this ends the recessions and forces things back out of whack!

In other words, recessions are attempts at setting things right again: balancing trade/budgets/spending/lending. The more we evade this by short-circuiting the corrections, the worse things get! Indeed, people even use this amazing term, 'CORRECTIONS' to describe these intervals of recessionary trade/business/spending periods! This is the time when we must settle accounts and balance our books!

We don't want to do this. We want 100% deficit spending sprees and the best of this is to have one that is at 0% interest with 0% savings! And lord help us! We are gaining this boon. This, of course, means we will NEVER have to 'balance our books' or have any corrections at all until we hit infinity! This is why the struggle to fix the banking system of the world will fail. The US can't suck up infinite debt or generate infinite red ink while saving nothing at all.

The business of saving the banks by giving them free equity while no one is saving enough, is doomed to failure. Savings were killed by Greenspan when he dropped rates to 1%. Savings is being slaughtered a mere 5 years later by Bernanke dropping rates to 1% all over again. Just so lending can resume. Even though there is NO BASE for this lending! This 'base' happens to be...SAVINGS. This simple lesson has been forgotten in the rush to restart lending while having no savings. Banks are said to be 'hoarding cash' which is why they are not lending.

HOGWASH. They have no real 'cash' because they aren't offering enough incentive to deposit money with them. Everyone is rushing to park their savings in the government Treasuries only because they FOOLISHLY think the US government won't go bankrupt!

This is INSANITY. We are seeing little Iceland go bankrupt. I lived through the NYC bankruptcy. It is nasty, very nasty. And Germany went bankrupt in 1932. Russia went bankrupt in the late 1990's. Nations can and do and go bankrupt! Look at Argentina! The belief that the US Treasury is a safe place is misplaced. It is an epic refusal to gage risk! The US is not 'AAA' anymore.

Here is a cartoon and story from exactly one year ago:

Culture of Life News, October 9, 2007: Federal Reserve Officer Discusses 'Stability'

Well, well, well! The Federal Reserve decides this is time to explain their philosphy: why are they screwing up everything so badly. Of course, the claim they are seeking the most hideous thing investors can imagine: STABILITY. Namely, they are the servants of Safety, the angelic being that wants everyone to be careful and sober. The cute, sweet angel that wants small profits for long term benefits! But the Fed actually works for RISKY. She is the demonic creature of the dark that loves chances, loves instability, loves wild, reckless speculators! And the news backs this up: the recent Fed rate cuts are causing risky stocks to soar and inhibits the purchase of bonds and savings!

Governor Kevin Warsh

At the New York State Economics Association 60th Annual Conference, Loudonville, New York

"Financial Stability and the Federal Reserve":

In my remarks at the School of Business at the University at Albany, I argued that the conditions causing the turmoil in the financial markets were long in the making and that these causes should not be conflated with the particular troubles in the mortgage markets. I also posited that the financial market conditions may have proven to be overly ebullient, masking troubles that may have sown the seeds of financial distress.1 This evening, I will underscore the responsibility of the Federal Reserve during periods of financial market turmoil and offer some perspective on the current state of financial markets.

The Fed does NOT offer 'perspectives', it gives away low-interest lollipops! It plays Santa Claus, not Sherlock Holmes! The very least these creatures can do is tell us the truth once in a blue moon! If he 'posits' that financial markets are 'embullient' then why didn't he scream bloody murder when Bernake was rushed into endorsing huge interest rate cuts that obviously redoubled this 'emullience' to the point, it bubbled out of all those champagne bottles and the brokers are now swinging from chandeliers while wearing lampshades? The trigger for all this is painfully obvious: its the rate cuts, stupids!

I swear, someone must take these guys and put them over a knee and spank them. Obviously, the speculators playing the Street are overjoyed with the bum's rush Cramer and his gang of bullies pulled. But as I looked at my own bank account today, I was very irritated to see the near-Japanese level of the interest rates being offered for my savings. What a waste of time! How dare any bank ask for my money? And of course, the entire banking system isn't getting 'savings' much anymore, for the last year, the US is in negative savings territory and this has very serious consequences. Which the top bankers in the Federal Reserve NEVER MENTION IN ANY SPEECHES. Call savers 'the Invisible Man and Woman.'

Same complaints from me, same stories with virtually no variation. No one at the top has learned any lessons in the intervening year. Instead, the same magic tricks are used, the same excuses are trotted out and the same juvenile junk is peddled. Once again, the Fed is handing out low interest rate lollipops. The infantile traders on Wall Street are supposed to react with joy for this means they can go into debt while placing dangerous, risky bets on stock futures. This, in turn, will flood the markets with money. Easy loans will go to car sales, house sales, all things selling.

And savings will collapse even more! The belief is, the higher 'profits' and 'wages' this flood of easy lending creates will REPLACE savings. Instead, it creates inflation. What a shocker. Inflation isn't the money supply, it is the money allocation. If lending is easy for stocks and houses, they will inflate in value. But this, in turn, dumps more money into the systems and over time, this becomes inflation. The whole planet is now participating in a massive infusion of cash via easy lending as all systems are being reset at 1% or less. This is extremely dangerous. Remember: up until this week, most banks were RAISING rates, not dropping them. And even more importantly, the LIBOR rate spreads between the lollipop rates set artificially by the central banks and the REAL rates were widening.

This is because of the nature of this recession: prices were being reset! This is a classic way of 'correcting' a situation. This situation is...too MUCH credit! So the natural rates rise. This causes a contraction. But then, the situation is too much credit so this contraction is inevitable. Sigh. But the G7 don't want this and will fight it tooth and nail.

Why is this? HAHAHA. Our trade rivals want to keep the US deficit spending running riot so they can export endless industrial products to us and then buy us out as we have to sell our souls and everything in this nation to foreigners! They LOVE this imbalance and are desperate to keep it going. We cannot let this happen. We threw away the nifty tool called 'tariffs' so we can't stop this destructive flood of imports except one way: by being unable to get more credit. Credit is a poison to our system, not the lifeblood.

U.S. May Take Ownership Stake in Banks

the law gives the Treasury the right to take ownership positions in banks, including healthy ones.

The Treasury plan, still preliminary, resembles one announced on Wednesday in Britain. Under that plan, the British government would offer banks like the Royal Bank of Scotland, Barclays and HSBC Holdings up to $87 billion to shore up their capital in exchange for preference shares. It also would provide a guarantee of about $430 billion to help banks refinance debt.

The American recapitalization plan, officials say, has emerged as one of the most favored new options being discussed in Washington and on Wall Street. The appeal is that it would directly address the worries that banks have about lending to one another and to other customers.
*snip*
The coordinated rate cut was unprecedented and surprising. Never before has the Fed issued an announcement on interest rates jointly with another central bank, let alone five other central banks, including the People’s Bank of China.

Good barking grief! We obviously don't have a banking system anymore. Why? NO SAVINGS. Not enough to support the huge credit industries! The only one of these that is still functional is the credit card industry and that charges between 12-33% interest. Which is where inflation usually climbs if there is unrestrained lending going on. Credit card industry is outrageously profitable and it is a ball and chain for card users!

The consumers are the ones who have reached their limits, by the way. Even credit cards are seeing failures now. Banks that get this bad should NOT be lending! Lending has to stop when it hits this brick wall of reality: people can't take on more debt. Of course, if the Big Guys get 1% loans while the peons get 33% loans, all is NOT well at all. For as the 19th century economics geniuses like Marx understood, if the workers don't get a cut of the profits of industrialization, the economy goes into a tail spin and we get depressions.

So we have the banks desperately trying to create inflation but due to the inability to get access to cheap 1% loans, the masses can't spend freely so this lending ability languishes. Some economists call this a depression cycle where cheap loans still cost more in real terms even as rates seemingly drop.

NYT:

As Washington casts about for Plan B, investors are clamoring for the Fed to lower interest rates to nearly zero. Some are also calling for governments worldwide to provide another round of economic stimulus through expensive public works projects.
*snip*
One concern about the Treasury’s bailout plan is that it calls for limits on executive pay when capital is directly injected into a bank. The law directs Treasury officials to write compensation standards that would discourage executives from taking “unnecessary and excessive risks” and that would allow the government to recover any bonus pay that is based on stated earnings that turn out to be inaccurate. In addition, any bank in which the Treasury holds a stake would be barred from paying its chief executive a “golden parachute” package.

Treasury officials worry that aggressive government purchases, if not done properly, could alarm bank shareholders by appearing to be punitive or could be interpreted by the market as a sign that target banks were failing.

The target banks ARE failing! And it MUST be punitive! I want arrests. And if the government is bailing out banking gnomes, they must be restricted and controlled. For they are greedy little twerps! They should be paid the same amount as government Treasury employees. After all, that is what they are! They certainly are not independent businessmen.

Overnight CP Costs Jump, Bond Risk Rises Amid Global Rate Cuts

(Bloomberg) -- Overnight corporate borrowing costs jumped, default risk increased and the bond market remained all but closed after central banks worldwide cut interest rates, showing unprecedented government intervention was failing to aid companies struggling to finance themselves.

Overnight rates on dealer-placed commercial paper rose 56 basis points to 3.5 percent, while the cost of protecting corporate bonds from default rose. Two issuers sold $750 million of U.S. company bonds this week, compared with the weekly average this year of $16.8 billion.
*snip*
The $1.6 trillion market for commercial paper, which typically matures in 270 days or less, is used by companies to finance payroll, rent and other daily expenses. Issuers post the commercial paper rates they are willing to pay each morning.
*snip*
Investment-grade bond yields yesterday rose to 7.98 percent, the highest since July 2000, according to Merrill Lynch & Co.'s U.S. Corporate Master index. Spreads relative to Treasuries widened 6 basis points to a record 514 basis points, more than five times their level in February 2007.
*snip*
Credit-default swaps linked to the debt of retailers including Plano, Texas-based J.C. Penney Co. jumped 45 basis points to 320 basis points, according to CMA Datavision, as the economic slump threatens to ruin holiday sales. Contracts on Nordstrom Inc. widened 30 basis points to a record 270, and Office Depot Inc. widened 46 to 700, CMA data show.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year. An increase in the contracts suggests deterioration in investor confidence.

The cost to protect against a default on U.S. high-yield, high risk loans also rose, the Markit LCDX index shows. The price of the index, which falls as sentiment deteriorates, dropped 0.5 percentage point to 89.1, according to Goldman Sachs Group Inc.

First, here is a news snippet from Markit:

Markit LCDX Index Roll Postponed

2 October 2008 - The Markit LCDX Series 11 roll has been postponed pending launch of a market standard non-cancellable single name loan credit-default swap (CDS) contract.

The real interest rate is most definitely not 1% or 2%. All this 'freeze up' is: real rates battling fake central banking rates. The Fed has to set this rate by manipulating things. They are not following the natural flow but fighting it. They even call this 'fighting'. Whether it be inflation or decompression, they are 'fighting' it. And of course, this is akin to Xerxes ordering the seas to retreat. He did this to demonstrate the futility of stopping natural forces.

Today, the credit default swap markets are supposed to begin working on paying up the bets placed by goofy gnomes. And this will fail. Note the cancellation of the launch at Markit. A bad sign. Heh. I am also furious about the story above where they talk about 'holiday sales'. The most unbalanced part of our culture is Xmas. This annual orgy of misspending and misrule is throwing all our systems out of whack. As a child, I loved Xmas. As an adult, I am drawing more and more towards my grandfather's view: he hated Xmas. Absolutely. He was a total Scrooge in this regard. He even would jokingly say, 'Bah, humbug!'

Well, our Xmas is going to be ruined because we are in a correction. If we celebrate this goofy festival by going deeper into debt, we are signing our death warrants. Not making things better. Xmas giving should be charity, not wild indulgences. Now, on to the Derivatives Beast which is mentioned in the above story:

Greenspan's criminal mess:

And his views held the greatest sway in debates about the regulation and use of derivatives — exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street.

“What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Mr. Greenspan told the Senate Banking Committee in 2003. “We think it would be a mistake” to more deeply regulate the contracts, he added.
*snip*
The problem is not that the contracts failed, he says. Rather, the people using them got greedy.

'Those who SHOULDN'T be taking on risk' are the damn banking gnomes! They wanted to make money at Goldman Sachs while not taking on risk but SELLING it to unsuspecting others. Then, they went and did very risky things, laughing as they did so. This got worse and worse as everyone sold risk and then did risky things. This system is inherently insane. It is like being a cook and burning everything but the one who replaces the burned meals is someone else. Obviously, all the cooks would end up burning the dinners and indeed, will burn the houses down! Which they did.

NYT and the Derivatives Beast:

“There is nothing involved in federal regulation per se which makes it superior to market regulation.”

Mr. Greenspan warned that derivatives could amplify crises because they tied together the fortunes of many seemingly independent institutions. “The very efficiency that is involved here means that if a crisis were to occur, that that crisis is transmitted at a far faster pace and with some greater virulence,” he said.

But he called that possibility “extremely remote,” adding that “risk is part of life.”
*snip*
[In 1997] Ms. Born was concerned that unfettered, opaque trading could “threaten our regulated markets or, indeed, our economy without any federal agency knowing about it,” she said in Congressional testimony. She called for greater disclosure of trades and reserves to cushion against losses.

Ms. Born’s views incited fierce opposition from Mr. Greenspan and Robert E. Rubin, the Treasury secretary then. Treasury lawyers concluded that merely discussing new rules threatened the derivatives market. Mr. Greenspan warned that too many rules would damage Wall Street, prompting traders to take their business overseas.

ARREST GREENSPAN! And that will serve as a notice to all future Federal Reserve chairs that if they dare do his sort of dumb things, they die.

Fed Gives A.I.G. $37.8 Billion in Aid

The additional assistance is on top of $85 billion in a bridge loan that the Federal Reserve extended to A.I.G. in September, but it will take a different form. A spokesman for A.I.G., Nicholas Ashooh, said the new assistance was intended to keep the company from having to draw down the Fed loan so quickly.
*snip*
.....the company surprised analysts last week by disclosing that it had already drawn down $61 billion of the Fed loan. The speed of the drawdown led credit analysts to downgrade some of its debt and put other types of its debt on negative credit watch, signaling that other downgrades were possible.

This week, former A.I.G. executives were questioned by members of Congress, who wanted to know whether Goldman Sachs and other business partners had benefited from the bailout. Goldman Sachs has said that it had no exposure to losses from A.I.G.

A.I.G. said Wednesday that it would use the $37.8 billion from the Fed to improve the liquidity of its securities lending business, which is losing cash rapidly. By stopping that flow, A.I.G. said, it would be able to preserve more of the Fed loan and use that money more effectively to wind down the affairs of A.I.G.’s troubled structured finance division, known as the financial products unit.

Party time for AIG. This is why letting these guys die is good. Instead of correcting this mess, AIG is trying to fix it all by sucking up literally multiples of billions of dollars. So the money game continues and the destruction roars onwards. Nothing is being fixed here. Everything is continuing. The imbalances are there and simply are spreading. The destruction of foolish organizations that totally disregard risk has to happen or else the risks rise. Miz Risky has to do her destructive things! She can't be denied. If she is not allowed to destroy stuff, she piles more and more risks onto it until it finally is destroyed! This is her nature.

Saving AIG by destroying our entire government's economic powers is STUPID. I don't care what the downside is, a destroyed US government will mean chaos, war, insurrections, coups and utter loss of our money, sanity and LIVES. This won't save us at all.

Central banks all but stop lending bullion

Central banks have all but stopped lending gold to commercial and investment banks and other participants in the precious metals market, in a move that on Tuesday sent the cost of borrowing bullion for one-month to more than twenty times its usual level.

The one-month gold lease rate rocketed to 2.649 per cent, its highest level since May 2001 and significantly above its five-year average of 0.12 per cent, according to data from the London Bullion Market Association.
*snip*
In normal circumstances, central banks lend gold into the market – providing key liquidity – to earn a small return on what otherwise is a non-yielding asset.

Other factors are also pushing lease rates higher, including more investors’ positions no longer available for lending, according to Philipp Klapwijk, chairman of GFMS, the London-based precious metals consultants.

Traders said the general dysfunction in money markets, with US dollar rates significantly higher, was contributing to volatile gold lease rates. Demand for physical gold and small and medium-sized bars had been strong, removing supplies from the market that otherwise could have been lent, traders added.

The US Mint onTuesday said it had run out of half-ounce and quarter-ounce American Eagle gold coins following “unprecedented” demand.

The true value of gold is false. Like interest rates, it is artificially low just as the world's bankers struggle to make the dollar stronger. The Nikkei collapsed 1,000 points when the yen was suddenly much stronger. Like exactly a year ago when it rose to 96 to the dollar, yesterday it rose to 99 to the dollar. The Japanese exporters hate this! It is now 100 to the dollar and they hate this. And all our trade rivals want the dollar's fall to end. They want a strong dollar so they can destroy our industrial base and buy up all our resources and infrastructure!

Meanwhile, the truth is in the business of gold: people are scared now and understandably scared. Even though gold earns virtually no interest, it is RISING! Even as the global banks try to drop their rates to 1%, the gold rates have SHOT UP to nearly 3%. So this is the loudest and clearest warning sign that the Fed and Bank of Japan rates are FAKE and DANGEROUS. If gold swap lease rates go to 6%, WOW. Hold onto your gold coins! Just amazing. And hard to ignore which is why this is not on the NYT front page.

Bottom Falls Out In Tokyo

Investors ran for the exits in Tokyo on Wednesday, with the Nikkei 225 plunging 9.4% on fear over the health of Japan's exporters and forced selling to cover losses.

Other major Asian stock markets tumbled 4% to 6%, as concern over the widening Western banking crisis and slowing economies outweighed actions by the central banks of Japan and Australia and the Hong Kong Monetary Authority to ease the credit squeeze.

In Japan, the benchmark index dropped the most in 21 years as investors were chilled by a report in the Nikkei business daily based on unnamed sources that asserted that Toyota's profit was likely to fall around 40% in the year to next March on weak sales in the key North American market and slower growth in China--far worse than the automaker’s previous forecast.

With investors liquidating losing positions throughout Asia funded by yen borrowing, the Japanese currency strengthened to 99.96 against the dollar, eroding the value of overseas sales for exporters.

The Bank of Japan is mulling dropping rates to 0% again. This is bloody hell. And stupid. And typical. And those nations that are holding lots of gold that isn't already in hock....the US is in hock....will laugh all the way to the bank.

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Comments

[chux08]

Hmmm....I guess you can't have tax cuts AND fight two undeclared wars, charging those expenses to a credit card and not have that negatively effect the currency OR the economy, huh?? And lose thousands of young men and women and have thousands more come back crippled and mutilated? On our children's tab to boot? No kidding...
God dammed George Bush....while I was opposed to that friggin war, that screwball Bush couldn't even do THAT right. While we were there and we did what we did, idiot child should have told Iraq that we will give you the "market price" (for their oil) but that oil IS OURS. We're liberating it and taking it back to America...not that that would have done much good. While I'm at it, are we not still spending dollars stationing troops and equipment in Japan? Korea? Germany? England? Italy? Spain? And just about every other place on the globe? I was stationed in Germany during 1974 to 1976 and I'll be dammed...we're still fighting the same imaginary boogy man that doesn't exist in all these places and ON OUR DIME just like we've been doing since the end of WWII!!!! It's MADNESS and our government has plenty!!
THE ONLY WAY THIS SHIT IS GOING TO STOP (SHORT OF A REVOLUTION) IS GOING TO BE WHEN IT ALL COMES CRASHING DOWN, THE MONEY WON'T BUY ANYTHING and for all intents and purposes, we're bankrupt. That's the only thing they'll understand and when that DOES happen, you watch these Keynesian rat bastards jump ship and go to South America heading to their big ranches and compounds trying to escape justice. Well, maybe we can launch a few Predator drones and clean up this mess just like they've been doing in Pakistan and other places. They have proved that that weapons system works even if it is immoral. (no wonder they all hate us, huh??) I'd LOVE to be the one that got to push that button, while muttering under my breath..."bye, bye *insert name here*, you piece of shit. See ya in the next life."
These bastards better hope that whatever you/they call this, that it works. I'd say it could be an EXTREMELY unhealthy environment for anyone connected to the coming trials and tribulations that once worked for Wall Street OR in certain circles of the government. And history tells us that this is so....

[WG]

Interesting news that major banks are upping gold lease rates. At around 6 months prior that lease rate fell to 0% to push down gold prices, but they probably ran out of gold in the vaults to do that right now. Guess gold is set to rise plenty going forward.

Though I'm more interested in all the gold certs floating around. If physical gold supply runs short and people start demanding physical gold when redeeming gold certs instead of cash settlement, things will get interesting. Will see news of mints going bankrupt when this happens.

[Neon Vincent]

Well, I've found out something interesting--Typepad does not like comments with a lot of embedded links; the posting software thinks it's spam. I do hope you allow my post about Risky Safety to see the light of day!

[stilldreaming]

“What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Mr. Greenspan

Interesting contrast with this bit on iTulip.

"Derivatives markets guarantee a winner for every loser, but they will over time concentrate the losses in vulnerable sectors. Nature obeys Mayer’s Third Law, which holds that risk-shifting instruments will tend to shift risks onto those less able to bear them, because them as got want to keep and hedge while them as ain’t got want to get and speculate. The logic behind margin requirements in stock markets and capital requirements in banking also holds in the derivatives markets. Permitting highly leveraged institutions to hold private parties behind closed doors is the political version of selling volatility: the predictable likely gains will one day be overwhelmed by an equally predictable disastrous loss. - Martin Mayer, Somebody Please Turn on the Lights, Derivatives Strategy, 1999"

[WG]

Ooh news on the lehman CDS carnival! Turns out settlement is to be Friday, and finishes at 2 p.m. I guess people involved in this knew the catastrophe that will follow, so scheduled it this close to the DOW weekend closing.

http://www.reuters.com/article/
rbssFinancialServicesAndRealEstateNews/
idUSN0841811720081008

[Grok]

Your right about arrests Elaine but I would add HEAVY fines along with it. Chux, actually they are Freidman rat bastards.

[Elaine Meinel Supkis]

WG: So, they moved it from Thursday to Friday, eh? I suspect this is so they can do the 'Friday news dump'. Note that the hour is right before the stock market closes. HAHAHA.

They know what is going to happen next. They have to work hard to pretend to be amazed and shocked when the expected happens.

Still Dreaming: thanks for the quote from ITulip.com. The collective there is the oldest economics collective online. The minds there are really great and one can learn so much there! I wish our economic overlords read that site from day one. But they avoid looking at reality.

[Elaine Meinel Supkis]

I forgot: the CDS collapse will be in the news right before a LONG three day weekend. They set this up for that purpose.

[carli]

The Credit Crisis in one paragraph:

"The credit crisis was caused by 1) ..securitized mortgage paper, that was 2) rated triple AAA by Moody's and Standard & Poors, which was then 3) "insured" by credit default swaps (CDS) -- the unreserved for, shadow insurance products 4) whose exemption was made possible by the Commodities Futures Modernization Act. That legislation exempted these derivatives from any supervision or regulation. The lack of reserve requirements is why there is now $62 trillion in CDS, many of which will never pay their counter parties the promised insurance."

And with a little help from:
"One other thing I've done, is I've called on private sector mortgage banks and banks to be more aggressive about lending money to first-time home buyers. And the response has been really good. There's a lot of people in this -- our communities around the country that deeply care about the issue of homeownership, and they've been responsive."

- George W. Bush, U.S. President, March 26, 2004

http://tinyurl.com/asdcr

At the end of the day it is all about accountability. So far it's just the taxpayers the world over footing the bill. Only if and until the taxpayers say enough with the KY Jelly, fire and jail the bastards, will it mean anything.

Saddam got hanged for much, much less.

[CEO Nutcracker]

Some interesting things brewing.

http://silverbearcafe.com/private/10.08/collapsing.html

I'll check in later.

[chorddog]

There are just so many people that should be hanged, then thrown in jail, and then fined, where do you start?
If I may open the window for a moment to let in some fresh air:
It's John Lennon's birthday today.
What's your favorite John Lennon song?

[Don]

S & P 500 is down over 30% so far this year.
Now the retailing industry has posted its new
forecast for the Holiday season-the worse in decades is coming. Santa Clause-stay home.
Meanwhile Obama and McInsane continue to tell
the American people how they are going to fix
this economy with no details. Cook County Sheriff in Chicago was on CNN this morning with 43,000 homes in foreclosure, and finally someone has a heart, he said he isnt going to throw them out. Plus the Cook County Jail cant house 43,000 home-owners now labeled criminals. Now AIG is
planning Condom 2 party. And no-one is going to jail???????????

[Tell]

"The government’s move will not succeed in restoring confidence in the banking system. Given the weight of the financial sector in Britain, far higher than anywhere else, a comprehensive bailout package involving every UK bank and every UK deposit would be far beyond the means of the government."

"To give some indication of the scale of what is involved—the assets of what are now, in many instances worthless loans of just four of the high streets banks, RBS, HSBC, Barclays and Lloyds TSB/HBOS—total €2 trillion, €1.6 trillion, €1.5 trillion and €1.4 trillion respectively. This is more than four times the value of Britain’s GDP."

"While some of the most important banks and building societies will be eligible for cash injections by the government, others will be allowed to go to the wall or be taken over. In any case, the government will struggle to find the resources to fund this rescue of the biggest banks. Its coffers are empty."

"According to the Institute of Fiscal Studies, this year’s budget deficit is likely to rise to £65 billion, a 13-year high that amounts to 4.4 percent of national income. The state takeovers of Northern Rock and Bradford and Bingley—set to cost taxpayers at least £130 billion—have already brought the total borrowings to GDP ratio to about 48 percent."

"Further injections of public cash, into banks that are losing their value, could result in the financial insolvency of the British government itself. Even in the mid 1970s, in spite of Britain’s dire economic straits, the government was able to appeal to the International Monetary Fund for loans. Today such an escape route is no longer possible."...

http://tinyurl.com/3h3rtm

[[email protected]]

Paulson has been forced to let the SWF's get equity rather than crap:

http://www.bloomberg.com/apps/news?pid=20601087&sid=au4PnE_L1TCQ&refer=home

[WG]

Possible game plan for mega-banks:

1) Wait for Friday's huge CDS fireball to consume many hedge funds, insurance companies and small banks (since market closes soon, dislocation will be postponed till Tuesday open)
2) Weekend tidal wave of bankruptcies destroy all the tiny fellas
3) JP Morgan and Goldman steps in to buy up all the corpses before Tuesday open
4) Sell all the pieces to Uncle Sam under that $850b giftwrap!

Lots of money to be made in this one! Damn I wanna make out like a bandit too!

[David]

One step back to Real Bills Doctrine?

http://www.reuters.com/article/ousiv/idUSTRE4982IY20081009

[Ralph]

Go to EBAY and type in silver bullion. 70% premium to the fake paper price on CRIMEX. WWW.GATA.ORG Bill Murphy,Chris Powell,Catherine Fitts,James Turk etc... Spent $256k of their own money to put a full page ad in the wall st. journal last January to expose the manipulation of the gold price by certain bullion banks and the FED, to artificially suppress interest rates. Its called GIBSONS PARADOX. Tinsley putt program run by Stamford Univ and US Govt. Gold price must be suppressed to get fake int rates. The lease rate expolsion is a sign the cartel is at its end. Buy physical Gold anyway,anyhow. It IS going to explode. Gold will trade at $6k per oz. and the Dow will trade there as well. In due time. When this occurs when 1oz. of gold will buy 1 share of the Dow, dump your gold for financial assets. This AM it takes 11oz. of Gold to buy the Dow. We have a long way to go.

[Elaine Meinel Supkis]

I have to go out soon to deal with family medical problems. Will be posting later today. So much to do and say!

I expect everyone here will keep up with the news. I read all comments and click on all links. I can't thank you all enough for this.

Sorry about typepad not allowing multiple links. Post one link at a time. It is quite OK with me to post a number of times in a row! I still click on all links.

[DrKrbyLuv]

While many are calling for more regulation we are missing an important point that Elaine brings up over and over - we already have laws, start the indictments!

[Tell]

"AIG to taxpayers: Pay no attention to the $440,000 spa trip"

"If we ever needed an argument against using taxpayer money to bail out private companies who made bad decisions and are teetering on the brink of extinction, this is it."

"Less than one week after the U.S. government forked out $85 billion related to the American International Group (AIG) mess, the AIG executives took a little jaunt to a California spa and spent $440,000 on their stay."...

http://tinyurl.com/3pqmpw

[Neon Vincent]

OK, I'll try again, this time with just the most essential links.

First Gankutsuou: the Count of Monte Christo, then Fullmetal Alchemist (to be fair, I brought it up first, but you ran with it), and now Risky Safety! LMAO! You're the only person I know who blogs about financial matters and uses anime shows and characters to illustrate your points about money and I love you for it. Otaku unite!

[Neon Vincent]

Next part.

BTW, you forgot to mention one key thing about Risky, both in this story and the one from a year ago, that reinforces your theme about the current troubles being the result of a raid on the Cave of Wealth and Death. Risky is a shinagami or death goddess. From Wikipedia: "[S]hinigami resemble small, cute versions of Death, and try to convince their victims to commit suicide. The title character, Risky, is a shinigami who attempts to use a miniature scythe to send the female protagonist to the land of the dead." So, when the bankers choose Risky, they're courting someone who wants nothing more than their self-destruction. I'd say they've managed a good start so far.

BTW, for those of you who wish to see Risky and Safety in their original Japanese form and not Elaine's Westernized adaptation (although I have to admit, you got the gist of the characters right for an American audience), click here. Note that Risky is even more of a wicked little Goth girl than Elaine draws, while Safety is quite the little angel.

[Neon Vincent]

Afterthought.

Speaking of Death Gods in pop culture, are the Merovingian and Persephone from The Matrix going to make cameos in your posts?

Also, I don't suppose you've alluded to the destruction of the bank buildings at the end of Fight Club in your posts. Or have you?

[Richard]

Your report of the Bryan Keogh Bloomberg article 'Overnight CP Costs Jump, Bond Risk Rises Amid Global Rate Cuts', leads me to think that the commercial lending marketplace has completely broken down and that the Fed announcment of CPFF will come too late and only be a drop in the bucket as to what is needed.

Given that the commerical lending market place has completely broken down, an economic and stock market breakdown is imminent.

Soon blue helmeted military troops will be deployed under the command authority of NORTHCOM for civil security.

The emergency management provisions of the Security and Prosperity Partenership, the SPP, will be enforced and state corporatism, that is state corporate rule, will arise where stakeholders will be appointed to rule over the factors of production and oversee industry, commerce, trade and investment.

At that time, if the Fed's new liquidity facility CRFF is still in effect, it will be available only for those companies which are deemed necessary for the security and prosperity of the homeland.

[Buffalo Ken]

Richard I disagree with your prediction. I have more faith in the "American" spirit. Sometimes I think you have read a bit too much of the Revelation because those are older stories and such stories always need to be "melded" to the current reality.

There for sure is going to be considerable volatility, but it ain't the end of the world. Worse has happened.

Peace,
Ken

[Buffalo Ken]

But I do think the National Guard should come home. Soldiers are way less likely to turn a weapon upon those who share their "home" area. People prefer to work together. Mutual Aid will prevail because it just makes too much sense.

Ken

[Buffalo Ken]

and if the Military was honest about what their best thinkers are thinking (I suspect) we could all acknowledge that US troops all around the world should be recalled so that they can work on more important things. We can't afford it for one and it is very unbalanced.

If the a sale was made to Taiwan and Taiwan spent gold, then I think Taiwan made a big mistake, but I suppose whats done is done. I also thought it was an incredible gesture from Tehran to release the US Generals that entered Iranian airspace. Hey perhaps they ended being emissaries of a sort. Who knows.

Peace,
Ken

[JSmith]

The US - not to mention world - economy takes an enormous dump like this roughly every 20 years or so. The thing is, right now all paper looks like bad paper but there really are some sound assets floating around on the tides.

My wife and I are wondering whether it's time to open up the cash account and go bargain hunting.

"Soon blue helmeted military troops will be deployed under the command authority of NORTHCOM for civil security."

"Blue helmeted military troops" is an oxymoron. I remember when the Serbs took their weapons away from them and chained them to their stupid white tanks. They call those blue helmeted military troops 'smurfs' for good reason.

[JSmith]

The US - not to mention world - economy takes an enormous dump like this roughly every 20 years or so. The thing is, right now all paper looks like bad paper but there really are some sound assets floating around on the tides.

My wife and I are wondering whether it's time to open up the cash account and go bargain hunting.

"Soon blue helmeted military troops will be deployed under the command authority of NORTHCOM for civil security."

"Blue helmeted military troops" is an oxymoron. I remember when the Serbs took their weapons away from them and chained them to their stupid white tanks. They call those blue helmeted military troops 'smurfs' for good reason.

[JSmith]

Please pardon the double post - Typepad crapped out on me. (Again.)