Elaine Meinel Supkis
A recent rash of bank failures is wreaking havoc on a large but little-known corner of the credit markets, in a development that could mean more write-downs for banks and higher borrowing costs for companies everywhere.Geeze, when Lehman Brothers became the Lameman Sob Sisters, one of the most ugly little details was the fact that all that paper they held which they sold as great investments were worth literally less than a dime on the dollar. Some were only a penny on the dollar. Even when a homeowner goes belly up, most often, the property does have some value! Usually, about 60% of the loan. Imagine if homes that were collateral for $500,000 sold for only $5,000 or even just $500? Only if there was some great catastrophe!Even as some lending markets begin to recover from last month's demise of Lehman Brothers Holdings Inc., the securities firm's default -- together with those of other U.S. and European banks -- is causing new dislocations in the multitrillion-dollar market for complex investments known as synthetic collateralized debt obligations.
Sort of like all those fancy houses in the Galveston area. One middle class community was totally wiped out, leaving only cement floors outlining where the house once stood. This is what has happened to all CDOs of whatever tranche and type.
The Lehman mess has not been settled at all. The bidders at the credit default auction who were supposed to collect the debris and then resell it...HAHAHA...knew this junk was as marketable as popsicles in a January blizzard in Nome, Alaska. But they had to buy something because the government enticed them somehow. How? Well, I would think that the $700 billion lollipop was waved in front of them?
With all this pious talk from the gnome community about 'transparency' and 'trust'...well, this doesn't go particularly far, does it? This is like being in a poker game where the young ladies are asked to play strip poker while the gnomes put on more and more layers of coats and hats and even veils and masks.
Synthetic CDOs are magical things. They have no reality. But they exist. They are devious creations created by some of the most devious minds on earth. The search for the Holy Grail of untraceable, finger-printless, opaque, dark pool money machine was perfected a mere 10 years ago and it was unleashed upon this earth to exploit the Japanese carry trade's funny money 0% lending! See? When we talk about all these strange unicornic creatures created by the gnomes, we must never forget the ultimate reason: to exploit this amazing, once in the last 500 years event! Never, in modern times, has any major export/industrial nation run itself on a 0% system!
So the problem was, how to shimmy this good thing into the real economic world and thus, use it as a basis for building great wealth without lifting a finger or making anything exportable. Before we descend down the particular deep pit into the Outer Darkness, first, let's visit the Bionic Turtle:
This illustrates a partially-funded synthetic CDO typical of the failed structure in the subprime meltdown. "Partially-funded" refers to the fact that only a fraction of the reference portfolio is collateralized (e.g., 7% to 15%); the investors purchase securities only on this funded tranche. "Synthetic" refers to the fact that credit risk is transferred not with a sale of loans to the SPE/SPV, but by the purchase of credit protection with credit default swaps (CDS).
He tries! He tries his best! Explaining this mess, do note with his graph, how the arrows all move contrary-wise. And how they basically dump all 'risk' onto others while absconding [to the bottom of the graph] with the real loot. Which is ALWAYS LESS THAN !0% OF THE VALUE OF THE DEALS! And the cherry topping this melange are the juicy fees earned, building, slicing and dicing these deadly deals!
After searching the web, I found this interesting magazine that is all about credit. Just 4 short years ago, they ran an enthusiastic article about the wonders of Synthetic CDOs and how they magically grow EXPONENTIALLY! Wow!
Balance-sheet and arbitrage CDOs can be structured as cashflow or synthetic instruments, although an increasingly popular formula among originators is to combine the two into so-called hybrid CDOs. The cashflow CDO, which formed the bread and butter of the market in its formative years, is a structure in which CDO notes are collateralised by a portfolio of cash assets purchased by the originator. In other words, in this classical structure the CDO owns the physical bond, loan or other security referenced by the instrument.A number of danger signs in this early article! First off, there is NOTHING LEGAL about these deals! Gads! How do we spell, 'ILLEGAL'? Legal means things are set in ink, signed by actual humans who can go to prison for fraud, for example. It means it leaves fingerprints, a trail, something physical. Instead, since these bizarre new thingies were NOT LEGAL, this meant the sellers and buyers could make up whatever stories they wanted with each other since no one ever expected to be hauled before a judge or examined by the SEC.The volume of traditional cashflow CDOs has been eclipsed in recent years by synthetic products, sometimes referred to as collateralised synthetic obligations. In a synthetic CDO, no legal or economic transfer of bonds or loans take place, with the underlying reference pool of assets remaining on the balance sheet of the originator. Instead, the CDO gains exposure to credit risk by selling protection to others through a CDS, which functions very much like an insurance contract. In other words, the CDO is still being paid for bearing credit risk, just as it would do if it physically owned a bond or loan.
From the perspective of originators, there are a number of clear benefits associated with synthetic CDOs. One of these is that risk transfer via synthetic structures allows bank originators in the CDO market to ensure that client relationships are not jeopardised. That is an especially relevant consideration in the market for CLOs, given that deal documentation in the syndicated lending market often prevents the transfer of loan ownership. Even where loan transfer is permitted, CDOs would often need, in theory, to secure the written permission of each borrower in order to construct a cashflow, which would amount to an impractical burden.
With that Republican idoit, Cox, in charge of the SEC, no one was ever allowed to interfere with deals. And indeed, more and more deals were done 'off the books' and in other obviously crooked ways. This was encouraged by Greenspan who claimed this was pure capitalism and not pure Ponziism. When these things took off, interest rates were at 1% and the search for places where higher rates could be charged was on. These Synthetic CDOs were all about removing obvious risks from the high-interest rate pools.
Business deals or home lending to risky people who were not good clients was the only way one could charge very high interest rates. But everyone buying these things were frightened about bankruptcy of these same, risky borrowers. So they needed come scheme to remove this threat. This is where the Synthetic CDOs were so very clever: they pretended that they could SELL the risks and thus, insure it!
The sales of these risks turned out to be a great way to feather many a gnome's nest. The fees and the sales and resales of these seemingly innocent things was a great way to make a buck for two years! Then the bad news began to come in: the bad risks were very bad risks. And were defaulting at record rates! And the people who supposedly were going to pay for these losses so that the original owners of these tranches would not be hurt, were unable to pay or unwilling to pay up!
A Deutsche Bank report on synthetic CDOs traces the strong growth in investment-grade CDOs back to 2000, by which time – notes the Deutsche report – “the credit default swap market was expanding at a seemingly exponential rate. We estimate the outstanding notional amount was growing at about 75% per annum and that the market totalled about E800 billion. Between the US and Europe, about 150–200 names were actively traded.”The fantasy that the risk was separate from the credit was a fool's game. It was cynical. The people who cooked this up knew it was a con. This is why it was not LEGAL. Namely, no one responsible wanted their nasty little names attached to any deals. Goldman Sachs and JP Morgan's top dogs didn't want to be barking in the pen after a trial. Paulson had to drop his lucrative business when he saw what was coming. He knew two years ago, all hell would break loose so he got himself installed as Treasury chief so he could be in control of the main banking entity that matters when things go crashing down.Since then, liquidity in the CDS market has continued to grow at breakneck speed, with some estimates suggesting that by the end of 2004, the CDS market will be worth some $4,800 billion.
For investors there are a number of important attractions associated with exposure to the CDS market rather than to cash bonds. CDOs made up of CDS allow investors to buy ‘pure’ credit because the structure separates the credit risk component of from the other asset’s risks, such as interest rate and currency risk.
He is NOT some nice guy who is sacrificing himself for humanity. He has hundreds of millions of dollars of Goldman deals at stake here and he wants to protect this stuff. Indeed, he is frightened of being arrested for fraud. But Congress doesn't want to arrest him. They want him to catch the falling knife of the Synthetic CDOs. He promised them, he would. Alas! This is all attached to that super-monster beast, the Derivatives Beast. Who isn't just synthetic paper but all sorts of oddball deals like currency/interest rate swap games and credit default swaps. These goofy, stupid gnomes let this creature grow to be bigger than the entire planet earth! Illegally!
A synthetic CDO is a collateralized debt obligation (CDO) in which the underlying credit exposures are taken on using a credit default swap rather than by having a vehicle buy physical assets. Synthetic CDOs can either be single tranche CDOs or fully distributed CDOs. Synthetic CDOs are also commonly divided into balance sheet and arbitrage CDOs, although it is often impossible to distinguish in practice between the two types.Tweedle Dee and Tweedle Dumb. Can't tell them apart. And they are not physical. They are metaphysical with a vengeance. Any time we see something that is full of mysteries like this, full of outright contradictions or suspend the laws of gravity, we are seeing magic, not reality. Like, magic TRICKS. Now onwards to tonight's news:
(Bloomberg) -- Investors are taking losses of up to 90 percent in the $1.2 trillion market for collateralized debt obligations tied to corporate credit as the failures of Lehman Brothers Holdings Inc. and Icelandic banks send shockwaves through the global financial system.Every one of the queer, strange, bizarre things cooked up by these crooks this last decade are collapsing! Not one of them is useful, sane or good. Whenever we see this sort of thing in the real, physical world, we usually decide, this is a crime. Drunks driving down the wrong side of the road, smashing into everything are criminals and liable to be arrested if they survive.The losses among banks, insurers and money managers may spark the next round of writedowns on CDOs after $660 billion in subprime-related losses. They may force lenders to post more reserves after governments worldwide announced $3 trillion in financial-industry rescue packages since last month, according to Barclays Capital.
``We'll see the same problems we've seen in subprime,'' said Alistair Milne, a professor in banking and finance at Cass Business School in London and a former U.K. Treasury economist. ``Banks will take substantial markdowns.''
The utter and complete failure of EVERYTHING these guys cooked up shows determined criminality. Just like Enron collapsed into bankruptcy, thus showing the underbelly of their conspiracies and illegal deals, so it is here: how on earth can these things be legal if they are so lethal?
Recently, China had several scandals over children's milk, toys and things. Lead or melamine was poisoning and even killing children. This was a crime and the government moved to punish the people responsible. Namely, they have committed suicide or are in prison. So it is here! All the bankers and dealers who invented, created and sold this obviously illegal business should be punished!
You don't need a law saying, 'Do this or that and you get arrested.' The mere fact that all of them have conspired to create TOTAL and UTTER economic destruction on an epic scale is grounds for arrest! Terrorists are supposed to scare us and this is illegal, whatever tools they use to scare us. So it is with these guys! They are terrorizing the entire planet. They are destroying our nation and many other nations as certainly as bombers blowing up buildings or shooting officials! Send them to Gitmo!
Here is proof that the Fed under Greenspan had plenty of warning about all this. A report written in 2004:
This graph is a classic 'hockey stick' graph. There should be a big sign attached to all such graphs: DANGER! DANGER! UNSUSTAINABLE GROWTH!!! Any realistic adult looking at such a graph should scream, 'Oh my god! Oh, my god! We must stop this, now!' Not, 'Oh my, look at that! We found a magic way to make something grow very, very fast!' This irritates me no end. I saw such graphs years ago and began to howl about it. No one listened. This is because humans WANT to have things grow to infinity as fast as possible if they can do it. This delights them, not terrifies them!
Out-of-control growth pleases us immensely. So the only way to stop this is to train our youth to fear this graph. Whenever they see such a graph, they must immediately raise alarms and show anger and fear, not happiness. The Credit Magazine guys thought the exponential growth was great! Not hideous. So we have a philosophical problem here that has to be addressed by the schools. Pronto. And we must force Congress to look into this matter, too. For they are making our debts grow the same rate!
Michael S. Gibson∗
Revised, July 2004
CDO tranches are sensitive to the business cycle
Because CDO tranches are sensitive to correlation, and correlation of defaults is typically driven by the business cycle, the correlation risk of CDO tranches can also be characterized, and measured, as “business cycle risk.” Using the model described in section 3 above, and interpreting the common factor as business cycle risk that is common to all credits, I can compute the exposure of each of the tranches of the hypothetical CDO to business cycle conditions. Specifically, I can compute the expected loss (EL) on the CDO tranche as defined above, conditional on a certain value of the common factor.This is so sad, actually. Mr. Gibson thought that these CDOs would lose 64% value? HAHAHA. More like 98%. And far from a once in 25 years' shock, all the tranches and rubbish collapsed totally and completely in less than 10 years! And because the economist writing this study for Greenspan is not all that wise, he looked straight at his graph showing EPXONENTIAL growth and didn't scream, 'Ach, mein Gott! Herr Grünspan! Achtung! Ungefährlisch!' Nope. Instead, he did recognize that something wasn't quite right and worried that in a recession, somethings might not work.Table 10 shows such a calculation. Three different business cycle conditions are considered:
boom, trend growth, and recession. These correspond to setting M , the common factor driving defaults, at its 10th, 50th, and 90th percentiles, respectively. The table shows both the dollar amount of each tranche’s conditional EL in the boom, trend growth and recession scenarios, and the conditional EL as a percent of the tranche’s notional amount.
The equity tranche, in a first-loss position, expects to bear defaults of about half its notional amount in a trend growth macroeconomic scenario and expects to lose its entire notional amount in a recession.
The mezzanine tranche, in a second-loss position, suffers no losses in a boom and minimal loss in a trend growth scenario, but suffers most of the portfolio’s EL in a recession.
In this sense, mezzanine tranches are leveraged bets on business cycle risk. Recall the hypothetical CDO’s mezzanine tranche. Its par spread is 315 basis points, compared with 60 basis points on the reference portfolio. In exchange for this higher return, the mezzanine investor is exposed to a loss of 64 percent of principal in a recession scenario, compared with 7.6 percent on the reference portfolio.
The senior tranche expects to suffer very little loss, even in a recession scenario. Figure 5 shows the expected loss on the three tranches across a full range of macroeconomic shocks (1st to 99th percentile). Beyond the 96th percentile common factor shock, corresponding to a less than 4-in-100 or less-than-once-per-25-years shock, the senior tranche begins to see its principal significantly eroded by additional losses. While the senior tranche is not exposed to “recession risk,” it could be said to be exposed to “depression risk.”
But he didn't think these things would CREATE a recession or even worse, a depression! He thought they might not be good in such climates. But didn't put two and two together and realize they would be the actual TRIGGER, the CAUSE of a depression. We see this clearly today. Today, all the central banks are in hysterics because of this stupid deal making. They haven't the faintest idea, how to unwind this without much of the wealth squirreled away in banks, vanishing in a horrid flash. Boom.
One of the things this paper has is a bunch of useless formulas. One is this simple thing: M T M [mark to market] = Fee − Contingent. This is what has failed. There is no market and the mark is way off the mark. Like, into the rough. And the whole point was to gain the Fee! After the pay-out. Elsewhere, the good professor talks about the Default hazard rate which he pegs optimistically at just 1 percent per year. Instead, it is a classic all or nothing matter. All the schemes floated at the same time and when one fell, they all collapsed. This is why we like to compare this with Ponzi schemes: critical mass means the whole thing collapses in a cascade. This is why Ponzi schemes are illegal.
Synthetic CDOs are popular vehicles for transferring the credit risk of a portfolio of assets.Again, this darkness! Things can't be 'observed'. Now you see it, now you don't! The biggest tricks in the trade of all stage magicians is to show you only part of what is really going on. The various machines, mirrors, cloth curtains, etc, are all there to mislead, conceal and confuse. The closer you look, the more you are deceived. This is because all good magicians use 'patter' to control people's perception of reality. Talking is magical. And it works! It can twist reality into a pretzel even though the dough is not tied in a knot.Using a pricing model for CDO tranches that does not require Monte Carlo simulation, [Elaine: HAHAHA]I analyze the risk characteristics of the tranches of synthetic CDOs. In a hypothetical CDO, the equity and mezzanine tranches contain 10 percent of the notional amount of the CDO’s reference portfolio but 70–90 percent of the credit risk.
This implies that credit risk disclosures relying on notional amounts are especially inadequate for firms that invest in CDOs.
A basic result is that equity and mezzanine tranches are leveraged exposures to the underlying credit risk of the CDO’s reference portfolio.
I explore several implications ofthis result. First, event though mezzanine tranches are typically rated low-investment-grade, the leverage they possess implies their risk (and expected return) can be many times that of a low-investment-grade corporate bond. Second, a mezzanine tranche’s risk and leverage depend on the riskiness of the CDO’s reference portfolio and the tranche’s credit enhancement. Third, because the equity tranche contains a large fraction of the CDO’s total risk, risk transfer is limited when the CDO originator retains the equity tranche.
CDO tranches and other innovative credit products, such as single-tranche CDOs and first- to-default basket swaps, are sensitive to the correlation of defaults among the credits in the reference portfolio. Because correlation is unobservable, differences of opinion among market participants as to the correct default correlation can create trading opportunities as well as “correlation risk” to be managed. Finally, the paper shows how the dependence of CDO tranches on default correlation can also be characterized and measured as an exposure to the business cycle, or as “business cycle risk.” A mezzanine tranche, in particular, is highly sensitive to business cycle risk.
(Reuters) - The United States has plundered global wealth by exploiting the dollar's dominance, and the world urgently needs other currencies to take its place, a leading Chinese state newspaper said on Friday. The front-page commentary in the overseas edition of the People's Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies. A meeting between Asian and European leaders, starting on Friday in Beijing, presented the perfect opportunity to begin building a new international financial order, the newspaper said.Oh boy! The Chinese were the oldest magicians. When Europeans first invaded China, they were amazed to see some of the street tricks. A fad grew from 1700 till today, trying to do these tricks in the West. Las Vegas depends on the magic community to awe and confuse patrons. The Chinese have a long history with the business of paper money. They invented it, after all! I will write a little history about that tomorrow.
Leaders from East Asian countries agreed Friday to have the fund set up by the middle of next year.Asians are groping for some way of dealing with this. Yet they are doing this with Japan! HAHAHA. Good luck. So long as Japan clings to the 0% system, they are endangering everyone. Right now, the carry trade is violently unwinding. But the hope is, in Asia, to rewind it and get the trade going again. This is a futile effort if the US is at 0%, too! A problem! For all of Asia has the biggest trade surpluses with the US. We are their profit center! So they are united in this regard. And so, this deal won't work if we can't bend to their will and resume consuming.Members of the Association of Southeast Asian Nations, Japan, China, and South Korea will be allowed to dip into the money when faced with a financial emergency.
Japan, China, and South Korea agreed to provide 80 percent of the funds, and Southeast Asian nations will give the rest.
"The pressure they're under now I think is more related to just a panic, the ongoing panic in financial markets. And, I think, the thinking is the $80 billion could be used as sort of a backstop for the regional authorities, that when they do experience pressure, to fend it off," he said.
Comments
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For nice explanation of CDS and CDO, CDO-Squared etc., check out this.
Posted by: nn | October 25, 2008 at 09:51 PM
Thanks for the great videos, NN!
Only one quibble: the professor isn't naked. Now, come on! When we talk about gnomes, money and naked short selling, we do it in the buff! Heh.
Posted by: Elaine Meinel Supkis | October 25, 2008 at 09:55 PM
Heads up. Robert McHugh has forecasted a 90 percent chance of the Dow taking a 2,000 point drop.
Posted by: USS Dutch TITANIC | October 25, 2008 at 10:31 PM
On a slightly more serious note, it is an interesting question whether we can get from here (speculative leverage unwinding) to there (sensible banking practices, a little bit of protection with tariffs, taxation of the financial psychos).
Unfortunately, having been studying this for years, I don't we can. First, it's a difficult task in itself. So much "real" trade is facilitated and controlled by the idiot banks, I can't see how domestic or international trade can continue whilst the denoument plays out. Second, it would need remarkable skill and intellect for any government (or collection of governments) to unwind this mess. And from my experience the intellects of the personnel who inhabit our governments are appallingly slow, blinkered, robotic and self-centered.
As the Mogambo Guru says, we are (therefore) freaking doomed.
I just don't see a way out. I see anarchy and and catastrophic implosion in trade because of the destruction of the integrity of the means of exchange.
I was laughed at and killed off years ago from the mainstream. Many other Cassandras no doubt experienced the same alienation. Only the idiots remained part of the core corrupt system. And now we expect them to get us all out of the mess they themselves created? You. Have. Got. To. Be. Kidding.
Happy Halloween.
Posted by: Karmaisking | October 25, 2008 at 10:31 PM
My maternal grandfather once told me a Jew would take a dollar, rip it in half, and try to sell a half for a dollar. From what I had heard of Jews, I didn't think any of them had gotten rich by ripping dollars in half, and besides, who would be stupid enough to pay a dollar for a worthless piece of paper?
Who would've ever guessed gnomes would come up with credit derivatives?
Posted by: Zulu | October 26, 2008 at 12:06 AM
Our onrushing Depression is no accident.
It is deliberate, planned by zi juus central bankers.
Greenspan, Bernanke, Schumer, and Barry Frank are ROTFLTAO.
Posted by: PLovering | October 26, 2008 at 12:22 AM
Karmaisking -
Interesting post. I can't say that you are wrong but would offer this pragmatic solution (not that the banking powers are looking for solutions)
The Pittsburgh Steelers football team had a great winning coach for many years - Chuck Knoll. His basic strategy was always the same, year after year, super bowl after super bowl.
Whenever the team played less than optimal, he would take them back to the basics - sound fundamental football. While global economics may be more complicated; we should still consider going back to fundamentals and make them sound.
No doubt the status quo has no reason to dilute their position or, even better fire themselves but the basics still remain the same. We need to enhance production, prosperity and savings at the individual/family level. Sound money is needed and a realization that the real economy is most important.
For example, balanced trade is best for the people. When trade is more balanced, each nation has an incentive to create spenders at home.
How much better off would the Chinese people be if the government had an incentive to allow them to keep enough of their income to be both spenders and savers? The same applies everywhere.
I just hope people wake up and see that the system should serve them and respond accordingly by taking more control.
Posted by: DrKrbyLuv | October 26, 2008 at 12:38 AM
Calvino!!!
I'm excited to see someone else from IBC here on Elaine's blog. Please send me an email. Would like to keep in touch with you!
[email protected]
Thanks!
Posted by: PW | October 26, 2008 at 01:26 AM
DrKrbyLuv,
Thanks for the thoughtful response. Interesting analogy. Yes, it may just be possible to return to "basics" (sound banking laws with regulation of fractional reserve banking, progressive taxation and a clampdown on tax havens, government lending "filling the breach" whilst the psycho financials are allowed to collapse). I truly hope you are right.
However, I have a different analogy, because I believe banking and economic systems have to live with history and with the investments they have made. No one seems to realize the incredible importance of making the right investment decisions. Residential developments CANNOT be turned back to farmland for example. You have to live with your investment mistakes. American history is useful here. Colonial Americans kept moving West to "start fresh" (move on from high land prices and potentially oppressive financial conditions) but now they've hit the West Coast, there is no chance to move on and recovering from past investment mistakes (unless we colonize Mars). We now all have to live in the sh*t we create.
In a competitive football environment you have a chance to reinvent yourself. The score last week isn't carried over to this week. Teams can therefore "start fresh" without the baggage of the losses from the last X weeks weighing them down.
Unless complete revolution wipes the slate clean (and I don't see that happening at least in the short term), we still have the crushing debt load. We still have money supply growth from years of Greenspan madness. That has "diluted" the means of exchange and screwed up the pricing mechanism and completely f*cked with the investment decisions of millions of entrepeneurs. This is not a situation where we can return to "basics" and quickly recover. History matters in banking and the economy. Money supply growth has encouraged malinvestments. Those ridiculous speculative residential developments don't just disappear like last week's football scores. The resources have been used. Wasted. How do we wipe the slate clean?
I hate to say this (because it hurts) but I have a different analogy. Let's say you've been a smoker for years. It has now caused throat cancer and also a type of cancer that is infecting the blood stream from the throat and could track down to the liver or some other vital organ. You could try surgery (cut it out) but that could kill you. You could try chemo (again risky). Or you could just keep smoking and die.
The equivalent in banking terms would be: (1) Kill off the pscho banks (and the businesses associated with those banks) and hope the rest of the economy survives (surgery option) (2) Try to have government intervene and somehow "reliquify" the money markets (chemo) (3) Or just guarantee bank deposits and let the pschos continue their game (the Iceland/Australia option) - the same as just enjoying another cigarette and forgetting about the past or the reason why you're here with cancer.
Short of revolution there is no way out. For possible "wipe the slate clean" solutions, google Web of Debt, Money as Debt, Michael Rowbotham Grip of Death, or Antal E Fekete.
But even the wipe the slate clean options are so close to the "surgery" option they are all high risk now.
Within 10 years of the Nixon/Friedman disaster (pulling off gold) we could have saved the system. Now the cancer has so riddled the monetary system, so attached itself to all businesses (big and small), so intertwined itself with world trade, so destroyed the means of exchange, so corrupted officials, made so desperate the middle classes that young kids will do anything (including esorting to prostitution in many countries) for a college degree to get out of the poverty trap........it's too late for a "return to basics and everything will be alright" solution.
Cancer is my best analogy. The monetary system has cancer and the parasite is eating away at the world economy. It produces nothing other than debt and consumes everything - people, souls, the environment...everything. And the monster needs to keep growing or it (and the wider economy dies). It is so big, if it dies, we die.
A leech, a cancer so big that to destroy it means destroying the economy.
I hope I'm wrong and you are right. Or at least the government has the very best surgeons. Based on what I see so far, the "surgeons" have no idea, are trying to calm the patient down with more cigarettes and are all running to the exit doors of the hospital to check on their own medical indemnity insurance.
The patient is dying and nothing is being down to attack the cancer.
We are (therefore) freaking doomed.
Happy Halloween.
Posted by: Karmaisking | October 26, 2008 at 03:42 AM
Karmaisking,
Seems like present lot of G7 gnomes is goin the way of Marie Antoinette - only thing missing is the right trigger.
Taiwan might have inadvertently started the stampede by announcing the dumping of Freddie and Fannie stocks.
Elaine,
Doesn't the Asian attempts to fix things remind u of US in the 30's trying to prop the Sterling Pound?? Things never change - just different actors.
Posted by: OC | October 26, 2008 at 04:51 AM
Some clues I have gathered from listening to the news lately.
Europe wants to do away with the dlr hegemon, however maintain the charade of being in control with the IMF, BIS entirety unchanged.
Which currency to use as the reserve is up for grabs.
This pisses off Japan which is a producer nation like Germany and in direct competition to sell as much as possible to US.
Japan has come out in support of retaining US dlr as the reserve currency， however it also says China is in agreement about the reserve.
China has not made a comment one way or another.
Therefore no concrete plan is in place, and the market tanks.
Posted by: Simon | October 26, 2008 at 05:08 AM
Simon,
Seems like China is holding the key - Japan is probably goin to cut a deal with China if USD tanks due to Benny Boy.
EU might get the short end of the stick as they have no aces - China & Japan just have to sit tight & EU will implode soon enough.
Jesus, these puff-up gnomes don't even have the skills to save their own skins. Personally, I think the Germans and some Nordic countries would be the only ones to get away and the rest of EU is DOA.
China seems to be interested in setting up the Chinese version of Asian Co-prosperity Sphere. Ha!Ha!Ha! That's to show Japan it succeed where Japan failed. Perhaps another one of those cryptic Asian sparring duels carried out behind the scene.
Godamm, seems like we never really left the 30s. Groundhog day!!!
Posted by: OC | October 26, 2008 at 06:18 AM
Synthetic Collateralized Debt Obligations seem to be "bundles" of issuer-side Credit Default Swap policies. That is, the "synthetic" CDOs are based on CDSs (derivatives), while "cash" CDOs are "bundles" of assets.
Here is how I look at it: You have five people rock climbing tied together with rope (the derivative), so if one falls, the others can rescue them. However, if the pitons that are driven into the rock are lousy, they all fall! Since the entire US so-called economy is essentially a vast cargo cult, the pitons are worse than lousy.
The entire idea of having stocks and bonds, which are merely instruments for selling risk, is odd enough. Taking out CDSs is not unlike buying lottery tickets and then buying insurance against any losing tickets. This reminds me of the giant fake Enron Corporation "trading room," a huge collection of cubicles where people were merely playing computer games and not trading anything, and it was all just a big Potemkin Village for show.
In fact that is just what the USA has now: a Potemkin economy!
I've been thinking about the concept of community industry, where all the large industrial operations are required to be owned and operated by their local communities, and cannot ever be sold. This thing with stock markets and derivatives, etc. has been a stupid miserable failure.
Posted by: blues | October 26, 2008 at 07:28 AM
This will pass only after we collectively suffer the pain of material and spiritual dislocation. Then MAYBE we will throw off the rubble of the misdeeds and have the strength of character once again to go forward in a manner that addresses the innocent and dispossessed
Posted by: gje | October 26, 2008 at 08:09 AM
This will pass only after we collectively suffer the pain of material and spiritual dislocation. Then MAYBE we will throw off the rubble of the misdeeds and have the strength of character once again to go forward in a manner that addresses the innocent and dispossessed
Posted by: gje | October 26, 2008 at 08:11 AM
Come on folks, you just have to love the Viagra economy. Why you might be the lucky sod who gets the 4 hour boner. It goes up; it stays up; don't forget to send your physician a thank you note.
Posted by: CK | October 26, 2008 at 09:20 AM
Yes, the 'good' economy was all about budget and trade deficits soaring to the heavens while unions and wages went down.
Posted by: Elaine Meinel Supkis | October 26, 2008 at 09:36 AM
Karmaisking,
Your analogy poignantly clear. And I refuse to turn blue holding my breath for revolution. I wish I could argue with your conclusion.....but I can't.
Posted by: Grok | October 26, 2008 at 09:56 AM
The "Good Economy" was also about CHEAP MONEY which everyone loves as much as CHEAP BEER and no one cares about the hang over.
People's brains are wired for excitement, gambling and thrills and there is nothing so exciting as a rush of new cheap money.
MONDAY, UP 1000+, TUESDAY DOWN 800.
http://www.financialpost.com/news/story.html?id=899269
Secondly, the bank pointed out it has already meted out much assistance -- 225 basis points of rate cuts since last December, including a half-point emergency cut in co-ordination with other central banks on Oct. 8, a move it called "extraordinary."
Posted by: GK | October 26, 2008 at 11:06 AM
Blues,
You well articulated the question that came to me in the middle of the night-what came before "market economies", or, of greater significance, what might come after? I know the desire to keep kicking this dead horse of a society/economy/world, but any and all ideas about what we can begin building, for whomever is left, is much more interesting, which is why the Archdruid's blog is so useful. Look forward to more ideas.
Posted by: Peter | October 26, 2008 at 11:54 AM
GK, it was cheap lending from Asia. And only so we would buy more goods from them while they industrialize and we deindustrialize.
Posted by: Elaine Meinel Supkis | October 26, 2008 at 12:08 PM
Yes, the US power had to be reduced using an economic 9/11 (10/10/08) using CDO's instead of thermite to blast out the steel banking beams of the economy so it could collapse at the speed of gravity and usher in the New World Order of Global Financial Governance.
The cheap lending was used to purchase stocks, which are now being sold en masse, and Yen loans are being paid back making the Yen rise.
The video linked to this site will absolutely blow your mind as you see the new Tower of Babel getting built around the globe.
http://economicrot.blogspot.com/
"Excellent video showing Sarkozy and Barroso calling for a "New World Order", "New World Governance", "New Global Order".
The EU and globalists are determined to use crisis' to setup the final stages of what they call the "New World Order". "
Posted by: GK | October 26, 2008 at 12:41 PM
It seems apparent that the US is the place where the crazy leveraged casino charades began.
The international power brokers have little interest in the real US economy and ruined our manufacturing base as obsolete. They operate a company that simply develops cash flow with the intent of raking off as much of it as possible.
There is no interest in developing value and they instead used the US dollar reserve as a vehicle to game an unwitting world. They are parasites and barnacles on our ships hull.
If we allow them to continue pissing on us all, then we should not complain about sloshing around in wet and stinky shoes.
Posted by: DrKrbyLuv | October 26, 2008 at 12:53 PM
What comes next?
Check out:
www.kunstler.com
He has some interesting ideas.
Posted by: PK Scott | October 26, 2008 at 01:19 PM
Really the basic question is how can a banking system that holds a potential liability of $1.125 quadrillion survive bankruptcy. That is multiples of the annual GDP of the entire planet. Government guarantees are meaningless if the guarantees bankrupt the contries making them. Normally the truckloads of money/debt being shoveled into the financial system would create a firestorm of inflation. Right now all that money/debt is being eaten by the derivatives beast.
I think the hyper inflation firestorm is set off when the people that are holding soon to be worthless IOUs come to that realization and go on a shopping spree of epic proportions. They will want to swap those IOUs for hard assets, period, and the "price" will become increasingly irrelevant.
If currancies are toast, only gold and silver, or a currancy backed by gold and silver will be attractive to the sellers of the things that we HAVE to have for survival.
I think that the gold and silver ETFs bullion will be confiscated (I have read that they have MORE gold and silver in their vaults than some Central Banks). The disconnect between the price of "paper gold" and "physical gold" could be exploited to the tune of about 20 to 25 percent right now. Pay the paper price and let the metal reset to the physical price.
It's way less messy than personal confiscation and lets the elite keep their personal hoards without becoming criminals.
Posted by: PK Scott | October 26, 2008 at 01:31 PM
Currency crisis is coming next....!
The free money given to those speculators/investors are now being used to attack/play with currency.
Posted by: Anthony | October 26, 2008 at 01:38 PM
http://www.pcworld.com/businesscenter/article/152830/microsoft_bug_greenspan_speaks_yahoo_cuts.html
Alan Greespan blames the banking crisis on outdated data from computers
Nothing to see here, just a computer glitch
Sure
Posted by: Simon | October 26, 2008 at 03:37 PM
Thanks to Doug for correcting my miscalculation. My calculator would not allow so many zeros, so I had to guess and I guessed wrong.
My understanding, though, is that the banks were collecting over 400 billion a day for a week or so in addition to the 700 billion bailout. Since Doug has an industrial-sized calculator, could you please do the following calculation for me:
2.5 trillion divided by 300 million.
Just give me a round figure. I would like to know how much per American we gave to a small group of gnomes.
Regarding this:
"Doesn't the Asian attempts to fix things remind u of US in the 30's trying to prop the Sterling Pound?? Things never change - just different actors."
Amazing, isn't it? I wonder if China has really learned anything at all from history.
Then again, they may just be playing along because we have nukes and insane leaders. In that regard, things are much different from the 30's. England had no nuclear option.
As for the one world order stuff, I will be amazed if European aristocrats insinuate themselves into China and take over like the British did to America.
If they do that, they will beat out cockroaches for the "world's most hard to kill pests" award.
Posted by: DeVaul | October 26, 2008 at 03:56 PM
Kunstler, I' glad his advice is better than his painting.
Posted by: ziff house | October 26, 2008 at 04:50 PM
What does everyone think of this plan to replace the USD with a basket of euro, ruble, yen, dinar?
http://fofoa.blogspot.com/2008/10/chilling.html
"I got a great source of info who is involved in the current "Post-US World" planning, execution, positioning utterly frightening / jw
"some incredibly nasty "S" coming the USDollar is to be killed off, along with the USTreasury Bond it is to follow a plan, already agreed upon numerous global forces concluded and decided to kill off the US entirely since they could not separate the innocent from the crime syndicates they want to surgically cut off the Wall St guys, big bankers, arms dealers, Dept Treasury, a few global bank centers (IMF, WB) and more but they could not determine a method to do so, while sparing the US population
SO THEY DECIDED TO KILL OFF THE US
a new global currency has been agreed upon, a basket
it will be based upon the euro, ruble, yen, dinar notice the dollar and psterling are not included, therefore to become Third World Nations the common factor is that all four come from export surplus nations the dinar will be gold-backed and bring a sudden end to the Petro-Dollar the ruble is expected before long to also be gold-backed, but smaller in scope after Europe is forced to purchase all energy products from Russia in rubles, big changes word has come to me that a global basket will SOON displace the USDollar that will immediately kick the US into the Third World"
Posted by: GK | October 26, 2008 at 05:10 PM
GK,
Note that the Yuan is not involved - why??
Something is not right. Does this mean China will play the same game on these currencies?? They won't last long...so does this mean the proposed basket of currencies is a transitional phase for China's 50 yr plan??
Posted by: OC | October 26, 2008 at 08:09 PM
Blues wrote, "I've been thinking about the concept of community industry, where all the large industrial operations are required to be owned and operated by their local communities, and cannot ever be sold. This thing with stock markets and derivatives, etc. has been a stupid miserable failure."
I believe this is a great idea and would work. The finance of industries MUST be removed from speculative vehicles. This would be a sane move. But then sanity has always been in short supply when it comes to speculation (gambling).
Posted by: Zulu | October 26, 2008 at 08:43 PM
One wonders where the productive people have gone. The folks you all knew who made things, started businesses, started local banks or S&Ls, expanded works and employeed people. It is difficult to produce things, risks abound, tastes change rapidly, the supply of abilities diminishes. I remember the end of a novel I read more years ago than I really wish to remember. A novel where the lights were going out, where the main character had just saved his beloved from tyrannical torture, a sad novel in which the parasites win and the productive stop producing. I hope some of us can find a gulch; but I doubt it. Altruism is a fine thing; until it is enforced at the end of someone else's bayonet. Share the wealth runs contrary to create the wealth. Making the pie grow is harder than being the pie slicer. Democracy has always been evil, the founders wanted no parts of it. I wonder if even in their most scared imaginings the founders could have pictured a Bernanke and a Paulson using democracy to so calmly and thoroughly pour unearned wealth into the pockets of their friends.
Today the US military expanded the war in the middle east and attacked Syria. All is well in this the best of all possible worlds.
Posted by: CK | October 26, 2008 at 09:19 PM
nice. i cant remember a more exciting time to hop into real investments. nice cartoon too.
i like the comments i've heard that the 'rise of the dow/fake economy were simply 'unsustainable.' it doesn't get any b etter than that.
Posted by: ifls | October 26, 2008 at 09:46 PM
CK,
I hope it is not true as Syria has a defense pact with Iran. This could be the elite's desperate act to divert attention away from the economic 9/11 happening now.
Posted by: OC | October 26, 2008 at 09:49 PM
GK -
It's not a stretch to think that many would greatly like to see the US "killed off." And it would be justified in many ways since the US has been a war mongering nation and a financial parasite.
The problem with the theory is that the US is being used by the global elites who have planned this all along. And no mention of China in the plan?
The other problem with this theory is that it assumes that the US will simply accept their new role as a third world nation. I can't help but think that if there is some international plot against the US, the plotters would fear the storm that would surely result.
The fact is that the US, if pushed into a corner, may simply begin taking what they need. One aircraft carrier attack fleet alone probably has more firepower than most countries in Europe and the Middle east.
Posted by: DrKrbyLuv | October 26, 2008 at 10:42 PM
DrKrbyLuv,
It's a setup. Iran & Russia knows the US will do that. They have set up lots of anti-ship missiles designed to destroy US aircraft carriers. Any move by US will result in total annihilation of its naval forces. Once that is gone, US will be forced to fall into 3rd world status like Pakistan.
Posted by: OC | October 26, 2008 at 10:52 PM
I knew GM wouldn't last until 2010, but now I see bankrupt GM needs even more corporate welfare to merge with another crappy company; Chrysler. It's akin to two poor people moving in with one another that can barely afford the rent.
GM Said to Ask U.S. Treasury for Aid in Chrysler Merger Talks (Bloomberg)
http://tinyurl.com/5lg44r
Posted by: Blunt Force Trauma | October 26, 2008 at 11:28 PM
Currency attacks is now ongoing process:
http://tinyurl.com/5mckrn
'The case for a bigger IMF' : Relying on China and Japan to supplement the IMF effectively makes China and Japan the key players. It shifts global political power to those with large (some would say excessive) existing reserves rather than those with large votes in the IMF.
Looks like all monetary institutions and resources are stretch to breaking point.
Posted by: OC | October 27, 2008 at 03:35 AM
Nearly alone, on the internet, I have been obsessed with the whole business of the relative size of FOREX reserves held by central banks. I felt, way back in 1999, that the new system set in motion by Japan was a key element in the coming crash of the dollar as a global trade arbitrage instrument. I warned the US government to deal swiftly with the trade imbalance with ANY nation running up huge FOREX reserves in dollars.
The tool for this, of course, is good old tariffs and barriers. Why make a new tool when there are plenty of old ones lying about with a long history of preserving a nation's banking system and industrial base?
Instead, we got nearly all our media, like 99.99% as well as the vast majority of so-called economists supporting the goofy and deadly idea of 'free trade'. We are now at the end game of all this after only 10 years of the US running half-trillion+ trade deficits.
As for our bright military: it is a very, very expensive military. It was set up to loot the US taxpayer, not defend the US or protect world peace. It will collapse totally like Russia's military if we go bankrupt. The Chinese know this and know that unlike Russia, we might just use it to attack our creditors when we flip out.
This is why China is cautious and being a very old imperial dragon, one of the oldest, continuous empires on earth, they are willing to take their time. Only the Derivatives Beast is moving very fast. No one controls THAT!
Posted by: Elaine Meinel Supkis | October 27, 2008 at 04:22 AM
Elaine,
I think they ran out of time; ME will be ground zero...
Posted by: OC | October 27, 2008 at 04:48 AM
Now it's not the time to bottom pick
Just look at all the news, manipulated to keep stock down.
Meanwhile the bond market is where the real action is.
Posted by: Simon | October 27, 2008 at 05:30 AM
I suppose China as a geographical country has remained intact but it has had several violent regime changes. The last one being chairman Mao. I think the idea we have of it as being strong and solid and old and there fore powerful is sort of illusory. Its big but so is the USA and Europe. And they have a wealth of intellectual assets. Little else though. It seems the West has lost sight of basic accounting and business principles as it gorged on zero inflation rates and created new financial instruments. I think when we return to those principals we will be productive again and have economies based on real wealth. And when we have a national perspective as well.
I always thought that the USA created lots of dollars because the rest of the world would suck up the inflation. With the dollar being world currency all wealth sort of belongs to America. No?
Posted by: igneous | October 27, 2008 at 09:29 AM
I admit that the subject of bonds is a little past my pay grade, but I do know that opinions are mixed on the "safety" of bonds.
Currancies collapsing and nations defaulting are possibilities that are on the table and being seriously discussed. How good will bonds do in THAT environment?
Any kind of "paper asset" will be decimated in that event. What you own outright and can put to productive use (and the means to hold onto it) are about as close to "safety" as you can get.
I may be a nut, but if I buy food then I have essentially saved that "money" in a form that I can consume later. If I buy seeds and have a place to plant them, I can produce food, and if they aren't hybrid seeds I can continue to produce food. If things don't get that bad, I don't have to go grocery shopping for a LONG time.
There are economists and financial advisors left, right, center, and fringe. They are all busy trying to figure out what happens next. The phrase that keeps coming up is that these events are "unprecidented." As in NEVER HAPPENED BEFORE.
The only thing I know, is that people like Elaine, that have been shouting from the rooftops that we were headed for a train wreck have been right and the "Goldilocks Economy" has been proven to be a sham.
The news has been ratcheting up and the term "cuurancy collapse" is popping up a lot more. Most people writing about what that might entail do NOT delve into the practical aspects as they apply to mere mortals who aren't trying to preserve their wealth (which most of us manifestly do not have to preserve)but trying to work out a stragegy to survive.
I'm not embracing a survivalist manifesto here, just hedging my bets to "downside risk".
Posted by: PK Scott | October 27, 2008 at 09:44 AM
Arrrgh, the pirates a sharpening their sabres for more boarding parties:
NYTimes.com: A Chase employee asks So When Will Banks Give Loans?
Answer from the Chase executive: “Twenty-five billion dollars is obviously going to help the folks who are struggling more than Chase,” he began. “What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop.”
Posted by: RobG | October 27, 2008 at 09:52 AM
Coming soon to a dying economy near you....another rate cut! A quarter point for sure, but possibly one-half. Weeeee. Go, Benny, go!
A great assist to the IMF that is currently buying up countries (Ukraine) and others (Hungary next), in the wings; for cents on the dollar.
Now that the Ukraine is "rescued", methinks that now with the US in their back pocket, their NATO membership will be rammed through REALLY pissing off the Russians.
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