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Friday, October 24, 2008

How to stop the financial markets from collapsing further

They may need to close them temporarily. Hope you don't need your money for anything while they're closed.

Comments (18)

Crisis Could Trigger Big Public Transit Payments, By THE ASSOCIATED PRESS, October 25, 2008

WASHINGTON (AP) -- Transit agencies around the country may have to come up with billions of dollars to repay investors as long-term financing deals disintegrate, a result of the global credit crisis that could eventually affect millions of commuters.

The problems stem from the collapse of insurance giant American International Group, which had guaranteed financing deals between transit agencies and banks. Officials say about 30 transit agencies across the country have entered into these types of deals, including those in Atlanta, Chicago, Los Angeles, San Francisco and Washington. ...

In a once-common practice that the IRS has ended, many transit agencies entered into arrangements in which they sold equipment such as rail cars to banks. The banks then turned around and leased the equipment back to the transit agencies. Both sides benefited.

The Federal Reserve came to the rescue of AIG last month ... In return for the $85 billion credit, the government received a 79.9 percent stake in AIG.

Well, dammit, where the Public OWNS the business, OPEN the BOOKS for Public RECORD, and ACCOUNT FOR ALL the flim-flam deals and 'double benefits.' We'll be the judge of what's a Public Benefit.

Eastern European economies face bankruptcy, By Niall Green, 23 October 2008

The economies of central and eastern Europe are being rocked by the crisis of world capitalism, compounded by the corrupt and pro-big business policies of their local elites.

Defying many economists and commentators, who had forecast that the region would be well placed to deal with the credit crisis due to the lower relative weight of finance capital within their national economies, much of Eastern Europe stands on the verge of insolvency and deep and protracted recession.

Bulgaria and Romania, who joined the EU in 2007, are also in a highly precarious position. ... Poland, Slovakia and the Czech Republic are widely portrayed as being in a better position than most other states in the region ..., however, highly dependent on direct investment from transnational corporations ....

The five countries are where Busher neo-cons have instigated rightwing civil disorders and propped up totalitarian puppets, such as the uber-nationalist twins as Poland's heads-of-state by rigged fraud computer 'voting.' Also, see US fraud-vote incursions in Spain, France, Italy, lately Canada, and ... the return on US rightwing 'investments' in Ukraine:
The Ukrainian stock market has lost over three-quarters of its value in a year.

Ukraine’s central bank has been forced to prop up most of the country’s financial institutions with state funds, while a run on the country’s sixth largest bank, Prominvest, was caused by warning that it was likely to collapse.

The possibility of providing a stimulus to the Ukrainian economy by cutting interest rates, ... is limited by the fact that inflation is currently running at 25 percent.

In other reports there's a sense that Russia might fare less-worse than the economic devastation in most places. Something about public 'labor ownership' vestiges remaining in the institutions and infrastructures.

In some and many US sites, where layoffs begin running riot and businesses close, (e.g., automaker Dodge announced 25% layoffs from 'white-collar' departments), on the way out the door workers should ask why capitalist 'owners' threw away all the money in advertising, and so paid for the extremist rightwing radio and television brainwashing. (It'd be cheaper to pay for massmedia with taxes, so have no, zero, zilch, none commercials ... and no 'pledge drives.' Broadcast the news and art of and by the public culture. To get Free TV and Free internet: tax the rich. That would be us.)

Massmind media is the screen of withheld facts and LIARS promoting the whole capitalist fraud and pyramid scheme, anyway, behind a mental blanket of false confidence.

Look, everything about Bush from Day 1 has been fraudulent. He's an out-and-out stupid sock puppet. The only confidence for that is negative confidence, indeed: accusations, charges, prosecutions against him and his rightwingers.

The rightwing destroys the jobs and livelihoods on purpose. They call it eugenics. Also social darwinism. Being unemployed, now you're supposed to go crawl in the oven and turn the gas on, yourself. They'll take over from here.

Watch capitalist TV for instructions ... sucker!

Thanks for the post. I watched him recently on OPB: http://www.charlierose.com/shows/2008/10/14/3/a-conversation-with-nouriel-roubini

We must be getting closer to the real problem which was never about people buying homes they couldn’t afford. It’s always been about derivatives. The cost of the failed homes is nothing when compared to the insane exponential guarantees the security swaps grew into afterwards.

That’s why the credit crunch happened. The bankers knew when these began to unwind they would have to have massive amounts of cash to stave off the beast for as long as possible. To call derivatives a problem, is the biggest understatement in the history of finance. The population hasn’t really tuned in and God knows what will happen when they do. My latest analogy involves the Mafia, and I’ll use thousands instead of trillions to try and pretend there’s some element of this that is even remotely realistic:

It’s as if we owed the Mafia 600 thousand dollars. We’ve held our emergency meetings and scraped together every cent we can come up with, and now we’ve gone to the Mob bosses and said, this is what we’ve got: Then we hand them a thousand bucks. We say that perhaps we’ll be able to come up with 4 thousand more dollars – maybe.

That’s right. The derivatives exposure is in the range of 600 TRILLION to a quadrillion – 1,000 TRILLION dollars. The biggest number I’ve heard so far to deal with this is 5 trillion. It sounds like a lot but it's not going to begin to work. Not when the entire world economy for a year is around 60 trillion and there's 600 trillion in risk out there.

Oh, and all these ridiculous gambles that added up to this much in potential payoffs if the guarantees were triggered? They didn’t really help the economy at all, except for the wealth that was generated for those working in the financial markets. It was all pretend money until it failed, but the 600 trillion in risk is real. The whiz kids with the 3-piece suits have screwed us beyond even our imagination. The only reason people aren’t more freaked out right now, is that the magnitude of what has happened is impossible to grasp.

"That’s right. The derivatives exposure is in the range of 600 TRILLION to a quadrillion – 1,000 TRILLION dollars."

Geez, these numbers keep getting bigger to a panic which I think means we are near a bottom.

Since the derivatives concept seems to mystify you, try this analogy - 25 y/o male buys $1M 30yr term life from Pacific Life for $1000/yr. However, Iran drops a nuclear bomb no PDX and 250K people die. What do you think the odds of Pacific Life paying all those policies are?

Derivatives are a way the hedge fund tries to create a guaranteed return by "insuring" their assets similarily. Just because the premiums they paid were way too low for the risk assumed doesn't mean the derivatives were wrong or the sellers evil. They just did not know the risk premium to add on.

Yes, things are very tough now, however, the more we use the Internet to start ginning up numbers like $1 billion trillion when we actually do not know the actual exposure doesn't help either.

As people, I do believe we will survive this in spite of all the idiot govvt intervention or financiers that lose their money. In the future, I honestly think people will learn and the market will adjust itself. Perhaps we can teach our children better the value of material things from this.

IF I had a gas oven I might just crawl in now as per Tenske's suggestion.
However I think I will just turn off the TV and not watch what I've got left dwindle down further. Nothing I can do about it now anyway. Besides I want to last tillelection day to see just how big the margine of victory is for Barack. I don't know why he wants the job of POTUS but I am glad he does. I have cast my ballot for "the smart young one". John McCain is beginning to remind me of Robbie the Robot from "Lost in Space". I think it is the way he waves his arms around.
Bill, can you make a joke about that?

Steve, your demystification of derivatives helped but it isn't this better: "Financial engineers" set up a booth outside a Vegas casino and sell insurance to guarantee a return to the gamblers heading inside. Premiums do not match amounts being gambled. Problems occur-Doh!

Portland Native,
This is the Bob Dole rule. Bob's right arm was damaged during WW2. He always carried a pen in it so you wouldn't try and shake hands with him using that arm.
McCain's arms were damaged during his ejection and subsequent treatment as a POW.
I didn't mean to imply I was an expert in derivatives. These are just the numbers I've seen since the crisis started. The 600 trillion was the low end so I went with that. I do disagree with your theory on what they are and your analogy about the insurance policy. I think the insurers - often 3rd parties - weren't trying to insure anything. They were just cashing in on the appearance of insuring them and I predict fraud charges will follow when the full anger over these happens. I'm also going to search for my sources on the 600 trillion dollar number.
I resent your condescending tone. To me it sounds like the financial people are looking down at the rest of us for not understanding exactly how they screwed everything up. Frankly, I'd prefer if we didn't have to try and find out. I don't need this.

Here's a phrase from the Wall Street Journal in an article called, "Derivatives and Mass Financial Destruction" from October 22nd.

"Of the $532 trillion notional amount of financial instruments covered by over-the-counter derivatives in June of this year -- including credit derivatives, interest-rate swaps and equity derivatives...."

So you're right. The 600 trillion dollar number is way out of line. Let's go with 532 trillion, and am I relieved. 532 trillion is a number we can handle. Oh wait, that was June. I bet that number went up since then. Of course, the Wall Street Journal could just be "ginning up the numbers" because they spend too much time looking at the Internet. Too bad. They used to be so good at covering the financial stuff.

"... if we owed the Mafia 600 thousand dollars ... (and) we hand them a thousand ...."

Then they turn on the gas ovens for us.

"... Iran drops a nuclear bomb no PDX ...."

Iran doesn't have a nuclear bomb. No one would have any when we scrap them all. Pay close attention: There. Ain't. NO. Threat. To. US.

Except the fear inside of the fearmongering LIARS. Look out! Fear! He's got a gun!

Okay, he can shoot himself. Then not so many of us feel like crawling into the gas.

I hereby redirect Bill's comments addressed to portland native over to Steve, where they more rightfully belong.

"I resent your condescending tone. To me it sounds like the financial people are looking down at the rest of us for not understanding exactly how they screwed everything up. "

I apologize. However, derivative instruments exist and few people understand them (including 99%+ of Congress.) My point was, yes, we do not know the extent of the damage, but assuming every last derivative deal will fail is not fact-based and only feeds a panic.

If you're not panicking right now, you're not paying attention.

I don't think a very high percentage of derivatives would have to fail before we'd be in that area where there is no possible way to pay the guarantees off.
From what I read, the derivatives add up to 10 times the size of the global economy. That means any failure rate over 10% has already exceeded the entire economic output of Planet Earth. That's how daunting this is. I also read an article that illustrated how one wave of failings would trigger the next. I think we're getting near the field trip portion of this particular nightmare.

I agree that we shouldn't instigate a panic, but the point is here the BANKS panicked because they know what's out there.

"the derivatives add up to 10 times"

I'd be curious whree you read that. You can call almost every mortgage originated a derivative, so this is where I have a problem with what is being reported.

In the old days, US Bank would write a mortgage and keep it an service it over 30 years. Now, your mortgage gets sold immediately and packaged with 10,000 other and split into differing packages of maturities and principal/interest splits.

So, yes, you could say the entire portfolio is at risk if 1 out of 10,000 mortgages fail since these portfolios guarantee a return, but assuming every mortgage is going to fail is not very accurate either.

As far as banks panicking, they are making loans again and home sales have been the highest in the past 13 months according to the O yesterday.

I am not saying to be blithely ignorant, but assuming total fiscal collapse isn't prudent either.

As far as what is going to fix this besides the market - I don't know. I really don't think passing laws or regulations will since Bush/Congress really have no idea of how these financial instruments work. Then again, they could just outlaw everything they don't understand, but is that what you want?

I've read the 60 trillion dollar figure for global economic output a bunch of different places and I've already given you a Wall Street Journal source for the derivative amount. My impression is you're trying to separate out the genuine housing stuff from the speculative derivative stuff. Maybe this will help. Let me grab a sentence from Sam Smith of the Progressive Review: "Even the total housing market is, according to journalist Joshua Holland, only one sixth the size of the mortgage security house of cards that was built on it. Holland estimates that the total worth [sic] of all derivatives was about $500 trillion or roughly 10 times the output of the global economy."

In other words, home owners not being able to pay has gotten a lot of the blame for the crisis but the far greater liability has come from unregulated, reckless gambling with derivatives. So naturally, the help goes to the big-time bankers who were most at fault and the blame goes to the poor who were most screwed over. I don't think we need much proof of that last observation. That part checks out.

I guess my point is that if you want a number for home mortgages "affected by derivatives, OK. 10,000 $200,000 mortgages in a "derivative" instrument is about $2T. 10,000 mortgages are not that many. My issue is with the reporting that all 10,000 mortgages are bad so we've got $2T missing which is not accurate.

Any reports that it's not as bad as it appears are welcome news to me. I am skeptical of course. Usually when I think of panics, I think about wild unfounded rumors that lead to real problems. In this case, the facts seem genuinely frightening and rather than addressing false rumors we seem to be in a pattern of convincing ourselves that it's not as bad as it appears.

But if that works, sign me up. Maybe derivatives are our friend. I can play that too if it'll help. I never bet against America, but I looked at this and it's truly overwhelming.

To think I was already concerned several years ago at the thought that every time the sun set on America, we owed another billion dollars. That actually used to concern me. Now we have the banks borrowing over a hundred billion a day just to stay afloat. But if it's okay, it's okay.
So I guess you're saying there's no chance that the federal government will slip into default in the next few years?

"I guess you're saying there's no chance that the federal government will slip into default"

Not as long as they own the printing press - States going in default are a lot bigger issue. This is my bigger worry that we are throwing so many dollars around, we will be awash in them. My assumption is Sen Obama will not spend less than Bush, especially with a Demo congress.

Right now, I don't see inflation, but when the economy turns around, I think we are primed for it.

I think we agreed on one thing this is not a good outcome now or later and expecting politicians or finance people to save us is gonna be a reach.

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