Moon of Alabama Brecht quote
October 14, 2008

Financial Markets: What's Next?

The social conservatives conservative socialists have now partly nationalized the major banks. That seems to have been the right thing to do, though I would have liked more strings attached to the move.

But what's next?

The stock markets have regained a bit and some lending may eventually restart, but the underlying problems have yet to be solved.

There have been some $650 billion of losses from mortgage lending recognized within the banking system, but the IMF expects the total losses to be $1.4 trillion. When these additional losses will get recognized all the capital the governments just injected in these banks will not be enough to make up for them. The situation will then be the same as it was last Friday and require additional capital injection.

The shadow financial system of hedge funds and private equity funds still exists and will need to further deleverage to eventually dissolve. This guarantees another two to four quarters of quite massive selling in about any asset class but, maybe, treasuries.

The Main Street economy will go deep into recession and there are yet no plans on how to soften the fall and eventually restart growth. A big infrastructure program would certainly help. (For my country, east Europe and Russia: a new fast-freight railroad from Hamburg to Shanghai.)

The collateral damage on pension funds, the Federal Deposit Insurances Corp, municipal funds etc is immense. Is there a way to repair them or do they need to be replaced?

All of the bad side effects from these current gigantic interventions need to be cleaned up. LIBOR manipulation is only one of them. The Fed and other central banks will need to mop up the additional liquidity they injected before it ignites serious inflation.

What we have seen so far can be exaggerated as 'the poor got robbed so the rich can make more loans to the poor.'

Where is the social benefit?

Can we please have a plan for a financial system that is a service to the economy and not a drag -  not a monster that depends on over-leveraged quant strategies nobody really understands?

This one sounds good to me:

[Berkshire Hathaway's vice chairman] Munger wants Wall Street balance sheets reduced by 70% and insists that the firms "be a market maker, a broker, an underwriter and a custodian of securities but not the hedge funds they have become." He wants to restrict leverage to 50% on every securities transaction except for the Treasury trading desk where "you're dealing with the safest securities around."
...
To rid Wall Street of its Las Vegas tone, Munger suggests leveling the options exchanges in Chicago and New York, and banning completely all derivatives contracts, a rather impossible vision but one that's true to his spirit.

Banning derivatives is certainly not an impossible vision. Declare them illegal and send anyone to jail who uses them anyway. But even if we have plans to make banking as boring again as it should be, how do we get from here to there?

There seems to be no unified plan yet on how to tackle all the above problems. I am afraid the only idea people will come up with is to again inflate the system and feed cheap money into it until another bigger bubble of fantasy profits forms somewhere (alternative energies are a candidate). That was the Greenspan strategy which created the current problems.

The politicians seem to believe that now all is well and we can go again down the same old path. That is wrong and we need better ideas. Those ideas will a first view seem radical or shrill. But a year ago socializing Wall Street was a shrill idea too.

I'll try to come up with some policy ideas over the next days. Any suggestions are welcome. What are your's?

Posted by b on October 14, 2008 at 17:33 UTC | Permalink

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Unexpected fallout from the Lehman bust: 12 Israeli contractors being held hostage on Caribbean island

Twelve Israeli real estate contractors were taken hostage this week on the Caribbean islands of Turks and Caicos, due to an apparent labor dispute involving hundreds of Chinese laborers.
...
The captives are all managers and engineers employed by the real estate company, Ashtroom. They were apparently taken hostage by Chinese laborers who had been working for them on the island.

The kidnappers are demanding payment promised to them by their employers. They claim that they have not yet been paid for their work because financing problems connected to the collapse of Lehman Brothers.

Posted by: b | Oct 16 2008 16:51 utc | 101

i think the name joe the plumber is very appropriate since we have just found out he's a political hack throw into look like 'everyman' for the purpose of making johnny mc look like the savior for the average man

so joe

so the Rand Corporation can't claim discovery of that concept...it's been going on since the advent of Civilization. The only thing Rand did was bottle, brand and label it.

well, they sold it too. you can hire a team of them to come to your company and materialize your dreams coming true all the while making it seem as tho the 'group' came to a consensus.

...

here's my take on derivatives. it's las vegas. legal gambling. a way for the wheelers and dealers to make money off the market whether its going up or down. it's just a new way of making money on other peoples loss.

this is a personal story of a very good friend of mine. last winter/spring he decided that oil futures was really the way to go. he was sick of his job being a research scientist, too boring. he wanted to travel and be able to work from anywhere on his computer. he decided to change professions and this synchronized nicely w/his company (amgen) doing a big employment reshuffle and they offered his group options for severance packages which he gladly accepted. then he signed up for this online instruction course on the internet that was several thousand and took place at 5 in the morning or some ridiculous time that allowed him to be part of this trading/instruction gambit.

to make a long story short after not very long he informed me it really had less to do w/guessing which way the market was going to go, but all about how to pad it on either side. so instead of buying stocks or futures or whatever you call them, it was these padding mechanisms. needless to say he started to loose money. i told him i thought he should really take it easy and maybe finish the course before he dove in. everytime he was a little up he would gamble a little more. knowing he was a gamblin' kinda guy i thought it could be dangerous because he could loose all his severance pay (alot) fairly quickly. i told him he should, right now, immediately, make a limit on how much he was willing to loose and make a commitment to stop if he reached this point. he committed to 10 grand, after he lost in in about 8 weeks he quit. but during that time everytime i talked to him everything was all about what the price was doing that day, and how many days he had insured, or whatever. a bunch of bogus bullshit. all these people winning and loosing around the price of oil going up or down, not even directly related to owning any of it. well, he sort of owned it, or something. what a scam.

so yeah, back to the trolls. it has been obvious over the last month or so they are coming in like gangbusters and using the delphi method. that charactaristic of isolating who is the leader, or more influential(me, lol, what a joke), and then trying to make them loose face or appear stupid, vs them setting themselves up in some stupid authoritarian position as mr 'take my quiz' 'honest' guant above.

yawn. an honest hit man, how quant. er quaint. bunch of hacks.

Posted by: annie | Oct 16 2008 17:02 utc | 102

another thing about this course my friend took. you have to place all this money w/these guys to insure when you lose its there for them to suck up, up front. so whats to say if there's so much money on a future going up at a certain time, as opposed to a few hrs later, certain people in the business don't have the power in back channels to influence WHEN those futures move a little to the right and the left? i mean what kind of difference does it make if a price shuffles the tiniest amount, an insignificant different to the consumer of the goods if an enormous fortune can be made speculating when it will shift???

even if something moves 2 cents, you can bet a zillion dollars on when it will shift. what kind of bullshit is that?

this is just a new way wheelers and dealers can play with other peoples money and separate themselves from accountability.. so what's all this you have to understand something before you can talk about it or have an opinion on it?

how about you have to understand something to invest in it? how about there should be regulators out there protecting innocent people from committing financial suicide?

vaudois Legal regulation is immensely complicated and confusing to the unschooled (of course I can speak only for myself), which is why it confuses me to see people running to the arms of legislators and regulators for protection from derivatives

i know how confusing something like this can be in this environment so let me try to walk you thru it on layman's terms. once apon a time, back before the current tribe of war criminals did a hatchet job on our governemnt that was so transparent even the idiot regular folks got a clue.. governments employed people who had experience and were experts in their field. these people weren't hired and fired when a new administration came into office because they weren't hired as political hacks, they were hired because of KNOWLEDGE and EXPERIENCE, and people trusted them.

their job was not to bring home the bacon for the gop or the dems but to make sure the government ran smoothly in a way that served the people (who they used to work for, as opposed to a political party). so the idea of 'running for protection' towards government figures was not overall considered a negative thing.

actually back in the old days part of governments function WAS to protect poeple, in the same way the police are supposed to protect you, and the firemen. the way soldiers were supposed to 'defend' which is why it was called the defense department, but i hear they are changing that concept.

does that clear up your confusion?

Posted by: annie | Oct 16 2008 17:28 utc | 103

by far the best way to do so has always been via long-term physical contracts, not via derivatives

Johnny, a long term forward is a derivative. In all instances they involve leverage, and mark to market, and settlement terms silimar to futures. It's no easier to track who has physical mark to market losses on physical trades than on CDSes. This is in fact the main virtue of a futures exchange - transparency, margining, netting and competition.

The other advantage is that buyers of coal for one month might not be "in the marketplace" at the same time as sellers. Bid/ask spreads without the presence of middlemen to warehouse risk (like specialists, or market makers) would be unfeasibly wide.

if oil futures did not exist, the entire oil derivatives market would be instantly replaced by an informal "spot market" (like back in the old days). And prices would most likely fall and remain stable.

There's very little to suggest that markets with no futures in them are more stable, or lower. And there's plenty of data in the other direction : the freight markets, power markets, you name it. Show me a market with no derivatives and I will show you a more volatile, easily manipulated, less competitive market laden with transaction costs - massive external costs that ultimately are borne by consumers. Oil before the advent of futures was dominated by a few major consumers and supplier oligopolies; prices were far from stable or low and supply shocks were common.

If oil prices were all determined in the spot market no long term exploration would ever occur, because without the ability to hedge forward no one would ever loan any part of the vast sums of money involved to drill.

Now that is the really 'democratic' opinion. Only experts should vote?

If I had no knowledge of 16th century Polish economic policy, why would I ever feel the need to assert my views violently on those who did (eg by threatening to ban their "useless" field of study!) How arrogant can you possibly be?

Which of course they seem to have done.

This is complete guesswork on your part. Weren't you complaining earlier that no one knows who holds what position? And in a zero sum market, *everyone* cant be holding a losing position. Who is holding the winners if hedgies and banks are all short?

54 pages from a University of Chicago free-market preacher is short and accessible?

Yes, it is short and accessible. A good deal shorter and more accessible than any major regulatory legislation you care to mention. And his conclusions about clearinghouses adding transparency and operational stability remain as true as when the paper was written, and point us toward the conclusions we should be making today (mutualize information and credit risk through public clearing associations, NOT to simply outlaw everything newfangled and confusing.)

Posted by: vaudois | Oct 16 2008 17:30 utc | 104

b, 102

Construction teams have been developing a new tourist resort on the secluded island.

certain somebodies are going to need more fancy little islands to hide in once the shit starts hitting the fan.

Posted by: annie | Oct 16 2008 17:38 utc | 105

If oil prices were all determined in the spot market no long term exploration would ever occur, because without the ability to hedge forward no one would ever loan any part of the vast sums of money involved to drill.

sure they would. since when does exon have to borrow money to drill? they are worth billions. there will be a market for oil as long as there is a need for it.

Yes, it is short and accessible.

didn't someone upthread say something about explaining it in 15 seconds?

If I had no knowledge of 16th century Polish economic policy, why would I ever feel the need to assert my views

if 16th century Polish economic policy was fucking w/your social security you may feel a need to assert your views.

Posted by: annie | Oct 16 2008 17:44 utc | 106

as our friend catlady implies the language of most economists is phallocentric & the more vulgar it is the cruder the casuitry - the 'economics' the trolls bring here is not economics at all - it is what is known in classical economy as either theft or fraud - in language as i have suggested it is the metaphysics of morons - here is a text that is lyric, still speaks today & is very far indeed from phallocratic discourse - the trolls who arrive with their supremmely stipd versions of game theory, chance theory or the endless copmputations of this paralytic form of prose. it is no accident that heidegger in philosophy mirros these imbeciles of 'economy' - it is a completely empty language - a joker in the pack where the pack has no meaning & what is authentic is often stolen? what these fools have in common is how to fool people & there is not the slightest difference with the money hungering pentacostalic preachers who promise prosperity in double portions. fuck their fucking tabernacle. fuck their thoughtless & themeless utilisation of numbers that would make a real kabbalist pull their hairs out. fuck them & their use in the final analysis of sledgehammers to seek solutions. fuck them & their hatred of the people. fuck them & their incompetent but complete destruction of society. fuck you. but thank you for proving finally that it is the end of capitalism as we know it.; & yes in the beginning of the 21st century - welcome to the class war

Posted by: remembereringgiap | Oct 16 2008 17:48 utc | 107

By the way b, I'm still hoping you can tell us whether you think that long term interest rates should be established by a small cabal of bond dealers, or whether the interest rate futures markets might be a more democratic and efficient mechanism.

Do you feel that bond futures have lowered or raised borrowing costs to the US taxpayer over the past 30 years? To the US homeowner? Do you think it would even be possible for the US government to implement its bond-financed bailout if there were no medium for bondholders to hedge?

I think you'll also have a hard time proving that foreign exchange forwards need to be eradicated, since they're quite obviously vital to any industry dependent on export or import.

Posted by: vaudois | Oct 16 2008 17:51 utc | 108

btw vaudois, feel free to ask me any questions you have regarding the issues that confuse you about government regulation/intervention.

Now that is the really 'democratic' opinion. Only experts should vote?

bla bla bla How arrogant can you possibly be?

vaudois, what kind of system would you prefer?

Types of government

* Anarchy - Absence, or lack of government.[6][7]

* Democracy - Rule by a government where the people as a whole hold the power. It may be exercised by them (direct democracy), or through representatives chosen by them (representative democracy).[8][9][10]

* Despotism - Governing by a single individual, the despot, who wields all the power and authority of the state. Other persons are subsidiary to the despot.

* Dictatorship - Rule by an individual who has full power over the country.[11] See also Autocracy and Stratocracy.

* Monarchy - Rule by an individual who has inherited the role and expects to bequeath it to their heir.[12]

* Oligarchy - Rule by a small group of people who share similar interests or family relations.[13]

* Plutocracy - A government composed of the wealthy class.

* Theocracy - Rule by a religious elite.[14]

* Tyranny - Governing by a single ruler, the tyrant, holding vast, if not absolute power through a state.

Posted by: annie | Oct 16 2008 17:53 utc | 109

since when does exon have to borrow money to drill?

Since always - as of today they have 9.6 billion in outstanding debt. But if they didn't would you really want only cash-rich oil majors to control all upstream oil development?

didn't someone upthread say something about explaining it in 15 seconds?

The basic idea of a CDS can be explained in 15 seconds. But I think the piece does a good job of explaining more than the fundamentals. Did you read it? Do you disagree?

Posted by: vaudois | Oct 16 2008 17:54 utc | 110

since when does exon have to borrow money to drill?

Not only does exxon have to borrow huge sums to drill, quite often the costs are too large for exxon alone to bear, which is why so many upstream oil development is conducted by huge consortiums of both buyers and sellers eg

http://www.forbes.com/afxnewslimited/feeds/afx/2008/06/02/afx5072411.html

None of this would occur without a liquid forex and interest rate forward market.

Posted by: vaudois | Oct 16 2008 17:59 utc | 111

By the way b, I'm still hoping you can tell us whether you think that long term interest rates should be established by a small cabal of bond dealers, or whether the interest rate futures markets might be a more democratic and efficient mechanism.

vaudois, can you tell us how it is you prefer beating your wife or whether the amount of bloodlet should be a determining factor in the methods used?

Posted by: annie | Oct 16 2008 17:59 utc | 112

Not only does exxon have to borrow huge sums to drill, quite often the costs are too large for exxon alone to bear

maybe they should only drill what they can afford to drill.

Posted by: annie | Oct 16 2008 18:01 utc | 113

i read up to page 8.

The basic idea of a CDS can be explained in 15 seconds.

have at it.

Posted by: annie | Oct 16 2008 18:03 utc | 114

maybe they should only drill what they can afford to drill.

Then almost nothing would ever be drilled!

if 16th century Polish economic policy was fucking w/your social security you may feel a need to assert your views.

If it had anything to do with my social security I would take great pains to figure out WHY and HOW rather than blindly spouting off.

Posted by: vaudois | Oct 16 2008 18:05 utc | 115

Not only does exxon have to borrow huge sums to drill, quite often the costs are too large for exxon alone to bear,

in my last argument w/my friend the failed oil investor, i was asking him why it was the american public has to have their paychecks squeezed to support these oil companies. why is it that our defense department is giving them the free assist of a 150000 force to secure their future drilling hole and pipelines? how come they get massive tax breaks and we have to flip the blood and treasure for their little junkits. kinda socialist don't ya think. except that socialist societies are supposed to reap the profit from that which is extracted from the people and i don't see that happening.

Posted by: annie | Oct 16 2008 18:08 utc | 116

Then almost nothing would ever be drilled!

lovely, since it's ruining the planet maybe we should spend the 10 billion a month we're spending on the 'investment' in these oil companies and evolve into the future.

oil is so yesterday.

Posted by: annie | Oct 16 2008 18:10 utc | 117

annie, a CDS is a market instrument to trade 'probability of default'. It's a way to transfer credit risk without demanding access to a physical bond.

6 seconds, read v-e-r-y slowly.

Further details are in the paper. Since your social security depends on it, I know you'll have strong incentive to read the rest! I hope you enjoy, and if you have any further questions, I'd be happy to answer them!

Posted by: vaudois | Oct 16 2008 18:11 utc | 118

If it had anything to do with my social security I would take great pains to figure out WHY and HOW rather than blindly spouting off.

blind? earth to you. when people who believe man and dinasours were raoming the earth together are qualified to be president of the free world i think it's time to accept voices will be heard other than those making all the sense.

now if you want to be on a board where everyone all comes from some basic understanding that you deem to be worthy, for heavens sakes go find one.

who the hell are you to come to a place the same people have been comingling for years and years and barge in here asserting we should stfu. go find another watering hole or suck it up.

and where's you 15 seconds of fame? i'm waiting.

btw, did my layman's terms on how government used to work back in the good ol days clear up some of your confusion about the little guys running for protection, or are you still baffled. feel free to ask me any more questions, sometimes the most simple things get lost in minds that become overburdened w/bullshit. btw, why are commenting about something you find confusing? maybe you should read up on the function of government if you have to ask about silly things like why people would seek government to protect them.

Posted by: annie | Oct 16 2008 18:18 utc | 119

annie, a CDS is a market instrument to trade 'probability of default'. It's a way to transfer credit risk without demanding access to a physical bond.

;)

that's what i thought. now, we are all qualified to have an opinion are we not.

carry on. how's that government function confusion working for you? did you read it s-l-o-w e-n-o-u-g-h?

Posted by: annie | Oct 16 2008 18:21 utc | 120

What is next is the ultimate bubble or deflated balloon:

First the middle class bought, funds shares and debts, etc.

the Banks lapped it up and bought and sold on

After the internet bubble a new expansion was needed

Ppl were sucked in and indebted themselves, signed and swore, for one of the only things that interest them, us, housing

The paper flew round the world, confetti, a storm of derivatives, flutter and cynical prayer, fees and more fees, groans and glee from those who understood

No buyers left...

Except the last resort, the Gvmts who control the central banks, can sign endless IOUs, using power and spreading risk, printing money, setting interest rates, and putting in hock future earnings, err ‘growth’, which will not be forthcoming.

Gvmts have time, the shipper and pretzel seller, home owner, has little. Gvmt can raise revenue by taxation, the couturier who makes fancy hats cannot. Gvmt. can rule, legislate, impose, the industrial baker cannot.

So who’s next up the ladder? Where does the buck stop? Who can the Gvmts sell to? God?

;) tongue in cheek but...heh...what?

Posted by: Tangerine | Oct 16 2008 18:22 utc | 121

who the hell are you to come to a place the same people have been comingling for years and years and barge in here asserting we should stfu.

I've actually been inviting you to ask questions and solicit more information, in a spirit of mutual understanding and friendship. Free of charge, no less. And this is the thanks I get? Now you made me cry!

did my layman's terms on how government used to work back in the good ol days clear up some of your confusion about the little guys running for protection, or are you still baffle

No, to be honest it didn't. In the old days government wasn't any more honest or competent than it was now. In fact in the old days "protection" was something the government charged you for, in between raping your children, stealing your crops and generally making life unpleasant. Maybe you meant more recently than that?


Posted by: vaudois | Oct 16 2008 18:23 utc | 122

now, we are all qualified to have an opinion are we not.

Of course we are -- about THAT. Nothing contained in that six-second summary justifies the conclusion that ALL DERIVATIVES OF ALL KINDS NEED TO BE BANNED which in case you missed it is the premise you are straining violently to defend.

Posted by: vaudois | Oct 16 2008 18:33 utc | 123


i was speaking theoretically about certain concepts of government. or illusions.

I've actually been inviting you to ask questions

perhaps if you want a following you could start your own blog, and then people who trust your judgment can all flock to you. make a blog and link to it, and go be high and mighty in your own home.

Posted by: annie | Oct 16 2008 18:37 utc | 124

Vaudois,

You aren't going to convert anyone here and it's probably wishful thinking to imagine we'd convert you. But if we can all keep things civilized I don't see why we can't all chew this over to our collective benefit. I'm curious as to why you seem to be approaching the current situation as if it was nothing more than business as usual while virtually everyone else is predicting the imminent dawn of the next depression. Obviously I'd like them to be wrong about that, but why, in your view, should we keep dancing and not run for the lifeboats?

Posted by: Tantalus | Oct 16 2008 18:37 utc | 125

Tantalus, I'm not trying to convert anyone. I'm hoping to be convinced that derivatives are wrong and need to be banned. I keep asking questions civilly and no one seems to want to answer them. Instead, all I've gotten is a tourrette's-like outburst from annie, who I continue to hope will offer me a more sedate criticism, instead of defensive and hostile posturing.

Posted by: vaudois | Oct 16 2008 18:40 utc | 126

strainly violently? lol. and Obama is a terrorist. your rhetoric is bogus bullshit.

if you think you are so right, again..why not start a blog and preach to those who desire your preaching. anyone w/an opinion you deem not worthy you can simply ban, unless of course they ask you questions to provide a platform for you to play your high and mighty act.

problem is you have no following and you, or your employer is likely threatened by this prospect. it is no coincidence we have been deluged by these trolls lately.

ok, i'm off for a while, my feeding the troll hasn't relieved us of this troll.

Posted by: annie | Oct 16 2008 18:43 utc | 127

I'm curious as to why you seem to be approaching the current situation as if it was nothing more than business as usual while virtually everyone else is predicting the imminent dawn of the next depression.

We may very well be heading for a depression, but people have often made predictions like this and have been very wrong. And I have strong reason to believe that banning derivatives would hasten that depression, and have articulated a few of them already. As far as I can tell many of the commenters here agree with me that derivatives needn't be banned altogether. But as I say I am happy to hear arguments in the other direction, if only to dispel misunderstandings (eg the guy who didnt realize that physical forwards were margined derivatives)

I'm still waiting to hear if b really wants to put all bond trading in the hands of bond dealers, and do away with FX trading as we know it altogether.

Posted by: vaudois | Oct 16 2008 18:47 utc | 128

Bourgeois society reproduces in its own form everything against which it had fought in feudal or absolutist form. In the first place therefore it becomes a principal task for the sycophants of this society, and especially of the upper classes, to restore in theoretical terms even the purely parasitic section of these “unproductive labourers”, or to justify the exaggerated claims of the section which is indispensable. The dependence of the ideological, etc., classes on the capitalists was in fact proclaimed. - k marx theorie of surplus value

Posted by: remembereringgiap | Oct 16 2008 18:50 utc | 129

anyone w/an opinion you deem not worthy you can simply ban

Do you think my opinions are "unworthy"? Are you hoping they'll be banned?

Usually when I encounter opinions I think are poorly considered, I try to counter them with facts instead of shallow bluster. Someimes my mind is changed. The last thing I would ever want to do is ban anyone from speaking, most especially if they disagreed with me. What kind of vain idiot wants to be surrounded by yes-men?

Posted by: vaudois | Oct 16 2008 18:51 utc | 130

*I'm still waiting to hear if b really wants to put all bond trading in the hands of bond dealers

bond trading s/b "setting of interest rates." I'm hoping someone in the "ban derivatives" camp can tell me whether generic, widely traded interest rate futures make the determination of interest rates more or less democratic and fair than in earlier times. Has it lowered costs to the consumer and to the taxpayer? Am I insane for thinking that a larger trading population usually entails more competition and transparency?

Posted by: vaudois | Oct 16 2008 18:56 utc | 131

vaudois - should be established by a small cabal of bond dealers, or whether the interest rate futures markets might be a more democratic and efficient mechanism.

A small cabal of future market traders is neither more democratic nor more efficient than a small cabal of bond dealers. I'd love a democratic and efficient way to set rates. We once had such a thing. It was called Savings & Loans. A bank offered 5% on savings and got the money and could lend it at 6%. Another bank offered 4% and didn't get my money and couldn't lend. Another offered 7% for savings, lend at 6% and didn't survive. That was a democratic and efficient system.

That was then replaced with a Federal Reserve System. When that was functioning as it was supposed to it was driven by democratic decided policy goals. Inflation protection and economic growth in the case of the U.S. Fed. That worked well for a while, but then money creation (and thereby rate setting) was taken away from the Fed and given to the shadow and not-so-shadow financial system without any restriction.

The future markets have little to do with rates if you go down to the basic economic flows. Credit creation/destruction, i.e. the creation/destruction of money, i.e. inflation/deflation, determines long trend interest rates. That is a function that should be in the hand of the people. Directly or via the Fed.

Do you feel that bond futures have lowered or raised borrowing costs to the US taxpayer over the past 30 years?

I have no real idea or fact available that tells me how bond futures have effected borrowing costs to the U.S. taxpayer. Is there a decent study about this? (Preferable not from some UoC "derivative expert" guy who couldn't see it coming.) I haven't found one.

I even have no idea what you are asking there. The interest rate for the private borrowing of those taxpayers? The interest rate of the government debt those taxpayers will have to pay off (which includes some big effects of currency devaluation)?

But you seem to imply that low interest rates (real ones, i.e. inflation corrected, or nominal ones?) are a good thing. I disagree with that. Too low interest rates lead to too much debt which has catastrophic effects (see the current U.S. housing market) when the trend turns back to the historic mean. Too high interest rates are also bad.

In a well managed economy a real inflation rate of 2%, a real saving interest of 4% and real borrowing interest of 6% for good debtors seem to be fine policy goals to me.

One can not get rich very fast on those marks. But that is the feature, not the bug.

Does a future market really help to keep these goals? Are there better instruments available?

I think you'll also have a hard time proving that foreign exchange forwards need to be eradicated, since they're quite obviously vital to any industry dependent on export or import.

They are not "vital".

They do influence import and export prices as the industries depending on imports and exports have to take more diligence to assess currency risk in their price calculations if there were no forwards.

Now again the question is if this would be good or bad. I am not sure of that (and neither is that shrill guy who a few days ago got a Nobel for thinking deeply about such issues.)

Would the U.S. have outsourced its manufacturing to China if there would have been no currency risk "insurance" via forward markets? Maybe not. Maybe that would have been helpful for the U.S. people who have seen their real wages diminishing over the last 30 years.

---

In general you ask me to prove that something would have been better WITHOUT this or that financial industry feature, but you do not prove in any way (except the attempt with that laughable UoC guy) that it has been better WITH such features.

What I can see is that income distribution has for the last years very heavily preferred those few people who argue FOR these "financial industry" features in their computer models rather than the majority of working people who weld the machines that produce the real stuff we all need.

The "financial industry" has gone from 5% of U.S. GDP to 20% of U.S. GDP. That was about all the growth the U.S. had. It was a big bubble in itself. The real stuff economy in the U.S. has shrunk for some 20-30 years now. There is a limit to such trends. In this case it has been reached.

The turn around, if possible, will be painful.

Posted by: b | Oct 16 2008 18:56 utc | 132

Vaudois,

I>put all bond trading in the hands of bond dealers, and do away with FX trading as we know it altogether.

What are you saying would happen were that to occur?

Posted by: Tantalus | Oct 16 2008 18:57 utc | 133

As we have seen recently for all the noble lies about CDS's being designed to spread risk, they did nothing of the sort. The risk was defaulted on then passed on to the public. Where is the vaudois' justification for that scam?
I would argue the same thing to the corporate capitalists as they are always telling the 'little people' you've got to take a chance to get ahead. If they couldn't lay off their risk on the taxpayer, and didn't drill, sure as shit someone else would come along and do it. Isn't that the entrepreneurism that these types always boast about?
And if all of the elites were too gutless to take the risk themselves, then by all means have society at large pick it up so as to spread the risk, but then it should be society through their selected machinery of government that enjoys the rewards.

This is the problem of derivatives, when things are going well the small shocks are passed around but in the end the real risk is passed on to people who were not to be included in the reward if all had gone according to plan.

Posted by: Debs is dead | Oct 16 2008 19:00 utc | 134

These insipid literary flourishes used by these fellows when they polemise against Smith show only that they are representatives of the “educated capitalist”, while Smith was the interpreter of the frankly brutal bourgeois upstart. The educated bourgeois and his mouthpiece are both so stupid that they measure the effect of every activity by its ||411| effect on the purse. On the other hand, they are so educated that they grant recognition even to functions and activities that have nothing to do with the production of wealth; and indeed they grant them recognition because they too “indirectly” increase, etc., their wealth, in a word, fulfill a “useful” function for wealth. - k marx

Posted by: remembereringgiap | Oct 16 2008 19:02 utc | 135

What are you saying would happen were that to occur?

As I've said it would make most international trade impossible. As far as bonds go, we would go back to a world before there were bond futures (ie a high interest world, where both the taxpayer and the homebuyer paid much more to borrow money, because an oligopoly of banks controlled long term rates.) b for one doesnt seem to think this is a bad thing. And yet he views the current environment, where interest rates are well below the 1970's levels, as a catastrophe.

In general, do you doubt the premise that a broader transparent market is a more fair market? Because there are few markets more transparent and widely traded than the Eurodollar and bond futures markets.

A small cabal of future market traders

Interest rate futures are the most widely traded financial instrument on the planet, after perhaps forex forwards.

A bank offered 5% on savings and got the money and could lend it at 6%.

How on earth is a system with 100bps spreads more efficient than one with 5 bps spreads?

Posted by: vaudois | Oct 16 2008 19:10 utc | 136

Nevertheless, just as the examination of money— both in so far as it represents a form altogether different from the natural form of commodities, and also in its form as means of payment—has shown that it contained the possibility of crises; the examination of the general nature of capital, even without going further into the actual relations which all constitute prerequisites for the real process of production, reveals this still more clearly.- k marx - tsv

Posted by: remembereringgiap | Oct 16 2008 19:15 utc | 137

@137 - you are quite effective in not answering the questions i ask - oh well -

How on earth is a system with 100bps spreads more efficient than one with 5 bps spreads?

Maybe the 5 bps spreads systems depends on being bailed out by society while the 100 bps system does not? At least that seems to be the current reality.
---

International trade does not depend on currency forwards - thanks, I have trade some of those, - it depends on risk and prices, and there is no, NO!, systemic case to me made that forward markets are better on that than real goods traders.

If the above thesis is wrong, prove so.

Posted by: b | Oct 16 2008 19:37 utc | 138

#133

The "financial industry" has gone from 5% of U.S. GDP to 20% of U.S. GDP. That was about all the growth the U.S. had. It was a big bubble in itself. The real stuff economy in the U.S. has shrunk for some 20-30 years now. There is a limit to such trends. In this case it has been reached.

The turn around, if possible, will be painful.

He who would not ban yet construes one shouldn't offer opinions on topics one does not fully comprehend (yet we are welcome to ask his advice for free) has yet to offer any constructive criticism regarding the response which he sought out.

Posted by: Straw House | Oct 16 2008 19:47 utc | 139

As we have seen the 'brave new world' of low interest rates proposed by vaudois was only a temporary fix which in effect compounded the problem. vaudois is a little man in the finance industry because he is proposing last year's arguments which have already been discredited, superceded by events.

His low interest regime made no difference to the ordinary man in the street because low interest was cancelled out by higher property prices.
Peeps base their buying decisions on total affordability, if interests rates are low, then they are prepared to borrow more principal. So the net effect of last years plan to lower interest rates was to drive property prices up to levels where the speculation spiral then pushed them out of control and an inevitable crash wiped out the CDS mechanism.

Listening to vaudois one would think the events of the last year never occurred.

Now I don't support usury in any form (don't borrow money and don't lend it - if someone is short I would rather give them the dosh than have them feel indebted, who cares if our house isn't as grand as others it still has beds and a kitchen my office to write in - oh and a bathroom. I'm sure other MoA-ites remember that is what a home is for - to eat, sleep and shit, not some fucked up status symbol for the low self esteemed.)

That said I understand that one of the purposes of interest in the world of finance proposed by usurers is to manage risk. That is interest should reflect the chances of the loan being repaid.

But vaudois' methods of pushing interest rates down negated that protection and money was lent at interest rates which didn't reflect the real risks of the loans not being repaid, the rest is history.

Credit Default Swaps created a monstrous real estate bubble which inevitably burst spreading destruction and poverty out to peeps who had no idea of what they were being sold by the silver tongued commission salesman for the moneylenders. The mess was so bad that even the elites who had thought themselves untouchable lost big time.

They went to their mates in government who bailed them out by using money which had been taken by that government for education, housing and old people's health costs. Now those programs will have to be cut to cover the hundreds of billions lost.

Yet vaudois still claims these CDS are a positive thing? Nothing to do with the fact he makes his bottom feeding living in the industry that promotes them of course.

As we discuss this vaudois' superiors will be dreaming up new fallacious arguments that appear to withstand rational scrutiny despite recent events. I suggest vaudois go and learn those lies and then come back so we can demolish them. This is too easy.

Posted by: Debs is dead | Oct 16 2008 19:50 utc | 140

Sumerians exchanged people -marriage, servants, slaves, children, etc., - labor and services, land, livestock, goods.

They had a clever accounting system, first material (tokens, exchanged hand to hand, but also filed and stored), then written, representing the tokens allowed more complex accounting and removed the need to make the tokens, the system allowed them to keep track of exchanges, promises, staggered payments (e.g. gradual payment of dowry), rents, and so on, contracts in short.

Their mathematical, numerical capacities - abstract, that is in the head and in the language, were high, better than their representative, symbolic tools (imho.)

An administrative/ruler class, salaried by taxation, took take care of all this, set up laws, standards, settled quarrels, smoothed economic relations.

The early currency (‘a standard’) used was an X of grain, barley. This proved unsatisfactory (impermanence, fluctuating exchange, etc. - so not a real standard) and in the *later* period silver equivalents were set up: silver could function as a yardstick; it could be amassed and stored; and while it had little real use, it became a sign of riches and status.. In this way, they converted the impermanent - 24 sheep! a wife! bolts of cloth, barrels of beer...to...’dollars’ in the bank.

They invented usury, or interest - only possible when value is stored, so that went hand in hand. Also investment, in the form of starting a business and then splitting the payments of the workers who ran it, and / or having a profit-sharing scheme.

Small town Sumerians may have griped they were being ripped off for grand projects - temples and the like; war, though afaik, the history doesn’t show that, but they were subject to money lenders who charged high interest (20 or more) and many fell into slavery, lost their land, and had to go work for the temple (like sharecroppers or prisoners, etc.)

Sumerians had no concept of sustainability.

They took from the environment what it provided in traditional ways and were primarily concerned with proper, *exchange* (debt relief, price of this or that good or service, priests stipends, etc. ) The environment was a backdrop, the scene on which all was set, and it afforded only, on occasions, nasty surprises (drought, floods...), deviations from the norm, for the rest, it was just ‘there’. Sunlight, water, agri, animal husbandry, territorial manipulations - irrigation, etc., so in daily life, for the energy punch, biomass and animal fats, animals and humans, often slaves, were used, all managed through ‘best practices’ of the times.

They had primitive forms of insurance (not clear about it for the mo.), paid for their military collectively, they often fought siege warfare (see contemporary Israel and Iraq.) Game playing (chess type games etc.) were divorced from finance and everyday life.

What has changed?

With the exploitation of oil, the combustion engine, and the understanding and use of electricity, nuclear power, the environment is still a stage that can be exploited mindlessly and will automatically furnish what it conventionally needed or ‘right’, expected, usual. ‘Money rents’ will, it is judged, perform, as the borrowers, through economic expansion, will be able to stump up (inflation etc. set aside), they are a good investment, usury pays - all forms of ‘credit’ and its ‘packaging’ honest or nefarious - upfront or diced and sliced and touted by pimps - are winners, a good deal, safe.

(What to do with debt slaves, once they cannot pay, is another matter. The Sumerians put them to work for the State, or powerful persons, as human labor was precious, useful, profitable. Not so for indebted students or prisoners today. They are removed from the labor market, of no use, surplus. It is the environment,with technology, that produces expansion - oil, coal, machines, etc.)

When the earth cannot provide for ‘growth’ any longer - then, for a while, it will be artificially created elsewhere. Mac Mansions will be built with funny money. Everybody running around on tick...and then... and then.. all those derivatives..

Posted by: Tangerine | Oct 16 2008 20:04 utc | 141

merci tangerine, b & debs

the fools from finance capital arriving here - arrive here with their undergarments soiled & i'm glad you have been clear in repudiating what is in essence an alphabet for arseholes

their mendacious mathematics is as far from purity as it is possible to be when yr system is defecating all over you

their bullshit is breathtaking in its pretence of comprehension - they clearly comprehend fuck all

the collapse of their corrupt system is a delight to behold & just as in latin america - the people finally did not need ideology - rather they arrive at that concrete historical point where enough is enough - where cooncrete conditions are finally inderstood & the people draw those lesson. the light in latin america comes fom that source - comprehension of concrete conditions

while the clowns of capital who have arrived here recently - try vainly to conceal their venality & that of their system - it is not too much to hope that in the west - theior people too will draw the necessary conclusions

Posted by: remembereringgiap | Oct 16 2008 20:16 utc | 142

unfortunately I can contribute nothing to the discussion at hand and frankly understand very little of it. somehow it seems a bit dishonest making money by betting on someone's failure but genuine work is so yesterday.

what does seem remarkable is that there are three different posters coming from the Vaudois region of Switzerland. They have an interesting past, comparable to the Jews. take a look

Posted by: dan of steele | Oct 16 2008 20:27 utc | 143

Yet vaudois still claims these CDS are a positive thing?

No Debs, if you'd read anything I'd written you'd know that I'm talking exclusively about IR futures and foreign exchange. You can talk all you like about CDSes (although I doubt they have as much to do with the credit problem as you seem to think.) I could be wrong about that, but its hard to move from CDSes to a generalized ban on all derivatives altogether, most of which are unlike CDSes in every way but sharing the name "derivatives."

b, generic interest rate derivatives aren't behind any portion of the current crisis. And without them there could be no bailout, because there would be relatively few bond buyers to do the bailing out. Ditto foreign exchange, and no, I'm afraid that if you've ever set foot in a treasury of any corporation you would know that a liquid forex market is vital to international trade. But like Debs and annie you haven't shown me how IR futures or foreign exchange is to blame for the current crisis, so my initial question is still unanswered. FX and Eurodollar futures have nothing to do with the crisis, and you are unable to explain why they should be banned along with CDSes.

And all your confrontational rhetoric doesn't make me feel bad, it just shows me you're very angry (for some reason angry with me, even though you've done nothing but insult me from the second I opened my mouth, and I've been perfectly cordial.) Lighten up! There's no need to insult people who approach you in a spirit of mutual understanding, sharing knowledge and opinions. It only makes you seem defensive, instead of the brilliant people I'm sure you all are.

Posted by: vaudois | Oct 16 2008 20:30 utc | 144

n principle it seems that the more transparent, liquid and broadly traded something is, the closest to "fair" its value, and that most derivatives fall well within this description. Not CDSes perhaps (yet, although a central clearing mechanism and greater standardization of terms would change this as well.)

Did we all miss this part?

Can we please say no more cutting and pasting Marx, and no more thumbing through the thesaurus for synonyms for "asshole?" Pretty please?

PS, I'm not really from Vaud (but genevois is a mouthful.)

Posted by: vaudois | Oct 16 2008 20:38 utc | 145

"The development of capitalism has arrived at a stage when, although commodity production still "reigns" and continues to be regarded as the basis of economic life, it has in reality been undermined and the bulk of the profits go to the "geniuses" of financial manipulation. At the basis of these manipulations and swindles lies socialized production; but the immense progress of mankind, which achieved this socialization, goes to benefit... the speculators."

v i lenin imperialism, the highest stage of capitalism

Posted by: remembereringgiap | Oct 16 2008 20:47 utc | 146

Monopolies, oligarchy, the striving for domination and not for freedom, the exploitation of an increasing number of small or weak nations by a handful of the richest or most powerful nations — all these have given birth to those distinctive characteristics of imperialism which compel us to define it as parasitic or decaying capitalism.

Lenin, Imperialism: The Highest Stage of Capitalism

Posted by: remembereringgiap | Oct 16 2008 20:53 utc | 147

Political power, properly so called, is merely the organized power of one class for oppressing another

Posted by: vaudois | Oct 16 2008 20:58 utc | 148

Speculation in land situated in the suburbs of rapidly growing big towns is a particularly profitable operation for finance capital. The monopoly of the banks merges here with the monopoly of ground-rent and with monopoly of the means of communication, since the rise in the price of land and the possibility of selling it profitably in lots, etc., is mainly dependent on good means of communication with the centre of the town; and these means of communication are in the hands of large companies which are connected with these same banks through the holding system and the distribution of seats on the boards. As a result we get what the German writer, L. Eschwege, a contributor to Die Bank who has made a special study of real estate business and mortgages, etc., calls a “bog”. Frantic speculation in suburban building lots; collapse of building enterprises like the Berlin firm of Boswau and Knauer, which acquired as much as 100 million marks with the help of the “sound and solid” Deutsche Bank—the latter, of course, acting through the holding system, i.e., secretly, behind the scenes—and got out of it with a loss of “only” 12 million marks, then the ruin of small proprietors and of workers who get nothing from the fictitious building firms, fraudulent deals with the “honest” Berlin police and administration for the purpose of gaining control of the issue of cadastral certificates, building licences, etc., etc.[14]

“American ethics”, which the European professors and well-meaning bourgeois so hypocritically deplore, have, in the age of finance capital, become the ethics of literally every large city in any country.

v i lenin - imperialism

Posted by: remembereringgiap | Oct 16 2008 21:02 utc | 149

by far the best way to do so has always been via long-term physical contracts, not via derivatives

vaudois@105
Johnny, a long term forward is a derivative. In all instances they involve leverage, and mark to market, and settlement terms silimar to futures. It's no easier to track who has physical mark to market losses on physical trades than on CDSes. This is in fact the main virtue of a futures exchange - transparency, margining, netting and competition.

Its amazing that you simply do not know what a "long term physical contract" is. You seem to think I was referring to a "long-term forward". No I was not !! And they have nothing to do with one another. I am stunned.

Seems you are so totally immersed & consumed by the world of derivatives that you cannot think outside it. Its obvious you have no interest in any concepts or ideas (even those tried & tested) that fall outside your "domain".

So I am ending my discussion with you for grossly misleading me regarding the extent of your knowledge and also your intent

Posted by: jony_b_cool | Oct 16 2008 21:16 utc | 150

Hi Jony,

What in your conception of things is a "long term physical contract?" If it a long term agreement to exchange some physical commodity for money in any way shape or form, it's also known as a "forward!" Yes it is!! And this is something I didnt pick up in my MBA program or working in an economics department of a school. It isn't something I learned in the bond trading floor of Salamon Brothers in between defrauding widows and orphans. It's something I learned through trading long term physical contracts with my own filthy hands!!

So please don't run away as I'm itching to know wtf you are talking about.

Posted by: vaudois | Oct 16 2008 21:25 utc | 151

I'll be damned, my cousin Joe The Plumber is one insightful idiot. This thread has proved him right. The Rand Corporation would be proud.

A central tenet in the philosophical model of the hive is group think. This is a system of thought within which group members reach consensus without critically analyzing or evaluating specific ideas and concepts. Group think can be manipulated to produce everything from infernal Kafkaesque bureaucracies to rampaging mobs, depending on the desired outcome.

Psychologist Irving Janis determined eight symptoms that are indicative of group think: (1) illusions of invulnerability, (2) rationalising warnings that challenge group assumptions, (3) unquestioned belief in the morality of the group, (4) stereotyping those who are opposed to the group as weak, evil, disfigured, impotent, or stupid, (5) direct pressure to conform, (6) self censorship, (7) illusions of unanimity, (8) mindguards, self-appointed members who shield the group from dissenting information.

Every major Capitalist, Communist and Totalitarian regime demonstrates these characteristics. Group think is not an Orwellian fiction, it is a day-to-day reality.

Link">http://www.typepad.com/t/"http://thecleaver.blogspot.com/2008/08/detonating-hive-mentality-way-of.html">Link

Posted by: Joe The Butcher | Oct 16 2008 21:50 utc | 152

vaudois@152,
I would like to give you the benefit of doubt that perhaps you did not read my post @96 properly. Or that you misunderstood it (though its pregnant full of context) or that you were moving too fast.

Still, your response @105 (which even includes the quote from my post@96) is so off that it would be irresponsible on my part to believe you have ever dealt with "long-term physical contracts"

Posted by: jony_b_cool | Oct 16 2008 21:53 utc | 153

jony, whether you believe it or not, I have. Feel free to quiz me. For you I have only one question:

what is a long term physical contract if not:

1.)a contract that is
2.)long term
in
3.) something physical
involving
4.)money.

Because whether or not my credentials stack up, these 4 things alone suffice to make what we are both discussing a "forward" contract in the conventional sense. I'm scratching my head trying to figure out what type of 'long term physical contract' doesn't fulfill these conditions.

Posted by: vaudois | Oct 16 2008 22:04 utc | 154

jb

it seems clear that poster vaudois knos next to nothing on this subject so dear to his heart but so far from reality

Posted by: remembereringgiap | Oct 16 2008 22:06 utc | 155

By the way jony, "refineries and power companies" are the main end users of the less liquid derivatives (paper indexes on API coal, NYMEX PJM prices, Inside FERC monthly indexed swaps, etc) but also 'physically settled' versions of all these things. One might be a GISB contract and the other an ISDA, but they are both unequivocally "forwards" regardless of how you choose to treat them.

Posted by: vaudois | Oct 16 2008 22:10 utc | 156

vaudois

such generic gobbledygook cnnot hid the irrevocable & inalterable reality - the shithouse is going up in flames - bit by bit

Posted by: remembereringgiap | Oct 16 2008 22:15 utc | 157

As always, the devil is in the details. The problem with CDS instruments was not inherent; it was that they were far too cheap relative to the risk they were meant to offset. A good analogy I've read was that they were akin to selling flood insurance during a drought. But as I mentioned above, the CDS changed the weather. The "invisible hand" worked its magic and most of the risk landed in CDS because it was the cheapest way to offset the risk of bond default. This mis-pricing of risk artificially increased the demand for bonds, which led to more risky mortgages, which led to more CDS. It was bound to fail.

A major reason CDS were too cheap was the reliance on so called "dynamic hedging". This is akin to flood insurers paying out all of their premiums in bonuses, telling themselves they can hedge against losses when and if the hurricane roars into the Gulf. Guess what happens when all the insurers try to execute this hedge at the same time in a panic...

The hedge play for those writing CDS is to short the bonds of the insured entity. For this strategy to work liquidity is required in the bond market. This was the faulty assumption - liquidity. In a panic there isn't liquidity. (This was the faulty assumption that led to the 1987 crash too.) Even in a "normal market", which to me means that price discovery is taking place, there are times when everyone is on one side of the trade.

The other way to hedge is to buy an offsetting CDS from yet another party. Shopping for offsetting CDS when everyone else is doing the same is very expensive. You're negating previously booked (and subsequently leveraged upon) profits and taking a loss. Ouch!

These offsetting contracts are why the CDS market resembles a casino. If you found a party that would buy a CDS from you for more than you could buy the same CDS, you could pocket "free money". This involved not trading an existing CDS contract, but rather writing two new ones! This sets up a chain of counter-parties where one default threatens many others. See Lehman > AIG > Goldman Sachs.

Posted by: jeff65 | Oct 17 2008 1:02 utc | 158

And if you hate CDSs, you will really hate Synthetic CDOs. They are sort of like CDS cluster bombs.

Posted by: jeff65 | Oct 17 2008 2:25 utc | 159

If I have been less formally polite towards Vaudois than other believe the situation warrants, I am distracted by the thought of what it must feel like when the sherrif's deputies call you 'sir' or "ma'am" as they politely oversee the eviction of those caught at the bottom of this triangle of greed.

Etiquette is tool utilised by the usurers to make some poor fuckers eviction more tolerable for those effecting it. A situation whereby peeps don't make a sound as they get buggered by the bank's gigantic and inhuman dildo of greed. That way everyone can pretend that nothing terrible is taking place.

I cannot separate those involved in usury into categories according to the degree of complicity in the destruction of homes that their occupation suggests.

As far as I am concerned anyone who chooses to put food on the table by facilitating the predatory practise of moneylending is complicit.
One amerikan family is evicted from their home every six minutes 24/7 according to the most recent data I have seen.

Some may have been deliberately incautious, sure, but when I speak to peeps who have got themselves up the proverbial without a paddle (Like many others I try to help fellow humans caught this way), one thing sticks out like dogs-balls.
Most peeps under the hammer have an obvious couldn't fail to miss lack of understanding of the very systems which have them by the pink bits.

Talk to an evicted or facing eviction family for a minute, and this failing is brutally apparent. In the country I live in, the most common reason I see for peeps being financially illiterate is they come from a culture which has no history of debt or moneylending.
A civilised bank would make sure that that situation was altered before signing up the family for a loan. But the reverse happens. That community is likely to find itself the target many moneylenders, aiming for them because they are financially illiterate. Nice eh!

A great many think that it is they who owns the home they bought, not the the bank. Consequently when the bank takes their home away, gob-smacked fails to describe their reaction to the realisation that they don't own the home they have been sweating blood to meet the payments on.

What was immediately apparent to me would also have been obvious to the low life who signed them up to a loan secured against their home. He/she didn't care - the commission was the only concern for that scum.


So now Vaudois is saying that banning credit default swaps is one thing but banning all derivatives is quite another.

A few threads back when b suggested banning CDS we discussed this and I came to the conclusion that banning CDS but not other derivatives simply wouldn't work.

Bankers would find a way around the letter of the law to create a new CDS type instrument which was legal. That is what such amoral people always do.

So if Vaudois or any fellow travellers ever get around to thinking about why their occupation is now the subject of a "War On Bankers" along the lines of the old "War On Drugs" they should consider why it was that the usurers set about deliberately circumventing the will of the community. Rather than blaming those of us who are just plain weary of attending to the destruction which their selfish acts of greed fuelled savagery has visited upon the most vulnerable in our communities.

Posted by: Debs is dead | Oct 17 2008 3:07 utc | 160

As far as I am concerned anyone who chooses to put food on the table by facilitating the predatory practise of moneylending is complicit.

Interesting. I admit I know of no culture on earth ignorant of moneylending. Where do you live? As for "usury" its really hard for me to conceive of today's interest rate environment as 'usurious' - in fact I think a lot of people here were complaining that interest rates have been far too low for too long, no?

jeff why wouldn't a central clearing facility such as one that exists already for interest rate futures solve the "chain of default" problem, as well as serving to control imbalances in position?

Posted by: vaudois | Oct 17 2008 7:51 utc | 161

And Debs, there's really no need to talk over my head in this impersonal way. I understand you may think it beneath your dignity to address venal, immoral low-life banker-types directly but then I'm not a banker. The only usury I perform is via savings bonds, and at a measly 3% interest! So when the revolution comes, please make sure that I am killed last.

Posted by: vaudois | Oct 17 2008 9:17 utc | 162

vaudois:

I don't believe the CDS contracts as written are standardised enough to allow a central clearing facility to work as you suggest.

My theorem is that if the risks were forced to be priced into CDS according to worst case scenarios (which they must be to avoid becoming the sink for risks that they are now), CDS could not be profitable to underwrite. Hedge funds and Synthetic CDO creators are looking for more than insurance company levels of profit.

Posted by: jeff65 | Oct 17 2008 10:21 utc | 163

I don't believe the CDS contracts as written are standardised enough to allow a central clearing facility to work as you suggest.

Currently not, but neither were oil trades before NYMEX listed its WTI contract. In principle there's no reason why CDSes couldn't become as standardized as this, especially with the backing of the government and a transparent trade, settlement and margining medium. Perhaps you're aware that both NYSE/Euronext and CCorp. are already developing CDS clearinghouses?

http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSL431251320080904
http://www.finextra.com/fullstory.asp?id=19117

Hedge funds and Synthetic CDO creators are looking for more than insurance company levels of profit.

These aren't the only buyers of CDSes. Take the example of a long term commodity supply contract: why should my company's shareholders have to absorb credit risk of a supplier, where some insurance company might by selling me a CDS on an exchange? What if the supplier had no dollar denominated debt available to short? Isn't shorting a bond through a margined prime brokerage account less transparent than trading an exchange-cleared CDS? What if the supplier had no bonds outstanding at all? Should I be bound by law to warehouse the risk of default? I really can't see why.

Posted by: vaudois | Oct 17 2008 11:37 utc | 164

The value of currency derivatives: `KIKO' Hedges Slay Korean Exporters, Threaten Banks (Update2)

Taesan LCD Co., which makes back- light units for computer screens, was ranked as South Korea's third-biggest start-up in June after posting record sales.

Three months later, the supplier to Samsung Electronics Co. collapsed after accumulating 80.6 billion won ($62 million) in losses on currency options that soured as the won slumped against the dollar, according to regulatory filings. Hana Bank, Korea's fourth-largest lender, assumed the losses when Taesan failed.
...
More than 500 Korean companies are struggling to repay KIKO, or Knock-In Knock-Out, contracts sold as a hedge against an appreciating currency. The options turned into losers as the won fell 29 percent against the dollar this year.

Posted by: b | Oct 17 2008 12:07 utc | 165

Vaudois,

I think it needs to be said that most people here would, at this point and assuming we had any power whatsoever (and it is rather hilarious that anyone should feel threatened by our pronouncements, seeing as we don't), ban anything and everything that stood in the way of a truly egalitarian society. There needs to be a distribution of wealth according to the basic human rights to sustenance, shelter, medicine. I've appreciated your cool head and your attempts to explain things, but the abstruse difference between derivative types, exotic or otherwise, is crashingly irrelevant to most of us. The system has failed the vast majority of human beings on this planet - I'm not talking about suburbanites in Atlanta or London, but the billions of ignored who manage to exist in spite of the 'developed' world - and it's all got to go so that we can make sure what comes next works.

Posted by: Tantalus | Oct 17 2008 14:00 utc | 166

What Tantalus said...!

Debs thx for making the point that most folks (borrowers) are not up-to-speed on financial matters in the manner of vaudois, and are therefore prime targets for "legal" contracts though which those -most folks- can own a home or a car or other for which he/they could never otherwise gather the cash.

I get a mortgage because I have a job, which pays me enough to support the loan payments. The mortgage seller (originator) doesn't care whether I keep that job for the 30 year term, only that I have it now. He'll sell the paper, as part of a stack, for a profit and I'll then send my payments to the buyer until I lose the job and face foreclosure. The friendly local banker with whom I made a contract is out of the deal and can't/won't help me now. I've just been screwed by a system designed by profiteers. Sure, I should've/could've been smarter up front, but I trusted the banker to be smart; he does money and I do landscaping. I don't even like money, which is why I have no savings.

Posted by: rapt | Oct 17 2008 14:41 utc | 167

I think it needs to be said that most people here would, at this point and assuming we had any power whatsoever...ban anything and everything that stood in the way of a truly egalitarian society.

All we need now is a manual telling us what those things are... or should we wait for legislators to tell us in 1000-page bills, accessible only to a priesthood of expensively educated lawyers? I'd propose that banning liquid, transparent derivative markets won't make society more egalitarian: just the opposite.

It's interesting to me that 'b' complains about the 'outsourcing' of manufacturing to China that forwards have facilitated. Maybe he thinks that Western countries should protect their "real wages" from the "competition" introduced by cheap eastern labor. Or that oil suppliers should have no access to buyers other than through privately negotiation with unleveraged supermajors. I can't fathom how that's a fairer system of trade. To me its a step in the wrong direction.

Posted by: vaudois | Oct 18 2008 13:24 utc | 168

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