Friday, Oct 17, 2008
The Real Monster In The Meltdown Closet
Rense: Not Enough Money In The World To Fix Things
Unsustainable mortgages are a key factor in the global crash, of course. And many people did take out mortgages they would not be able to afford if the housing bubble ever burst, which it has, most spectacularly. And yes, it is undeniable that the financial services industry has been tempting people with easy credit like schoolyard pushers flashing reefers.
But this alone would not have been enough to threaten the destruction of the entire global financial system, nor cause the blind, screaming panic that has strangulated the financial markets. The house of cards has fallen down, and revealed a hole of derivatives-based debt that could not be filled, literally, by all the money in the world, much less by the mere trillions that national governments are frantically throwing at it today
8 Comments
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1. theboltonfury said...
don't worry about it. This money never existed in the first place
it will just be removed from the balance sheet and our lives will just get even harder
we're used to it
2. Renting2 said...
Know little about these derivatives, but aren't they just paper contracts that people have paid for? Wouldn't it be cheaper to declare them void and return the premiums? Or is that too simplistic?
3. uncle tom said...
An anarchist rant - boring..
4. planning4acrash said...
We need to stop blaming the public. BTL was big because most families rejected big mortgages. Local governments and other state apparatus have been far bigger participants. Just look at Iceland!
5. george monsoon said...
Speaking of Iceland, They are in dire sh**. I have been keeping my eye on Ireland, and I the way their economy is unwindiind, I would not be surprised if the Irish banks go under and they go back on their word of 100% deposit guarantee's
6. nooneo said...
Why don't they simply remove all the money from all the players in the Premier League for 1 year. That should fill the hole in the world's finances.
On a more serious note, I like George monsoon have serious doubts about the Irish economy. They really have had the most enormous property bubble, with prices set to fall by at least 50% and in modern terms they have never seen a sigificant downturn in property prices. I would seriously think twice about keeping any large sums of cash there, purely based on the 100% guarantee. I'm not sure their banking system is as regulated as well as say Spain who appear on a more solid footing.
7. malct said...
2. uncle tom said...
An anarchist rant - boring..
Friday, October 17, 2008 09:29AM
UT - you have a point, but after the text in the box above, he goes on to quote Will Hutton of the observer
Yes, "mere" trillions. As Will Hutton explains in the Observer:
...the dark heart of the global financial system [is] the $55 trillion market in credit derivatives and, in particular, credit default swaps, the mechanisms routinely used to insure banks against losses on risky investments.
This is a market more than twice the size of the combined GDP of the US, Japan and the EU. Until it is cleaned up and the toxic threat it poses is removed, the pandemic will continue.
Even nationalised banks, and the countries standing behind them, could be overwhelmed by the scale of the losses now emerging.
Try to imagine that: a $55 trillion market now at risk of complete destruction.
Even the derivative debt owed by individual institutions stands at nation-wrecking levels. For example, a single bank in Britain, Barclays again, holds more than $2.4 trillion in credit default swaps, the tradable "insurance" mechanism against securities default.
This is more than the entire GDP of Great Britain. If all this paper goes bad, there are not enough assets in the entire country to pay it off. And that's just one bank, in one country.
Hutton gives the details:
This market in credit derivatives has grown explosively over the last decade largely in response to the $10 trillion market in securitised assets - the packaging up of income from a huge variety of sources (office rents, port charges, mortgage payments, sport stadiums) and its subsequent sale as a 'security' to be traded between banks.
Plainly, these securities are risky, so the markets invented a system of insurance. A buyer of a securitised bond can purchase what is in effect an insurance contract that will protect him or her against default - a credit default swap (CDS).
But unlike the comprehensive insurance contract on your car which you have with one insurance company, these credit default contracts can be freely bought and sold. Complex mathematical models are continually assessing the risk and comparing it to market prices.
If the risk falls, the CDSs are cheap; if the risk rises - because, say, a credit rating agency declares the issuing company is less solid - the price rises. Hedge funds speculate in them wildly.
can't see how that can be boring, we need to know and understand what's really happening. At least he's trying!
8. Ketha said...
Whatever the 'truth'.. the crash happening now is happening in a very cynical, very abstract age.. people won't, (on the whole, hopefully) fall back on nationalism/racism/fear/religion (some will, but not as many)... they will blame the rich elites and exact a heavy price for this greed... we might finally demand a just system based on the greater good and morality... something that is hardly as radical as the greedy right want to you believe. i'm not left with either, the solution is 'beyond' the traditional 'wings'.