1.3 Quadrillion and Counting 09-18-08 mpg It's the Derivatives, Stupid! Why Fannie, Freddie and AIG Had to Be Bailed Out Must Read - A quote...."Why the extraordinary measures for Fannie, Freddie and AIG? -- The answer may have less to do with saving the insurance business, the housing market, or the Chinese investors clamoring for a bailout than with the greatest Ponzi scheme in history, one that is holding up the entire private global banking system. What had to be saved at all costs was not housing or the dollar but the financial derivatives industry; and the precipice from which it had to be saved was an "event of default" that could have collapsed a quadrillion dollar derivatives bubble, a collapse that could take the entire global banking system down with it." -- Also posted at GlobRsrch Death and Dying on Wall Street:: The End of the Reagan Era A quote...."For 66 years Glass-Steagall worked. It brought stability to banking institutions by securing deposits, limiting speculation, and encouraging home ownership. Commercial banks did well, earning solid and consistent returns for years. Glass-Steagall, along with many other pieces of New Deal legislation, such as Social Security, brought government regulation to the economy, producing a stable correction to the failures of free market laissez faire capitalism. -- When the stock markets exploded during the 1990s, many market worshipers came to see Glass-Steagall as a quaint holdover from the New Deal era. Thus in 1999, senator Phil Gramm–and up until recently presidential candidate John McCain’s financial advisor–pushed through the repeal of Glass-Steagall, permitting yet again a merger of commercial and investment banking institutions. Now banks, eager to raise money to invest on Wall Street, had little incentive to deny loans to individuals. These loans would help provide the capital to invest in securities." -- bold/underline by website editor. This is an EXTREAMLY important point. Oddly enough, and in what would seem to be a counter intuitive process to many people, when banks give out loans they LITERALLY create money out of thin air because they book the loan as an asset on their balance sheets. One may ask, “Well, what assurance does the bank have that the loan will be paid back?” The answer is they’re supposed to have a process of checking the credit worthiness of the applicants and also set aside a “capital requirement” also known as a “loan reserve” to cover possible defaults. The idea is if you force the bank to set aside ten percent, for example, of funds received to cover possible defaults, you may feel secure that in a reasonable economy such a required loan reserve for all banks might possibly protect the individual bank, but it should certainly be sufficient to protect the banking system as a whole. The loan the bank makes availble (i.e. the money it created supposedly after checking the credit worthiness of the recipient) when used to purchase something (a house lets say) itself gets re-deposited at another bank of which ninety percent can be re-loaned out yet again, and than re-loaned out yet again, in a process of ever diminishing ninety percent increments until it's used up. This is why our banking system is called a "Fractional Reserve" system. If you reduce the amount of fractional reserve required to be held you increase the amount of credit being created and vice versa, if you increase the amount of fractional reserve required to be held you decrease the amount of credit being created. As stated before a ten percent loan reserve would normally be sufficient in a reasonable economy – however - this is not a reasonable economy. Take away all regulations (except loan reserves, even the Fed wasn’t that stupid), throw in loads of easy money (the Fed’s dropping their interest rates to one percent) and essentially tell every greedy banker out there that if the person has a pulse you can give them a loan (i.e. create more “money” that the bank can invest to make....you guessed it, more money) and you have the makings of an economic mess. On top of these insane policies however if you also base your loans on assets inflated by an enormous price bubble (housing), wildly inflated expectations of earnings (corporate and consumer loans) and the completely ridiculous, obviously idiotic, utterly criminal idea of all time....you give massive loans (create money) to participants in a market, or invest in a market, that is totally opaque (composed of unknown or unpriceable financial instruments), has no liquidity whatsoever (how can you trade something you can’t reasonably price) has no fractional reserve requirements (therefore unlimited leverage) and thus has expanded exponentially and uncontrollably, ( $1.3 Quadrillion dollars and counting, in just ten short years) is essentially a scheme that creates an end run around the reserve requirements, much less the more stringent margin requirements, in other words if you go and create what is called the “derivatives” market....you get yourself and your nation into a whole new order of economic trouble. You get yourself into something that has never been seen before, at least not since the 1929 stock market mania, something that’s not going to be resolved without a similar amount of contraction and economic pain.... something that was easily predictable, and in fact, had been predicted by many market observers during the last several years. See also....The Plunge Protection Team - mpg - 03-07-07 See also....Some Tentative Laws - 07-20-08 - mpg See also....Effective Fed Funds Rate 03-24-07 - mpg |