What caused the world economy to collapse,article link
seeker
Les Cargill
> http://www.truthout.org/013009T
The author seems to think that things like
antitrust or other regulation are effective in curbing
"white collar sociopathy".
What's really happened is that in the '80s-'90s, there
were a bunch of little $40M per year solid-citizen
companies. They could get financing from a number
of sources, they employed people in relatively
meaningful work, made things, sold 'em.
About 1995 to 2000, they all became obsolete, because
there were fraudulent organizations in the financial
markets offering twice to ten times the return on
investment by the little $40M per year companies.
The engine of finance - funds - stopped being interested
in 10% ROI at all. They wanted 25 or 35 percent. And
people told them they could have it.
As it turns out, they could *not* have it, but being
accustomed to willing suspension of disbelief and
having magazine subscriptions to INC or Business Week,
why, why ever not? After all, didn't you *deserve* it?
Fund managers represented a new class of investor - one
who picked them on a page with other funds to park
401k earnings in. So any "sociopathy" comes from
the format this data was presented in. People invariably
picked the higher rates of return, under the guidance
of the salesdewd at the company meeting.
And because these things attracted investment,
they had apparent growth. But this wasn't growth
based in real people making real things to sell to
other real people.
So if there is a failure, it is *universal*. Of course
there's a leadership problem, but the led had a hand in it
as well. The gambler's fallacy will make peasants of
us all.... this phenomenon well preceeded any
failure ( with a very long lead time ) and it's
not done yet. People will never have enough information to
play in these markets at the retail level, so the game is
bound to fail.
--
Les Cargill
Econotron
news:9e8fe133-3eeb-4b28...@35g2000pry.googlegroups.com...
> http://www.truthout.org/013009T
>
The world economy has not collapsed.
e.
Rod Speed
Modern first world economys have been about a hell of a lot more
than just manufacturered goods for a hell of a long time now.
> So if there is a failure, it is *universal*. Of course
> there's a leadership problem, but the led had a hand in it
> as well. The gambler's fallacy will make peasants of us all....
Bet it doesnt. And it aint the gambler's fallacy driving it anyway.
> this phenomenon well preceeded any failure ( with a very long lead time ) and it's not done yet. People will never
> have enough information to
> play in these markets at the retail level, so the game is bound to fail.
Have fun explaining how come they havent failed over well over half a century now.
AND its the exact opposite of failure thats produced the real living
standards that leave those our grandparents had for dead.
Saggy
Great article, but, what does it mean?
The article claims that hedge funds are somehow like bucket shops, but
this is not clear to me. What is the correspondence ?
The article says that the credit derivatives (credit default swaps I
assume) were the source of the problem, and that they pay off when the
CDOs fail. How do the CDO's fail? Go bankrupt? How many have
failed? The article claims that the hedge funds made money from the
credit derivatives when the CDOs failed. Is that correct? Who were
the credit default swap writers that had to pay up ?
The article says that 600 T of credit derivatives are outstanding. Is
this accurate? How is the number known? This I assume is the face
value of the insurance policies, what are the premiums that are being
paid? Who is on the hook to pay up if the underlying CDOs fail, i.e.,
who wrote the credit default swaps?
Answer to last question ... AIG was a big writer of credit
derivatives. It has lost big, from paying up on credit derivatives?
So, AIG is still in business with 500 T of credit derivatives
outstanding ?
The article says that the CDOs were downgraded, and the hedge funds
that held them unloaded them, and that many will go out of business.
But it seems to me that the hedge funds were playing to win when the
CDO failed, and hence the downgrading of the CDOs should have
benefited the hedge funds. I.e. that is, CDOs being downgraded and
failing should have increased the value of the credit deriatives held
by the hedge funds. Why did downgrading the CDO hurt the hedge funds.
Have the credit derivative writers failed and the credit derivatives
become worthless? Lehman failed, but AIG is still going and Bear
Sterns was bought, and so the credit derivatives they wrote are not
defunct? How many T of credit derivatives written by Lehman became
worthless?
Rod Speed
> Great article, but, what does it mean?
Not a lot.
> The article claims that hedge funds are somehow like bucket shops,
> but this is not clear to me. What is the correspondence ?
He's essentially saying that the average investor cant possibly win
against the immense market power that the bucket shop or hedge
fund has by reason of their vastly large holding in the stock the
individual is buying etc.
> The article says that the credit derivatives (credit default swaps I assume)
Bad assumption.
http://en.wikipedia.org/wiki/Credit_derivatives
http://en.wikipedia.org/wiki/Credit_default_swap
A CDS is just one type of credit derivative.
> were the source of the problem,
He's just plain wrong.
> and that they pay off when the CDOs fail.
Credit derivatives arent just on CDOs.
> How do the CDO's fail?
When enough of the mortgages default etc.
> Go bankrupt?
Nope, only legal entitys can do that.
> How many have failed?
Very few in the sense that the credit derivative is excerisable.
> The article claims that the hedge funds made money from
> the credit derivatives when the CDOs failed. Is that correct?
Not in the sense that there was much money involved in those failures.
> Who were the credit default swap writers that had to pay up ?
CDSs aint the same thing as a credit derivative.
> The article says that 600 T of credit derivatives are outstanding. Is this accurate?
No one knows.
> How is the number known?
It isnt, it can never be more than an estimate, because they
dont have to be documented in a publicly available form.
> This I assume is the face value of the insurance policies,
Bad assumption.
> what are the premiums that are being paid?
Any derivative has cost.
> Who is on the hook to pay up if the underlying CDOs
> fail, i.e., who wrote the credit default swaps?
You keep mangling CDSs and credit derivatives.
> Answer to last question ... AIG was a big writer of credit derivatives.
Yes.
> It has lost big, from paying up on credit derivatives?
Nope.
> So, AIG is still in business with 500 T of credit derivatives outstanding ?
No one except them knows what they have outstanding.
> The article says that the CDOs were downgraded, and the hedge funds
> that held them unloaded them, and that many will go out of business.
Yes, because they lost all their assets. Thats what happened to Bear Stearns.
> But it seems to me that the hedge funds were playing to win when the CDO failed,
Hedge funds were always about a hell of a lot more than JUST CDOs.
> and hence the downgrading of the CDOs should have benefited the hedge funds.
Nope, because of the loss of value that downgrading produced.
Plenty of them were marked to market with a value of zero, because
they became quite literally worthless in the sense that no one would
offer you a cent for them, because it wasnt clear what the risk was
once it became clear that they had got AAA+ ratings that they didnt
even come close to qualifying for.
> I.e. that is, CDOs being downgraded and failing should have
> increased the value of the credit deriatives held by the hedge funds.
Nope, because marking them to market with a zero value is a
completely separate matter to the CDO becoming worthless in
the sense that too many of the bundled mortgages had actually
defaulted, and so would see the credit derivative exercisable.
> Why did downgrading the CDO hurt the hedge funds.
Because the mark to market system rendered them worthless.
> Have the credit derivative writers failed
Nope.
> and the credit derivatives become worthless?
Nope.
> Lehman failed, but AIG is still going and Bear Sterns was bought,
For peanuts. It did basically fail.
> and so the credit derivatives they wrote are not defunct?
Nope.
> How many T of credit derivatives written by Lehman became worthless?
No one knows in a formal sense.
Saggy
monkeys ! Too bad the economy is going down the crapper.
On Jan 31, 11:54 pm, "Rod Speed" <rod.speed....@gmail.com> wrote:
> Saggy wrote:
> > Great article, but, what does it mean?
>
> Not a lot.
>
> > The article claims that hedge funds are somehow like bucket shops,
> > but this is not clear to me. What is the correspondence ?
>
> He's essentially saying that the average investor cant possibly win
> against the immense market power that the bucket shop or hedge
> fund has by reason of their vastly large holding in the stock the
> individual is buying etc.
>
> > The article says that the credit derivatives (credit default swaps I assume)
>
> Bad assumption.http://en.wikipedia.org/wiki/Credit_derivativeshttp://en.wikipedia.org/wiki/Credit_default_swap
>
> A CDS is just one type of credit derivative.
>
A CDS is a credit derivative, and I don't see him mentioning any other
types, so, I assume he's talking about CDSs written on MBSs. If not,
what is he talking about?
Also, from wiki ... Credit default swaps are by far the most widely
traded credit derivative product. Also according to wiki, the amount
outstanding is 29 T (not 600 T)
CDSs can be written on different types of obligations to pay, MBSs are
just one case. What are CDSs written on, and how much (estimated of
course for each type)?
Why the big discrepancy in the article # 600 T for credit derivatives
and the wiki # 29 T for CDSs (which are by far the most widely
traded)?
> > were the source of the problem,
>
> He's just plain wrong.
>
> > and that they pay off when the CDOs fail.
>
> Credit derivatives arent just on CDOs.
>
> > How do the CDO's fail?
>
> When enough of the mortgages default etc.
>
> > Go bankrupt?
>
> Nope, only legal entitys can do that.
>
> > How many have failed?
>
> Very few in the sense that the credit derivative is excerisable.
>
Yes, wiki agrees. So you're saying that the downgrading of the CDOs
created the collapse. That seems clear. But the credit derivatives
didn't play a big part .... yet .... !!!!! Wow, the best is yet to
come.
> > The article claims that the hedge funds made money from
> > the credit derivatives when the CDOs failed. Is that correct?
>
> Not in the sense that there was much money involved in those failures.
>
> > Who were the credit default swap writers that had to pay up ?
>
> CDSs aint the same thing as a credit derivative.
>
The article says that the hedge funds made big bucks from the credit
derivatives, what credit derivatives is it talking about, and did the
hedge funds make big money when the credit derivatives paid off or by
trading them, writing them ???
Here's what the article says ....
............As insurance, they were poised to pay off fabulously when
these weak bundled securities failed. And who was waiting to collect?
Well, every gambler is looking for a sure bet. Most never find it. But
the hedge funds and their ilk did.
Hyperbole?
????? Are the credit derivatives written by Lehman defunct? Bear
Stearns?
Democracy Highlander
bread and wine. C1 is 2% more efficient at making bread than C2 and C2
is 2% more efficient as C1 at producing wine.
Case 1: C1 and C2 keep their own localized economies and trade only
surpluses and use protectionism to keep both bread and wine
productions.
Case 2: C1 and C2 implement total free-trade, C1 specialize on bread
and C2 only wine and then trade with each other. Because of
advantages, they both consume 2% more bread and wine.
Case 2 (Globalized economy) seems definitely better to case 1
(Protectionist economies).
Now, let consider a plague of locust in C1 destroying all their crop.
Case 1: C1 is left without food. They appeal to humanitarian aid from
C2 and also agree to trade most of their wine for some bread. C2 help/
trade with them and give them enough bread (1/3 of C2 production) to
survive till next year.
Case 2: Both C1 and C2 are left without food. If they are the only
major players into the global economy of liberty loving countries. Now
it is a good time for their enemies C3 and C4 to attack and subdue
them both. Bye bye freedom, we will always remember you.
.................................
For many many years, from when the systems started to become complex,
the engineers knew that as a complex a system, as easy can fail. In
order to handle the ever growing complexity, engineers started to
develop complex systems in independent modules, able to be designed
and operate independent of each other, and they just communicate
using a small and well managed interface. That way, if a sub-system
fail it crash does not affect other sub-systems. The supervisor module
will detect the failure of a sub-system and try to restart/reboot it.
This modularization does indeed introduce a lot of inefficiencies. The
computer used for flight control can also handle communications very
well, but it never will. The reason is that the engineers want to
prevent a potential crash of the comm module to make the plane
unresponsive to pilot commands. If the comm module crash, the co-pilot
just turn it off-on without the risk that the pilot lose the control.
This safety feature however, imply multiple computers, with their own
power sources, cases, heat sinks etc. It is less efficient but is able
to handle failures. It goes so far as to have duplicate subsystems for
the most critical components like flight computers.
One can only wonder how an economist proponent of globalization will
propose to consolidate all the computers of a plane into a powerful PC
running an off the shelve Microsoft Windows Vista - Home Edition for
"efficiency" purpose :-) Oppose any "useless redundancy" because this
is not what the market wants and even globalize all the electric
circuits on the plane on a single big fuse, instead of that "wasteful"
fuse panel with independent circuits.
If the financial system would not been as tightly integrated, and
globalized and so consolidated in huge large financial institutions
(too big to fail) the sub-prime problems in US would been visible much
much sooner. A number of small banks fail, our friends from England,
Germany, Canada, Australia or yes, even France would been able to help
and nothing bad happen.
Unfortunate, instead of having a large number of small local/national
banks we allowed a wave of huge consolidation of the financial power
in institutions "too big to fail". We gave them the right to globalize
at their will and by this to induce unhealthy inter-connects into all
our friends financial systems (more circuits on a single fuse).
By this, when the short-circuit happen in US, there was available
enough raw power to
keep the wire running hotter and hotter until it started a fire
everywhere in the system.
.........................................................
Looking at this economic collapse we shall start to think. Efficiency
is not always the only purpose:
Yes, we can increase the production with 2% but we risk to loose our
freedom for that. Do we really want to pay that price price ?
We can reduce at half the weight of the avionics, and that will
increase the fuel efficiency with 1% for every plane. But for that 1%
increase we are going to have every one in five planes crashing and
killing everybody on board. Do we really want to pay that price
price ?
We can globalize our economy, giving free-trade rights to corporations
to do at will whatever they want without any government control and
supervision. But by doing this we will have something worst than Great
Depression, a world wide systemic collapse that have the power to be a
civilization ending event. Do we really want to pay that price
price ?
Rod Speed
> Thanks for your response. This is more fun than a barrel of monkeys !
> Too bad the economy is going down the crapper.
Yeah, it is causing a few problems.
>>> Great article, but, what does it mean?
>> Not a lot.
>>> The article claims that hedge funds are somehow like bucket shops,
>>> but this is not clear to me. What is the correspondence ?
>> He's essentially saying that the average investor cant possibly win
>> against the immense market power that the bucket shop or hedge
>> fund has by reason of their vastly large holding in the stock the
>> individual is buying etc.
>>> The article says that the credit derivatives (credit default swaps I assume)
>> Bad assumption.
>> http://en.wikipedia.org/wiki/Credit_derivatives
>> http://en.wikipedia.org/wiki/Credit_default_swap
>> A CDS is just one type of credit derivative.
> A CDS is a credit derivative, and I don't see him mentioning any
> other types, so, I assume he's talking about CDSs written on MBSs.
Bad assumption.
> If not, what is he talking about?
Credit derivatives in general.
> Also, from wiki ... Credit default swaps are by far the most widely traded credit derivative product.
Yes.
> Also according to wiki, the amount outstanding is 29 T (not 600 T)
Yes, thats a rather more plausible number, but still an
estimate since they dont have to be publicly documented.
> CDSs can be written on different types of obligations to
> pay, MBSs are just one case. What are CDSs written
> on, and how much (estimated of course for each type)?
I've never noticed any real list of the values, but then I havent looked for one either.
> Why the big discrepancy in the article # 600 T for credit derivatives
> and the wiki # 29 T for CDSs (which are by far the most widely traded)?
That 600T is straight from someone's arse.
>>> were the source of the problem,
>> He's just plain wrong.
>>> and that they pay off when the CDOs fail.
>> Credit derivatives arent just on CDOs.
>>> How do the CDO's fail?
>> When enough of the mortgages default etc.
>>> Go bankrupt?
>> Nope, only legal entitys can do that.
>>> How many have failed?
>> Very few in the sense that the credit derivative is excerisable.
> Yes, wiki agrees. So you're saying that the
> downgrading of the CDOs created the collapse.
Yes, essentially because no one had any real idea what they were
really worth, or even how they should be rated, and so hardly anyone
was prepared to lend any institution holding them anything, because
they had no idea what the risk of not getting that money back was.
Thats what produced the credit crunch.
> That seems clear. But the credit derivatives didn't play a big part .... yet .... !!!!!
It seems unlikely that most of the CDOs will end up failing,
essentially because they dont have that big a percentage
of the worst of the sub prime and ninja loans in them.
> Wow, the best is yet to come.
I doubt it. I doubt that the govt will allow too many of the CDOs to fail
in the sense that the credit derivatives written on them are exercisable.
I bet we see something like the S&L fiasco, with the govt
bailing the industry out, and eventually the govt making at
least some money on what they take over etc.
Its less clear how the govt plans to do that, whether they plan to
break up the CDOs to separate the steaming turds from the good
loans and just what they plan to do with the real steaming turds.
Its also not clear what happens to credit derivatives
written on CDOs that are broken up by govt etc.
Its even possible that govt will mandate that detail now that its the 'socialists' driving the bus.
>>> The article claims that the hedge funds made money from
>>> the credit derivatives when the CDOs failed. Is that correct?
>> Not in the sense that there was much money involved in those failures.
>>> Who were the credit default swap writers that had to pay up ?
>> CDSs aint the same thing as a credit derivative.
> The article says that the hedge funds made big bucks from
> the credit derivatives, what credit derivatives is it talking about,
All of them they made money on.
> and did the hedge funds make big money when the credit derivatives paid off
Nope, because few have become exercisable.
> or by trading them, writing them ???
Yes, predominantly.
> Here's what the article says ....
> ............As insurance, they were poised to pay off fabulously when
> these weak bundled securities failed. And who was waiting to collect?
> Well, every gambler is looking for a sure bet. Most never find it. But
> the hedge funds and their ilk did.
> Hyperbole?
Yep. Many of the hedge funds went bust very spectacularly indeed.
Thats essentially what happened to Bear Stearns.
>>> The article says that 600 T of credit derivatives are outstanding.
>>> Is this accurate?
>> No one knows.
>>> How is the number known?
>> It isnt, it can never be more than an estimate, because they
>> dont have to be documented in a publicly available form.
>>> This I assume is the face value of the insurance policies,
>> Bad assumption.
>>> what are the premiums that are being paid?
>> Any derivative has a cost.
>> Yes.
>> Nope.
>> Nope.
>> Nope.
>> Nope.
Nope.
http://en.wikipedia.org/wiki/Lehman_Brothers
> Bear Stearns?
Nope, since JP Morgan Chase bought them.
zzbunker
But, that inefficieny isn't always so bad. Since it's also why that
the actual
non-braindead engineers also cut-off communications with many
buisness people,
like the New York-Tower-of-Bullshit G.M and G.E. "Efficiency
Experts" ENITRELY
And started working on Gas Turbine Engines, Autonomous Vehicles,
Biodiesel,
Neo Wind Energy, Digital-Terrain Mapping, GPS, Drones, Cruise
Missiles,
Pv Cell Energy, Microcomputers, RISC Processors, C++ debugging,
Parallel Processors,
Cell Phones, Holographic Memory, HDTV, CD+rw, CD-rom, CD-ram DVD-
tw, DVD-rom,
DVD-ram, Optical Computers, non-Chrysler Mufflers, non-Ford
Robots, neo-D Cell Batteries,
neo-Banking, neo-Printers, and neo-Publishing.
jos boersema
I agree wholeheartedly (have been saying the same thing for a long
time): we need modularity, because that becomes shock-proof. In terms
of economics that means inefficiency, or maybe not: the disasters that
increase their damage effects because of interdependence must be counted
as a decrease in economic efficiency.
Economic wealth output is also not the only factor to considder:
economic interdependence running at high/vulnerable "wealth efficiency"
means a serious loss of sovereignty for all countries.
As a practical rule it is probably best if each country:
- has its own currency
- has its own sufficient food/water supply or could start that up quickly
- at least has some industry in all important areas
The politicians are also mudying the water of the economic debate: "free
trade" is now a word denoting free-price setting as much as it is about
no border tarriffs/barriers. That is wrong: borders keep a country
sovereign, modular, insulated to a degree. Within the country there
should exist a free price setting trade system. Border tarriffs are a
great tool to keep the economic filth/instability out of an economy, for
example: if we know that certain cars are build with effectively slave
labor (a serious imbalance/disaster in the production country, which
will potentially correct itself during an upcoming civil war or other
such calamity), then slapping a tax on those cars equal to what they
would cost under fair labor (might triple the cost of such cars)
insulates the home economy from the outside world disasters, it does
not promote the sales of the slave build cars (humanitarian profit),
and once that country goes through a correction the home country
remains relatively unaffected because the market for slave build cars
was kept small, thus allowing honestly build cars to dominate that
market already. In the ultimate case much or everything could be
internally fabricated for the home market, in which case a country
is 100% protected from foreign problems (that is probably not an
optimum position either).
The best design is IMHO: many many sovereign countries, none too large.
Even when some go through great corruption periods or whatever, there
would be so many other countries to shift trade to that most other
countries wouldn't even feel it.
The modularity is very important for political efficiency: to find out
what policies work and what don't. The more countries, the more
different policies are being implemented concurrently. Example: if the
USA had been 12 sovereign countries, they would only have had one Bush
in one of them, only of of these countries at one time would go through
a financial crash. Seeing that, the other countries who are into
Government lending practices and wars or whatnot, seeing the crash might
get out of such choices. In case the whole world is one nation political
efficiency drops to near zero.
|Economic efficiency ^
| *
| * *
| * *
|* *
0--------------------------------Interdependence>
|> cost of disaster greater
|Political efficiency ^
| *
| * *
|* *
|* *
0---------------------------------Interdependence>
|> loss of diversity & sovereignty reduces political experimentation
^^Simplest forms of interdependence lost: knowledge from other countries.
Hence the optimum level of interdependence / trade barriers lies
somewhere less inter-dependent then pure economic efficiency taking
account of cost of disasters, to allow for political efficiency. Or
rather: for the optimum level of inter-dependence you also have to
take into account the importance of political efficiency, since
political efficiency is extremely important for how well an economy
functions.
An example is easily found: say one country invents a better economic
model. Other countries could benefit from that: political efficiency
transfers into economic efficiency. In a totally inter-dependent "one
nation" world no country can invent a better economic system since
they would be tied hand & foot to what exists, and may have to contend
with the overwhelming economic power of the big companies & banks who
don't have general economic efficiency as their goal, but maximization
of exploitation of the Earth & humanity for their own benefits and
position in the competitive market.
Trade barriers should remain in a serious manner, and remain the
toy for day to day politics. The great empires USA, India, China,
EU must be cut up into quite a few new fully sovereign "modules."
Each must have its own currency (or it is not sovereign), and should
strife to be an independend "universe" for itself, or at least be
able to survive fully independent (food/water/shelter). I think this
also makes for a more interesting world. Foreign trade becomes a
carefully done bonus for marginal economic efficiency, rather then
pretty much the back-bone of many national economies. Having complete
set of industries in all countries breeds employement & general
competence.