By now, most homeowners know that their monthly mortgage payment might go to a pension fund in another state or a bank in another country, thanks to the bundling of home loans into securities.
What they might not realize is that these mortgage-backed securities are only the beginning of the slicing and dicing that has brought the world’s financial markets to the abyss. Companies that purchase these securities also buy something called “credit default swaps,” a product cooked up by Wall Street in an effort to insure against losses.
The explosive growth of these credit derivatives, as they are known, is a tale of hubris, folly and blind devotion to markets. Derivatives now back more than $60 trillion in credit ”” that’s 20 times the annual budget of the United States making them kind of like cluster bombs spread throughout the global economy.
The fact that there is a $60 trillion upside-down pyramid riding on US home values shows that a lot of people with a lot of liquidity made some stupid assumptions–or not so stupid. So long as you weren’t the one left standing when the music stopped, you made out like a bandit.
In any event, it is obvious now that US banks are hopelessly over-leveraged on assets that are not worth nearly what the quants assumed they were. All the Fed’s and the Treasury’s efforts to keep economic reality from asserting itself will only prolong the agony. No government in history has ever won a battle with falling prices.
Well, house prices need to fall in real (uninflated) dollar terms. They don’t need to actually fall as much if there’s high inflation, which the 700 B bailout will ensure…
#2. very true about the bailouts causing high inflation. Hopefully, this debacle will convince people that the Federal Reserve needs to be abolished and the U.S. returned to a hard currency.
“The Federal Reserve needs to be abolished and the U.S. returned to a hard currency” —TGS [#3]
How would that help? The United States had similar debacles aplenty when it was on the gold standard and had no central bank. Those debacles included the Panics of 1837, 1857, 1873, 1890, 1893, 1896, and 1907.
How has the Federal Reserve and fiat money helped? The dollar has lost over 90% of its value since 1913 and the boom-bust cycle continues ad infinitum, with global, systemic effects. The response to the Panics was to cartelize unsound banking, not to insist on sound banking.
“The response to the Panics was to cartelize unsound banking, not to insist on sound banking”
How is banking cartelized today?
How does the government “insist on unsound banking”?
1. The Federal Reserve
2. Deposit insurance and low reserve requirements
I suppose I could add “printing up money to buy overvalued assets” as well.
1. CARTEL: A “cartel” is “a combination of independent commercial or industrial enterprises designed to limit competition or fix prices.”
http://www.merriam-webster.com/dictionary/cartel
The Federal Reserve is a central bank, a provider of payment-related services, and one of four federal bank regulatory agencies. In none of those capacities does it act like a cartel to “limit competition or fix prices.”
If you disagree, please give specific examples of how the Federal Reserve has fixed prices within the past decade.
From 1933 until the early 1980s, Congress required the Fed to set the maximum interest rate banks could pay on deposits. But those days are long gone.
2. RESERVE REQUIREMENTS: In what sense are reserve requirements too low? What would be an adequate reserve requirement?