Wednesday, September 17, 2008

I'm Lucky But One Gets To Wondering

I've got a good job, and it's not in the banking industry, but I'm getting hit hard. One has to wonder...
"This has been the worst financial crisis since the Great Depression. There is no question about it," said Mark Gertler, a New York University economist who worked with fellow academic Ben Bernanke, now the Federal Reserve chairman, to explain how financial turmoil can infect the overall economy.
...if we weren't spending billions of dollars a week on a war we really didn't need in Iraq, perhaps we may not be in this bind?

1 comment:

Anonymous said...

CDSs, life insurance sold on the premise that no one dies, no reserves are required, and premiums are profit!

'Credit Default Swaps' are insurance policies on repayment of debt issued by unregulated insurance companies. (Regulated insurance companies are required to have capital.) The financial services industry lobbied strongly in the late 1990s for no regulation of CDSs and they won. They're now reaping the blowback.

You borrow $1m from me. To insure that I get my $1m back, I buy a CDS from AnyOneCo for $10k. You default. I try to collect from AnyOneCo but AnyOneCo has no money and never did; but AnyOneCo laid off their risk (for $2k) on AnyTwoCo (who also has no money); etc..

The whole $62T of CDSs could all default. The damage to the real economy can't exceed the amount of the losses on the original loans. It will take some time for this to unwind. A lot of people in financial services will lose their jobs. But there was never any money there to lose, the 'money' was all notational, the face value of debt insurance contracts.

Cheap money is at the center of the problem

For me to profitably lend money at 6 percent I must lend in an environment where I suffer no defaults. This 'zero-default' requirement brings forth insurance against the prospect of defaults, CDSs. When the companies issuing CDSs are unregulated (they have no money), bad things happen when the initial borrower defaults.

Dear money, and every lender managing their own default risk, is the answer. I can lend at 18-35 percent and if a few borrowers default I still net 6 percent on my money.

Dear money is also good for savers. When money is dear, it pays to save and become your own lender.