The item (‘Regulation Threat to CME Dominance’) on the front page of the ‘Companies and Markets’ Section of the January 27 Financial Times could easily have been missed if one didn’t scan the page carefully. Basically, it noted the increasing aberrations to do with “automatic trading”- especially “flash orders” - which now dominate 70% of equities and derivatives transactions,
The trades are instantly implemented as computers (on trading floors) have been matched to the peculiar structure of the very derivatives that drive most equity trades, both purchases and sales. In one case, CME Group – associated with the Chicago Futures Exchange is to investigate a trader who – within seconds- made both 200,000 buys and sales on a “mini” futures exchange subsidiary. This has raised eyebrows, especially as it means large trades could easily be manipulated if no watchman is at the gate.
The truth is with automatic trading there is no “gate” or gatekeeper”. By the time most of these automated flash transactions are completed (in about two microseconds) a massive gain or loss can be effected – with the latter often coming at the expense of ordinary Joes and Janes still operating by telephone: calling in their action to their broker, or mutual fund company. The sad fact is that in nearly all such transactions these folks will be a day late and a literal dollar short.
What we need, pronto, is the regulation of flash trades as part and parcel of any broader financial regulation reform – which is much more desperately needed than just imposing a 0.15% fee on banks (which I understand, comes under an obscure loophole that they can use to claw back the money under a tax write-off).
As I stated in several earlier posts, this reform needs to encompass limits on derivatives, especially credit derivatives, and any other arcane instruments or entities designed by the "quants" subsequent to the 2008 credit meltdown. As for credit default swaps themselves, I believe the optimal control is to place them in separate exchanges and not mix them up with normal derivative-bearing securities. (Especially as they represent "bets" on trading conduct and outcomes, not merely traditional securities)
Those of us sincerely worried about the formation of a new asset bubble, because of the flood of cheap money engendered by the Fed’s ongoing low interest rates, really hope Mr. Obama will take this issue on tonight in his State of the Union address. His most urgent populist maneuver is, indeed, to take on the epicenter of capitalism run amuck - in Wall Street – but to do so in an intelligent and direct way, not by appeal to hocus pocus or diversions.
Showing posts with label CDS. Show all posts
Showing posts with label CDS. Show all posts
Wednesday, January 27, 2010
Thursday, December 3, 2009
PLEASE! No more asset bubbles!
It is time nations take the bull by the horns and set up a system to prevent the malignant proliferation of yet more asset bubbles, leading to more economic collapses such as occurred last year. The latest news is not one to bouy hopes, as articulated in the article, 'Concerns Grow of Overheated Debt Market' in The Financial Times today.
As noted in the piece, three asset-metastasizing nasties are now breeding. These include: cov lites, pik toggle notes, and dividend recap exercises. To varying degrees, each of these critters played a role in inflating the assets during the credit bubble years which got pricked about a year ago - leaving people with deflated 401ks, etc. All of the techniques were used on Wall Street because in their various ways, they enticed companies and consumers into taking on crippling levels of debt. No surprise they have returned to the Street - ever wonder how the DOW is getting juiced toward 11,000?
Let's look at each in turn. In the cov lites, short for covenant light, borrowers are granted credit with few if any restrictions. Meanwhile, Pik toggle transactions allow debt to be "repaid" with MORE debt using a device called "payment in-kind notes". Then, in dividend recaps, businesses take on additional debt to pay dividends to share holders. Anything wrong with these pictures?
Why is it that these debt-tilted instruments are being seen again? The reason, primary, is that yields in normal instruments, facilities are so low that people are trying to jack up returns with risk- be- damned gambits. Blame the Federal Reserve for this, and their abnormally low interest rates, next to zero. If the Fed had the gumption to even raise the rates to just 0.50 to 0.75%, it would stave off a lot of this asset bubble building bunkum which puts us all at risk. At the same time, of course, the stock market and DOW would deflate a bit, but hey - the normal investors would be able to earn a little bit more in their money market accounts, funds, or bank CDs. As opposed to risking it with a ginned up stock market.
Such a move would also strengthen the dollar immediately. As a sign that dollar erosion is still having a vast effect on confidence, one need only check the most recent Gold prices - which have topped $1200 an ounce. Showing that those who can afford it trust bullion more than paper money bucks. Why do you think the sale of those gold American Eagles has been temporarily suspended?
In the minutes of the November Meeting (FT, ibid.) of the Federal Open Market Committee it was noted: "the possibility that some negative side effects might result from the maintenance of very low interest rates included the possibility of excessive risk taking."
Well, you don't say! And I wonder why that is? Maybe because many folks are tired of chasing yield in money markets and CDs?
Still, there are millions who won't be lured by the Siren call of the Wall Street gaming tables. As noted in today's Wall Street Journal ('Back to basics', p. R7), many wealth managers are now catering to people-investors who demand 'vanilla' approaches, as opposed to the glitzy, sexy but esoteric devices that spelled the end of Lehman and others. So, these financial advisors and managers are now fulfilling a need, to earn some yield but not using "nasties" that could blow up their nest eggs.
As the WSJ author of the piece observes:
"Of course, they can't tout that such ideas will yield double digit annual returns".
True, but neither can the brokers and FAs concerning STOCKS, at least over the past eleven years. Over this period, stocks, mutual funds have returned less than treasurys or CDs!
Bring on the vanilla!
Footnote:
A major impediment to improving the regulatory provenance for the OTC (over the counter) derivatives is the current contretemps between Europe and the U.S. While the U.s. wants the formation of a clearing house to process these OTC's, to reduce the counterparty risk, the Europeans do not. At least with a clearing house to process the OTCs, some closure must occur and the counterparty must provide it. As opposed to the open-ended nightmare that descended on us via the credit default swaps last year! (With nine of ten counterparties left holding empty bags).
Stay tuned!
As noted in the piece, three asset-metastasizing nasties are now breeding. These include: cov lites, pik toggle notes, and dividend recap exercises. To varying degrees, each of these critters played a role in inflating the assets during the credit bubble years which got pricked about a year ago - leaving people with deflated 401ks, etc. All of the techniques were used on Wall Street because in their various ways, they enticed companies and consumers into taking on crippling levels of debt. No surprise they have returned to the Street - ever wonder how the DOW is getting juiced toward 11,000?
Let's look at each in turn. In the cov lites, short for covenant light, borrowers are granted credit with few if any restrictions. Meanwhile, Pik toggle transactions allow debt to be "repaid" with MORE debt using a device called "payment in-kind notes". Then, in dividend recaps, businesses take on additional debt to pay dividends to share holders. Anything wrong with these pictures?
Why is it that these debt-tilted instruments are being seen again? The reason, primary, is that yields in normal instruments, facilities are so low that people are trying to jack up returns with risk- be- damned gambits. Blame the Federal Reserve for this, and their abnormally low interest rates, next to zero. If the Fed had the gumption to even raise the rates to just 0.50 to 0.75%, it would stave off a lot of this asset bubble building bunkum which puts us all at risk. At the same time, of course, the stock market and DOW would deflate a bit, but hey - the normal investors would be able to earn a little bit more in their money market accounts, funds, or bank CDs. As opposed to risking it with a ginned up stock market.
Such a move would also strengthen the dollar immediately. As a sign that dollar erosion is still having a vast effect on confidence, one need only check the most recent Gold prices - which have topped $1200 an ounce. Showing that those who can afford it trust bullion more than paper money bucks. Why do you think the sale of those gold American Eagles has been temporarily suspended?
In the minutes of the November Meeting (FT, ibid.) of the Federal Open Market Committee it was noted: "the possibility that some negative side effects might result from the maintenance of very low interest rates included the possibility of excessive risk taking."
Well, you don't say! And I wonder why that is? Maybe because many folks are tired of chasing yield in money markets and CDs?
Still, there are millions who won't be lured by the Siren call of the Wall Street gaming tables. As noted in today's Wall Street Journal ('Back to basics', p. R7), many wealth managers are now catering to people-investors who demand 'vanilla' approaches, as opposed to the glitzy, sexy but esoteric devices that spelled the end of Lehman and others. So, these financial advisors and managers are now fulfilling a need, to earn some yield but not using "nasties" that could blow up their nest eggs.
As the WSJ author of the piece observes:
"Of course, they can't tout that such ideas will yield double digit annual returns".
True, but neither can the brokers and FAs concerning STOCKS, at least over the past eleven years. Over this period, stocks, mutual funds have returned less than treasurys or CDs!
Bring on the vanilla!
Footnote:
A major impediment to improving the regulatory provenance for the OTC (over the counter) derivatives is the current contretemps between Europe and the U.S. While the U.s. wants the formation of a clearing house to process these OTC's, to reduce the counterparty risk, the Europeans do not. At least with a clearing house to process the OTCs, some closure must occur and the counterparty must provide it. As opposed to the open-ended nightmare that descended on us via the credit default swaps last year! (With nine of ten counterparties left holding empty bags).
Stay tuned!
Thursday, October 15, 2009
Is it real - or Irrational Exuberance?
The headlines in today's Wall Street J0urnal were glaring and unmistakable:
DOW At 10000 as Crisis Ebbs
In other words, we are expected to believe the last few months of "rally" are real, and the magic number is bona fide- spearheading a new onrush to wealth. But can it be believed? is it truly a marker of being out of the recession, or is it a dupe's snare?
There are a number of unsettling warning indicators that are being ignored except by a few. This negligence leads the scrutinizing genuine investor (as opposed to speculator) to believe what we are actually seeing is what former Fed Chairman Allan Greenspan once referred to as "irrational exuberance". That is, the mindless predisposition to feed and fuel another speculative bubble merely because the DOW is rising.
Let's look at some of these:
1) High unemployment
The unemployment rate remains at 9.8% and according to more serious stats, is probably closer to 15%. As I have remarked in earlier posts last year, the BLS unemployment statistic is inherently lowballed and hence flawed, because it drops non-workers off the rolls after 6 months- relabelling them as "discouraged". This simply isn't cricket, and leads to an artificiality in the numbers, much like the "consumer price index" (which excludes health care costs, fuel and food costs) does with inflation.
As I pointed some weeks ago on this blog, protracted low unemployment means that either: a) people will not be able to spend adequately to prop up consumption (which constitutes 70% of the national GDP) or b) they will have to go into debt to finance spending.
(1) means corporate profits must continue to retreat and any growth is therefore unreal- based on inflated P-E ratios and rising risk tolerance. (2) means more leveraging of the economy, which is exactly what initiated the real estate bubble.
Let's go on:
2) The dollar's value is decreasing, in inverse proportion to the rise in equities. The increased propensity to take on market risk is pushing it lower. The U.S. Dollar Index, a measure of the dollar's value against a slew of currencies fell to 75.49 on Wednesday, from 75.94 on Tuesday. This means the practical-trade in value of our currency vs. world currencies is at about 75 cents. An effective devaluation. Looking at the value of the Euro in the same timespan confirms this, as it was at $1.4919 Wednesday up from $1.4829.
What's going on? Why is the dollar value falling as the DOW goes up?
Simply put, dollars are being removed from real (productive) markets and injected into speculative or phantom money markets via the stock market. When I use the term "phantom money" I mean that the value varies almost daily based on the P-E or price to earning ratio. Because people received too little in real income, and so could not generate actual savings, they've tried to make up for it in the stock market via speculation. This is somewhat analogous to a poor schlub who barely has ten bucks to his name in discretionary weekly income, but uses it to play the lotto in the hope it will deliver actual wealth. No it won't. The odds are his real remaining money will simply be bled down.
Let's take another example: In the early 80s, the constant shrinkage of bank (pass book) interest rates, as well as CDs, forced vulnerable people to chase yield in risky vehicles for which they were never prepared. These items drove millions of average Janes and Joes into the 'market' who otherwise may never have ventured there. Just as, before 1929, millions of ordinary folk were driven into the infamous 'investment trusts' that caused them to lose everything.
The more recent (ca. pre-2000) piling into the market with 401ks, IRAs, etc, resulted in a hitherto never-before -seen phenomenon. What mass speculation did was to drive P/E ratios to incredible overpriced magnitudes. In some cases some equities, and mutual funds, were trading at over 70 time earnings. Invest one buck and get $70 back. It was better than playing the slots in Vegas on a good day.
People actually came to believe they could reach retirement based on ginned up returns from such speculative investment rather than plain old, unsexy, slow but steady saving. They were way wrong, and learned the lesson in the 2001 post 9/11 crash, and more recently in the mortgage -bubble generated crash.
What I'm getting at here is that the inverse dollar value-equities relationship is a nasty warning sign. It is telling the investor who has more than air between the ears that he's playing with his hard earned money much like the guy who earns $150 a week and is trying to double it playing slots, or the lotto.
Meanwhile, this chasing of phantom gains by speculation in the stock market - in fact - has caused the underfunding, under-investment in the REAL economy. Not the speculative one. Thus, as money has been removed from the spending stream and injected into speculation, real corporate infrastructure - including for better (improved) plant, research, labor was removed. Are you still scratching your head wondering why, if the DOW is so big and cool, the employers and corporations still aren't hiring people?
THAT is the question you ought to be asking.
The dollar's slide is also tied directly to the lack of national savings, which though it had slightly improved during the worst of the recession, is now retreating again. Granted a 2.7% rate is better than 0.7% from 2007, but it is still less than it was in December. (3.9%)
One thing the Fed could do to address the dollar value-equity imbalance is to raise interest rates. Not much, just to 0.5% or better 0.75%. This would have multiple benefits, not least of which is to protect the dollar from further retreat. It would also help other nations, such as Canada, to continue their own path out of recession. As it is, the increase of the loonie's value vs. the U.S dollar is stalling economic growth for Canucks.
Of course, the Wall street boys will weep and gnash their teeth, and we can't have that, can we?
3) There has been no true regulatory reform put into place.
Wall Street is basically carrying on as it always has, and there is no accountability, none. This sets the stage for yet another bubble based on derelict and obscure financial instruments, which will ensnare the unwary. Lest people- common investors forget, the "insurer of insurers" AIG, failed precisely because it sold vast amounts of CDS or credit default swaps without properly covering their own positions. Trillions of these yet remain on banks' books as "toxic waste".
What has to be taken away from the AIG, Lehman experience is that these damned CDS are totally toxic devices which need to be strictly regulated. (My own take is that they need to be outright outlawed, but no one will ever permit that to be done, too much common sense. And besides, there's a sucker born every minute who might buy them).
At the very least, only those who actually own the underlying REAL bonds ought to be able to purchase them. You can't do it on other people's money. If a true government regulation was passed simply requiring this, the result would be to tame a horrific financially destructive force and also cut the overblown price of CDS.
But nothing has been done!
Hence, the potential to craft new, more devastating ones persists, and any in the stock market - or even owning a bond fund or mutual fund, need to be very aware of that.
My personal opinion is that I would not set one investing "foot" in the market until every last CDS is cleaned out, OR (better) strict federal legislation is passed to control their creation.
Now, it is true many forlorn 401k owners have lost over 50% because of the 2008 meltdown. And they are impatient to get their hard earned money back. But they really ought to have understood from the get go that the 401k was never originally designed as a speculative-investing plan but as a SAVING plan. The original 401k was designed to allow workers to put money away each week, not to gamble it on stocks, or mutual funds (see also: The Great 401k Hoax, by William Wolman and Anne Colamosca)
Another point you need to know: if a share of anything goes down by 20%, it requires an advance of 25% to get back just to the breakeven point. If the value of a share drops 40 percent (as has occurred with some recent mutual fund hits since last year), you need a 66.7 % advance to break even. If the share drops 50% - as already noted- a 100% gain must be registered to return to ‘break-even’ (i.e. you’re not losing more than what you already paid).
Most realistic prognoses for most stocks and especially mutual funds (such as appear in 401ks) disclose at most only a 3-4% gain or return per year. If you experienced a 40% drop and are trying to earn it back, this means at least 16 2/3 years at 4% per annum. If you were 60 when your mutual funds blew out a 40% drop hole, it means you won't make it back to where you were (before the fall) until you are 76-plus.
But things get worse. In the above Pollyanna scenario no one is reckoning in taxes, or fund fees. Assuming 1% for each of those, means your after tax, after fees collected real return is only 2% per year. That means you will need to wait 33 1/3 years to get back to break even!
Perhaps, just perhaps, you'd have been better off with plain old saving (say in T-bonds or CDs) rather than being in the market in the first place!
DOW At 10000 as Crisis Ebbs
In other words, we are expected to believe the last few months of "rally" are real, and the magic number is bona fide- spearheading a new onrush to wealth. But can it be believed? is it truly a marker of being out of the recession, or is it a dupe's snare?
There are a number of unsettling warning indicators that are being ignored except by a few. This negligence leads the scrutinizing genuine investor (as opposed to speculator) to believe what we are actually seeing is what former Fed Chairman Allan Greenspan once referred to as "irrational exuberance". That is, the mindless predisposition to feed and fuel another speculative bubble merely because the DOW is rising.
Let's look at some of these:
1) High unemployment
The unemployment rate remains at 9.8% and according to more serious stats, is probably closer to 15%. As I have remarked in earlier posts last year, the BLS unemployment statistic is inherently lowballed and hence flawed, because it drops non-workers off the rolls after 6 months- relabelling them as "discouraged". This simply isn't cricket, and leads to an artificiality in the numbers, much like the "consumer price index" (which excludes health care costs, fuel and food costs) does with inflation.
As I pointed some weeks ago on this blog, protracted low unemployment means that either: a) people will not be able to spend adequately to prop up consumption (which constitutes 70% of the national GDP) or b) they will have to go into debt to finance spending.
(1) means corporate profits must continue to retreat and any growth is therefore unreal- based on inflated P-E ratios and rising risk tolerance. (2) means more leveraging of the economy, which is exactly what initiated the real estate bubble.
Let's go on:
2) The dollar's value is decreasing, in inverse proportion to the rise in equities. The increased propensity to take on market risk is pushing it lower. The U.S. Dollar Index, a measure of the dollar's value against a slew of currencies fell to 75.49 on Wednesday, from 75.94 on Tuesday. This means the practical-trade in value of our currency vs. world currencies is at about 75 cents. An effective devaluation. Looking at the value of the Euro in the same timespan confirms this, as it was at $1.4919 Wednesday up from $1.4829.
What's going on? Why is the dollar value falling as the DOW goes up?
Simply put, dollars are being removed from real (productive) markets and injected into speculative or phantom money markets via the stock market. When I use the term "phantom money" I mean that the value varies almost daily based on the P-E or price to earning ratio. Because people received too little in real income, and so could not generate actual savings, they've tried to make up for it in the stock market via speculation. This is somewhat analogous to a poor schlub who barely has ten bucks to his name in discretionary weekly income, but uses it to play the lotto in the hope it will deliver actual wealth. No it won't. The odds are his real remaining money will simply be bled down.
Let's take another example: In the early 80s, the constant shrinkage of bank (pass book) interest rates, as well as CDs, forced vulnerable people to chase yield in risky vehicles for which they were never prepared. These items drove millions of average Janes and Joes into the 'market' who otherwise may never have ventured there. Just as, before 1929, millions of ordinary folk were driven into the infamous 'investment trusts' that caused them to lose everything.
The more recent (ca. pre-2000) piling into the market with 401ks, IRAs, etc, resulted in a hitherto never-before -seen phenomenon. What mass speculation did was to drive P/E ratios to incredible overpriced magnitudes. In some cases some equities, and mutual funds, were trading at over 70 time earnings. Invest one buck and get $70 back. It was better than playing the slots in Vegas on a good day.
People actually came to believe they could reach retirement based on ginned up returns from such speculative investment rather than plain old, unsexy, slow but steady saving. They were way wrong, and learned the lesson in the 2001 post 9/11 crash, and more recently in the mortgage -bubble generated crash.
What I'm getting at here is that the inverse dollar value-equities relationship is a nasty warning sign. It is telling the investor who has more than air between the ears that he's playing with his hard earned money much like the guy who earns $150 a week and is trying to double it playing slots, or the lotto.
Meanwhile, this chasing of phantom gains by speculation in the stock market - in fact - has caused the underfunding, under-investment in the REAL economy. Not the speculative one. Thus, as money has been removed from the spending stream and injected into speculation, real corporate infrastructure - including for better (improved) plant, research, labor was removed. Are you still scratching your head wondering why, if the DOW is so big and cool, the employers and corporations still aren't hiring people?
THAT is the question you ought to be asking.
The dollar's slide is also tied directly to the lack of national savings, which though it had slightly improved during the worst of the recession, is now retreating again. Granted a 2.7% rate is better than 0.7% from 2007, but it is still less than it was in December. (3.9%)
One thing the Fed could do to address the dollar value-equity imbalance is to raise interest rates. Not much, just to 0.5% or better 0.75%. This would have multiple benefits, not least of which is to protect the dollar from further retreat. It would also help other nations, such as Canada, to continue their own path out of recession. As it is, the increase of the loonie's value vs. the U.S dollar is stalling economic growth for Canucks.
Of course, the Wall street boys will weep and gnash their teeth, and we can't have that, can we?
3) There has been no true regulatory reform put into place.
Wall Street is basically carrying on as it always has, and there is no accountability, none. This sets the stage for yet another bubble based on derelict and obscure financial instruments, which will ensnare the unwary. Lest people- common investors forget, the "insurer of insurers" AIG, failed precisely because it sold vast amounts of CDS or credit default swaps without properly covering their own positions. Trillions of these yet remain on banks' books as "toxic waste".
What has to be taken away from the AIG, Lehman experience is that these damned CDS are totally toxic devices which need to be strictly regulated. (My own take is that they need to be outright outlawed, but no one will ever permit that to be done, too much common sense. And besides, there's a sucker born every minute who might buy them).
At the very least, only those who actually own the underlying REAL bonds ought to be able to purchase them. You can't do it on other people's money. If a true government regulation was passed simply requiring this, the result would be to tame a horrific financially destructive force and also cut the overblown price of CDS.
But nothing has been done!
Hence, the potential to craft new, more devastating ones persists, and any in the stock market - or even owning a bond fund or mutual fund, need to be very aware of that.
My personal opinion is that I would not set one investing "foot" in the market until every last CDS is cleaned out, OR (better) strict federal legislation is passed to control their creation.
Now, it is true many forlorn 401k owners have lost over 50% because of the 2008 meltdown. And they are impatient to get their hard earned money back. But they really ought to have understood from the get go that the 401k was never originally designed as a speculative-investing plan but as a SAVING plan. The original 401k was designed to allow workers to put money away each week, not to gamble it on stocks, or mutual funds (see also: The Great 401k Hoax, by William Wolman and Anne Colamosca)
Another point you need to know: if a share of anything goes down by 20%, it requires an advance of 25% to get back just to the breakeven point. If the value of a share drops 40 percent (as has occurred with some recent mutual fund hits since last year), you need a 66.7 % advance to break even. If the share drops 50% - as already noted- a 100% gain must be registered to return to ‘break-even’ (i.e. you’re not losing more than what you already paid).
Most realistic prognoses for most stocks and especially mutual funds (such as appear in 401ks) disclose at most only a 3-4% gain or return per year. If you experienced a 40% drop and are trying to earn it back, this means at least 16 2/3 years at 4% per annum. If you were 60 when your mutual funds blew out a 40% drop hole, it means you won't make it back to where you were (before the fall) until you are 76-plus.
But things get worse. In the above Pollyanna scenario no one is reckoning in taxes, or fund fees. Assuming 1% for each of those, means your after tax, after fees collected real return is only 2% per year. That means you will need to wait 33 1/3 years to get back to break even!
Perhaps, just perhaps, you'd have been better off with plain old saving (say in T-bonds or CDs) rather than being in the market in the first place!
Tuesday, September 29, 2009
Peter Thiel is Absolutely Correct!
Already barely a year from last year's financial meltdown with the DOW crashing over 700 points, we behold the exact same constellation of factors aligning for a new bubble. And with no effective restraints imposed on "the Street" we may expect their henchmen and innovators to soon trump even the credit default swaps which wrought so much havoc.
Add to this unemployment remaining at 9.7% and you have a nasty mix, indeed, which doesn't bode well. Numerous organs of high finance, from The Financial Times, to The Wall Street Journal, to FORTUNE and even investor-oriented MONEY, have already noted there is no practical basis for the rise in the DOW toward 10,000 we are seeing. After all with so many unemployed consumption is retreating and making do with less, and even big spenders are tightening their wallets or purse strings. So why are investors so caught up in this trap?
One who isn't buying it is Peter Thiel, co-founder of online payment company Paypal, who "thinks the economy is far from recovered and has bet with the bears amid the relentless rally" (Wall Street Journal, Sept. 28, page C1, 'Pessimism Exacts a Price on the Skeptics')
While other Hedge funds have experienced bonanzas in investment, Thiel's (Clarium Capital) "has seen double digit declines". (WSJ, ibid.)
Thiel is not repentant, nor should he be. As he put it (ibid.):
"The recovery is not real. Deep structural problems haven't been solved and it's unclear how we will create jobs and get the economy growing again- that's long been my thesis and it still is".
In the WSJ piece, of course, Thiel is referred to as a "contrarian" but this is misplaced. In fact, Thiel is one of the few sane folks not caught up in the syndrome of "irrational exuberance" that Alan Greenspan first coined in 1997. He is level-headed enough to see the signs and portents don't warrant a market buy in, though millions of lemmings seem to believe otherwise.
What does Thiel mean when he asserts "the recovery is not real"? First, note the clue in his reference to "deep structural problems". The core issue is illustrated in the diagram at top showing two banks with different levels or thresholds of net equity. Bank A is in much better position than Bank B by virtue of it having far less exposure to the toxic debt (actually bets on mortgage debt) known as CDS or credit default swaps.
To refresh memories, these were first clearly articulated in the fascinating (but terrifying!) FORTUNE article: 'The $55 TRILLION QUESTION' (October, 2008, p. 135). Quoted in the piece, a University econ professor (Frank Partnoy) who doubles as a Morgan Stanley derivatives salesman noted:
"The big problem is there are so many public companies- banks and corporations, and no one really knows how much exposure they have to CDS (credit default swap) contracts."
Since most CDS contracts are made "on the fly" in no formal mode, and often by word of mouth on cell phones (ibid.) no one even knows where all the $55 trillion of this toxic waste is buried. As another hedge fund operator (Chris Wolf) quoted in the article put it:
"This has become essentially the dark matter of the financial universe" - comparing it to the dark matter discovered in astrophysics.”
Finally, and most apropos, as the FORTUNE piece observed:
“you can guess how Wall Street's cowboys responded to the opportunity to make deals that: 1) can be struck in a minute, 2) require little or no cash upfront and 3) can cover anything.”
Now, the government's TARP (toxic assets relief program) was designed to eliminate the hidden CDS in all the exposed banks' ledgers, and thereby increase their aggregate equity to make mutual (interbank) and other loans feasible again. The chief fly in the ointment is that barely $100 billion has been allocated to deal with a $55 TRILLION bank black holes incepted by their purchase of these things. To make matters even worse, banks haven't even neen using the TARP money to eliminate their CDS exposure, but to bolster their own bottom lines and ledgers and enhance their individual equity.
But who can blame them? After all no "mark to market" indicators have been forthcoming, so there's no guidance on what any given credit default swap contract should be sold for. Pennies on the dollar? Ten cents? How much? Even ten cents on the dollar (which most banks certainly wouldn't accept, given the losses) means $5.5 TRILLION needed to get back to the status quo of bank equity before the meltdown.
But no one has made any decisions, so banks not only retain TARP money for their own use but are actually starting to make risky loans once more. On the bet that in the heating DOW climate they can make back money faster than under any Fed TARP deal. Thus, like it or not, CDS are still lying around like so many financial "bombs" ready to detonate again. No wonder Thiel isn't buying into the pseudo-rally!
Thiel's worry concerning the extent of job creation is also not irrelevant. Without job creation, and by the literal millions, people won't start major spending again. Since consumer purchases account for 70% of GDP in this country, it means a lower GDP is in the making and quite possibly a long term decline - ushering in the sort of long term deflation we've already seen during the 90s in Japan.
To recap that, after the Japanese market meltdown in the early 90s, and major job losses, Japanese consumers pulled in their purse strings and enhanced savings rates to well over 10-12%. This ushered in a prolonged period of zero or no spending, and deflation. Recall that in deflation prices uniformly plummet. While it sounds superficially good, what it means is that companies can't sell to make a profit, and hence must lay more people off to meet their bottom lines. The more people without jobs the less further spending, and the more layoffs ...and so the vicious cycle goes.
The key point is without consumer spending - fueled by decent paying jobs- companies can have no real growth. This was a point made by William Wolman and Anne Colamosca in The Great 401k Hoax, noting that believable returns on any financial speculative instrument (say like an equity stock) cannot exceed by more than 1% or so what the company's actual growth rate is. If a company is only experiencing 0.3% growth per annum, but its stock is selling with a retrun of 7%, watch out! It's bogus! The Price to earnings ratio (P-E ratio) is out of whack and you are looking at a bubble.
Bubbles get punctured or burst, as we've seen with the tech bubble.
Message here: Pay attention to Pete Thiel's reticence to buy into this market.
And: Caveat emptor!
Tuesday, April 14, 2009
Responding to Libertarian Dreck
In 'Port-of-Call' - a subsidiary Newsletter (March issue) of Intertel, the top 1% IQ society, I had published an article entitled 'The Tattered Illusions of Knowledge', examining in depth the basis for what are called "toxic assets". I was specifically addressing one Libertarian's claim that there was no such thing and that the term "toxic assets" amounted to a travesty of language.
My original article and the Editor's response can be found here:
http://www.hevanet.com/kort/2009/stahl4.html
The Editor, Kort Patterson, also a hardcore Libertarian, totally missed the boat in his remarks - but never published my reply to his off-base criticisms. I presume because he didn't wish to carry on the debate further. Not wishing to let a good response go to waste, I therefore provide it below in its entirety:
As usual, Editor Kort amuses me with his rejoinder to my recent article (‘The Tattered Illusions of Knowledge’, March) and his claims that I have evinced little demonstration that I know what Libertarianism is about. Well, Kort, I do – but to have put all that into perspective would have required about doubling the article.
But let me stick to the basics here: I regard Libertarianism (after its main progenitor, Ayn Rand) as little more than an economic creed. Roughly the political-economic equivalent to creationism.
Before I go on to Libertarianism proper I want to demolish a few of the Editor’s early claims made to do with regulation, deregulation and “free markets”.
Kort avers (page 7): “there hasn’t been any meaningful deregulation of the American economy in the last half century”
Evidently he conveniently forgets (or perhaps doesn’t know – since we are on the topic of illusions of knowledge) that massive deregulation was ushered in under the Reagan administration, from the Bank Holding Act(1984) to rescinding “Regulation Q” – for which, as G.P. Brockway notes (‘The End of Economic Man’, pp. 156-57) state usury laws were suspended and banks were allowed to sell money market funds. There was also massive relaxation of restrictions on branch banks and – by 1984, “the New Deal reforms were in a shambles”. (Brockway, ibid.)
Brockway further points out (p. 157):
“Competition is by no means a universal good and in the case of banking it is almost a universal disaster. Ordinary businesses compete with each other more at the selling end than at the supply end. The competition at the selling end forces them to exert downward pressure on the prices they pay for supplies. In the case of banking, the shape of competition is significantly different – because its supply (money) is different.”
As Brockway goes on to note, the core competition in banking is for deposits, and this means banks try to out-do each other in interest rates offered. The dealie here is you don’t want the interest rate offered to Joe or Jane Public to be anywhere near the “spread” or interbank rate.
As he observes (ibid.)
“Competition forces banks to pay higher and higher interest rates and to offer more and more expensive services. As their costs of funds increases, so also rates charged borrowers must increase.”
Of course, Kort ignores or forgets the most egregious deregulation of them all, which paved the way for CDS (credit default swaps) to multiply in the first place: the repeal of the Glass –Steagall depression era law that prohibited mixing investment banking with commercial banking.
This leads into Kort’s next charge that the selling and dispensing of these (CDS) derivatives was simple “fraud”. No, it wasn’t – once the Glass-Steagall Act was repealed (unless one interjects the assignment of ‘AAA’ bond ratings as I noted in my article) all such inventions were allowed. The cruel fact and irony of the matter was that Glass-Steagall's revocation ok’d all activities that would be common to an investment bank and that included the creation of novel instruments to enhance yields or returns.
The tragedy is that Glass-Steagall’s repeal enabled the contamination to spread to commercial banking as well. And, as I noted, they are now holding $55 trillion of these toxic assets.
Kort may be further amazed to know that in a number of financial quarters (e.g. The Financial Times, The Economist) clarion calls have been made NOT to outlaw CDS!! If the calls have been made not to outlaw them then clearly they are still valid and legal instruments. You do not demand entities not be outlawed if in fact they are ALREADY outlawed. Hence, their creation cannot be “fraud” and in particular cannot be “willful and intentional fraud”. (Though I do agree that the bond rating of the SIVs or structured investment vehicles – by insurance companies like AIG, most likely was!)
To reinforce this, I refer the Editor to John Dizard’s column on ‘Wealth’ in The Financial Times of Dec. 30 (page 6). Dizard observes:
“Just because we have had a global financial crash caused by a credit meltdown, accelerated by the workings of credit default swaps and their unholy offspring, doesn’t make it quite fair to condemn a whole risk management program”
Dizard instead argues for more transparent information on bond issuers, and rating agencies. As he puts it, if this is done, along with small “lot trading size” then the demand for CDS as a hedging tool will diminish. Again, the point is the existing CDS are not “fraudulent” as Kort makes them out to be, but their hidden use in SIVs and instruments is, if bond ratings do not reflect the risk.
Let’s try to understand what is happening here: the dismantling of a Depression-era law (based on the then experience of investment banks – especially in offering certain vehicles then, known as "investment trusts”) prohibited mixing investment banking and commercial banking. This is deregulation no matter how one (even a Libertarian believer) chooses to parse it.
With the Glass-Steagall regulation gone the way of the dodo, there was nothing to hold back the flood, a point reaffirmed in the FORTUNE article I cited (‘The $55 TRILLION Question', October).
Kort in another paragraph displays a gross misunderstanding of the issue and perhaps this is my fault for not making myself clearer, or expatiating at more length, in my article. He asserts the victims “did not know what they were buying”. But my point was they didn’t know what they were buying because the derivatives were buried (concealed) in the legal instruments or CDOs. (collateralized debt obligations) comprising the quite legit bond funds purchased.(For the gory details on this I recommend Kort and others interested get hold of The Financial Times from Monday, December 17, 2008, wherein they will find – on page 8- the Analysis, ‘Out of the Shadows: How Banking’s Hidden System Broke Down’)
In the same way, I am 100% certain that neither Kort nor any of his Libertarian friends know the extent to which they own untold $$$$ of derivatives (all unregulated by the SEC) in the mutual funds they currently have! These derivatives are so obscure that not even the highest ranking financial advisors are able to fully explain where and how they are integrated into a typical fund or its components. Does this lack of knowledge make Kort cease to purchase mutual funds? I doubt it. Does their lack of SEC regulation and transparency make him scream “Fraud!”? I doubt that too. Since like most other Americans’ he has been conditioned to believe that only by owning equities (usually via mutuals) will he be able to afford retirement. Never mind how the equities as mutual funds are constructed. We don’t wanna know ‘bout that!
As Kort so aptly puts it:
“Hardly a free market of VOLUNTARY transactions based on real value and accountability”
INDEED!
And, of course, inhering in this insight is the core defect of all Libertarianism: that in order to really work to any effect it requires 100% transparency in all transactions and markets. Something that is totally and ultimately a fantasy. It can never happen, nor would ever happen – even if the country were now being run by Ron Paul as President and Jacob Sullum as Veep instead of Obama-Biden whom Kort casts as “authoritarians” – one of the most astounding pieces of hyperbolic aspersion ever rendered. (He also lamely tries to disparage FDR as being the culprit who “prolonged” the Great Depression, totally oblivious to the fact that the Fed’s then deflationary interest rate policy was at the crux. I refer him to Chris Farrell’s excellent monograph: ‘Deflation’, page 103, the Chapter, ‘The Great Depression’)
Another beef I have is this notion, permeating Kort’s remarks, that a “free market” exists. It does not. More Libertarian delusions. What we have is a coercive market. In this sort of perverse artifact, corporations create demand via the gimmick of mass market advertising. They can also create artificial shortages and hence, spike higher costs (say for oil) whenever they want. Having worked in an oil company once, in the late 60s, I can first hand vouch for that. I used to hear the laughter of the honchos echoing from their 7th floor offices as I made my rounds as a geologist’s assistant.
William Wolman and Anne Colamosca in their book: The Judas Economy: The Triumph of Capital and the Betrayal of Work, Addison-Wesley, 1997, detail the coercive market in labor and the horrific costs it has imposed. Chief culprit is the usurpation of the productive economy’ by the speculative one on Wall Street. From the era of “Chainsaw” Al Dunlap companies have had to tow the Street’s line and that usually means cutting workforce to the bone to increase share value. Never mind the poor slobs laid off, in the Libertarians’ dream world they can land on their feet if resourceful enough.
Exhibit A: the de-regulation of the energy industry ca. 1997 and later. Hyped as the greatest benefit of the “free market” ever for the small, residential consumers, since now - for once - the great market would determine cost, and not "greedy local utility companies." But no one could have foreseen or predicted how the likes of Enron would manipulate the energy markets - by shutting down access, energy in one state - and re-selling it in other states at robbery rates. This energy manipulation cost the state of CA more than $4 billion over 2000-001 alone. Not to mention untold customer misery, even as Enron shylocks were caught on tape laughing about how many 'grannies' they managed to get thrown out of their homes'.So much for your great “free” markets.
Kort’s most glaring and egregious misstep is saved for later when he insists:
“the citizens of the Weimar Republic failed to understand that their crisis was the result of government inflicted corruption of the free market”.
He compounds that with an earlier canard that “the Weimar Republic suffered from aggressive interference in its economy by a socialist popular government”
The truer story, as noted by Ian Kershaw in his magnificent account of Hitler’s rise to power (‘Hitler Nemesis’) is that Weimar constituted a weak democracy which had little or no control over the most radical Rightists, especially Hitler’s NSDAP party. They would regularly beat Marxists, socialist, any leftists on the streets while holding up signs that read: “Tot dem Marxem” (Death to Marxists)
With no strong government (a kind of Libertarian ideal, no?) Weimar was hit from pillar to post by the polarizing forces unleashed between Left and Right, after World War I. As Kershaw puts it, a “political culture of violence” had taken root. A political law of the jungle dominated, since inevitably the biggest, baddest and strongest were the ones who wielded power. Who were these bullies? Not any “Socialists” (more often then not the victims along with Jews) but the NDSAP party of Hitler and crew. [1]
Kershaw (p. 328, ‘Hitler Hubris’ – the first volume of his Hitler history) notes that the Nazi leaders didn’t immediately recognize the significance of the stock market crash in the U.S. in 1929. The newspaper, Volkischer Beobachter, did not even mention Black Friday, according to Kershaw. (ibid.)
This didn’t halt the financial carnage, since before long the reverberations struck - given Germany’s dependence on American short term loans. Within weeks, as Kershaw points out, “industrial output, prices and wages began the steep drop that would reach its calamitous low point in 1932.” Coincidentally, it was on July 31, 1932 Hitler and the Nazis achieved their highest ever vote totals in the Reichstag, 13,745,800 votes or 37.4 percent.
A result of Socialist “meddling” in free markets? Hardly. Rather an inevitable result based on a canny understanding of Weimar’s inherent political instability and the exploitation of brute force and propaganda to gain total power and intimidate the actual government. (Another reason why as an unabashed “statist” I advocate powerful central power- with the instant ability to take down bullies in whatever form they may appear) Hitler nonetheless kowtowed to the capitalists and industrialists to finally gain the measure of support he needed to finally attain the Chancellorship (with the unwitting help of Paul von Hindenburg)
How happy were the capitalists and German industrialists? Kershaw again (‘Hitler Nemesis’, p. xxxiii):
“Leaders of big business, though often harboring private concerns about current difficulties and looming future problems for the economy, for their part were grateful to Hitler for the destruction of the left-wing parties and trade unions. They were again ‘masters in the house’ in their dealings with their work force”
Well, looks like a Libertarian capitalist’s wet dream to me! And how exactly did the assorted industries of high capital fare under der Fuhrer? Well, boffo times were afoot except for one little segment. Now, let us hear from Clive Ponting (‘Armageddon: The Reality Behind the Distortions, Myths, Lies and Illusions of World War II', p. 333):
“The only major purge was in the newspaper industry “
Of course, this is the industry charged with reporting the truth to the people. I don’t think it needs to be added that the journalists were also among the first to be dispatched to the concentration camps!
Let’s now move on to Libertarianism itself. Truth is there are so many assorted Libertarian voices of the past and present, one never knows who speaks for most current day followers. One can perhaps look at Ayn Rand, in her treatise ‘The Virtue of Selfishness’, but I’ve had freethinkers Libertarians at cocktail parties tell me in no certain terms I should not use her as the standard for their credos. Rand herself once insisted she was “not a Libertarian”. So who else?
Well, how about Charles Murray writes in What it means to be a Libertarian (p. 6):
“It is wrong for me to use force against you, because it violates your right to control of your person....I may have the purest motive in the world. I may even have the best idea in the world. But even these give me no right to make you do something just because I think it's a good idea. This truth translates into the first libertarian principle of governance: In a free society individuals may not initiate the use of force against any other individual or group”
Of course, this is also undoubtedly where the pet Libertarian canard that “taxes = theft’ comes from. But look at it objectively (not to be confused with ‘Objectivism’) this is arrant twaddle and illogical to boot.
I mean “libertarian principle of governance”! This is an oxymoron! Governance presumes and demands the non-passive act of governing, which means someone is actively setting standards of expected action, and also providing the means to uphold them. Else, what’s the point? It’s all an exercise in mental masturbation. In other words, unless someone (coercively) enforces governance, it will be meaningless. Now, maybe there IS a docile libertarian principle of “governing suggestion”- but this in no way is the same as “governance”!
Anti-statism is a central tenet of libertarianism, but it rests on no foundations, other than the so-called libertarian principles babbled by Murray and others. For example, Frank Chodorov, quoted by David Boaz of CATO Inst. in ‘Libertarianism: A Primer’, goes so far as to write:
“Society is a collective concept and nothing else; it is a convenience for designating a number of people... The concept of Society as a metaphysical concept falls flat when we observe that Society disappears when the component parts disperse”
Boaz himself joins in on what the “individual” means:
“For libertarians, the basic unit of social analysis is the individual.... Individuals are, in all cases, the source and foundation of creativity, activity, and society. Only individuals can think, love, pursue projects, act. Groups don’t have plans or intentions”
But, as Prof. Ernest Partridge puts it in his blog piece on ‘Liberals and Libertarians’ cited in my earlier article:
“Now consider the implications of this denial of the "independent existence" of "the public" and "society." If there is no "public," then there are no "public goods" and there is no "public interest." If there is no "society," then there is no "social harm," or "social injustice" or "social (and public) responsibility." It then follows that government has no role in mitigating "social injustice" or promoting "the public interest," since these terms are fundamentally meaningless. Poverty and racial discrimination, for example, are individual problems requiring individual solutions”.
I can assure Kort and his brethren that if Boaz’ concept held sway and government force was not used in Alabama in Sept. 1963 (JFK nationalizing the Alabama National Guard to enforce school integration) we would still be a segregated nation, with blacks sitting in the back of the bus, ‘colored’ water coolers and restrooms, and the rest. Only someone totally divorced from reality would claim individual African-Americans could have obtained their civil rights with mere individual effort and no government input.
Meanwhile, The Libertarian Party Principles state:
“We hold that all individuals have the right to exercise sole dominion over their own lives, and have the right to live in whatever manner they choose, so long as they do not forcibly interfere with the equal right of others to live in whatever manner they choose.”
Again, more inherently contradictory twaddle and piffle. Interference with the lives of others is permitted, so long as it’s not “forcible interference”. Anti-coercion libertarians do not simply oppose coercion they also claim to legitimately define it. Their definition excludes much that others would see as coercion. To me, the TABOR law in Colorado, because it continuously and aggressively scales back tax support for the public domain (based on the past year’s population and growth) is coercion and very vicious besides. Right now, thousands of disabled people across the state stand to lose their services thanks to TABOR and controls like it. All with the best intentions of course, that we not “take by force” those hard-earned gains of the filthy rich bastards ensconced in one of several of their 45.000 square foot mansions in Aspen!
As one critic has put it (to do with Libertarians’ convoluted principles):
“Libertarians make exceptions for defense of property and prosecution of fraud, and call them ‘retaliatory force’ But retaliation can be the initiation of force: I don't need force to commit theft or fraud. This is a bit of rhetorical sleight of hand that libbies like to play so that they can pretend they are different from government”.
Libertarianism clearly posits initiation of force for what it identifies as its minions interests and calls it righteous retaliation, and uses the big lie technique to define everything else as “evil initiation of force". (As they would certainly call JFK’s nationalization of the AL guard in ’63 to force school integration) They support the initial force that has already taken place in the formation of the system of property (e.g. the seizure of Native American lands and violation of umpteen treaties), and wish to continue to use force to perpetuate it and make it more rigid. It is this inchoate ethics that translates into the system’s weakness and exposes Libertarians as true hypocrites – just maybe a slight cut under the fundagelicals.
The long and short of it is every belief system has its evangelistic “scriptures”, designed to help proselytize the unwashed masses to their cause. The Campus Crusade for Christ uses Josh McDowell’s ‘Evidence That Demands A Verdict’, Scientology uses Ron Hubbard’s ‘Dianetics’, and Libertarians use ‘Libertarianism in One Lesson"’ (I am also cracking up just writing the words)
In the absence of counterargument all these tracts are semi-convincing. However, they can all be easily rebutted because of their weak, exposed flanks: the many exceptions that must be omitted in order for their so-called principles and dogmas to be convincing.
I warrant Libertarianism and its fanciful world of minimal force might work, in a fantasy world-universe where all citizens are equally educated and have equal access to facts and information, and equal opportunities to advance their social-economic station. But that is emphatically not the world we inhabit, whether Kort concedes it or not. This is why Libertarianism will remain the province of the very few, though it is disturbing to behold all the inroads it’s made into the high IQ societies like Mensa and Intertel lately. To read some of the letters or articles is almost like witnessing a collective mind-virus unleashed, and by people whose “bible” is ‘Atlas Shrugged’.
Thankfully there are still many of us who don’t buy this bunkum, no matter who tries to peddle it. Call us proud “statists” if you will, but we will continue to advocate expanding government so that it serves all citizens – not merely the corporations, the rich, and not so rich, or any who can afford the luxury of Libertarian codswallop.
Finally, to anyone out there whose mind hasn’t been infected by the Libertarian mind virus, I commend Paul Kurtz’s excellent Editorial (‘Overcoming the Global Economic Tsunami’) in the February-March issue of ‘Free Inquiry’ magazine, page 4. Kurtz has it exactly right in his proposals, especially when he avers:
“Effective regulation must be reintroduced to protect the public interest”.
[1] It is a somewhat tragic fact that too many Americans, full of naivete and very little historical or political comprehension, mistakenly believe the “National Socialist Party” (NSDAP) of Hitler were valid Socialists. Nothing could be further from the truth! They were out and out FASCISTS who detested Socialists, as well as their kin, the Marxists. Amazing how language misuse can pervert the careless brain!
My original article and the Editor's response can be found here:
http://www.hevanet.com/kort/2009/stahl4.html
The Editor, Kort Patterson, also a hardcore Libertarian, totally missed the boat in his remarks - but never published my reply to his off-base criticisms. I presume because he didn't wish to carry on the debate further. Not wishing to let a good response go to waste, I therefore provide it below in its entirety:
As usual, Editor Kort amuses me with his rejoinder to my recent article (‘The Tattered Illusions of Knowledge’, March) and his claims that I have evinced little demonstration that I know what Libertarianism is about. Well, Kort, I do – but to have put all that into perspective would have required about doubling the article.
But let me stick to the basics here: I regard Libertarianism (after its main progenitor, Ayn Rand) as little more than an economic creed. Roughly the political-economic equivalent to creationism.
Before I go on to Libertarianism proper I want to demolish a few of the Editor’s early claims made to do with regulation, deregulation and “free markets”.
Kort avers (page 7): “there hasn’t been any meaningful deregulation of the American economy in the last half century”
Evidently he conveniently forgets (or perhaps doesn’t know – since we are on the topic of illusions of knowledge) that massive deregulation was ushered in under the Reagan administration, from the Bank Holding Act(1984) to rescinding “Regulation Q” – for which, as G.P. Brockway notes (‘The End of Economic Man’, pp. 156-57) state usury laws were suspended and banks were allowed to sell money market funds. There was also massive relaxation of restrictions on branch banks and – by 1984, “the New Deal reforms were in a shambles”. (Brockway, ibid.)
Brockway further points out (p. 157):
“Competition is by no means a universal good and in the case of banking it is almost a universal disaster. Ordinary businesses compete with each other more at the selling end than at the supply end. The competition at the selling end forces them to exert downward pressure on the prices they pay for supplies. In the case of banking, the shape of competition is significantly different – because its supply (money) is different.”
As Brockway goes on to note, the core competition in banking is for deposits, and this means banks try to out-do each other in interest rates offered. The dealie here is you don’t want the interest rate offered to Joe or Jane Public to be anywhere near the “spread” or interbank rate.
As he observes (ibid.)
“Competition forces banks to pay higher and higher interest rates and to offer more and more expensive services. As their costs of funds increases, so also rates charged borrowers must increase.”
Of course, Kort ignores or forgets the most egregious deregulation of them all, which paved the way for CDS (credit default swaps) to multiply in the first place: the repeal of the Glass –Steagall depression era law that prohibited mixing investment banking with commercial banking.
This leads into Kort’s next charge that the selling and dispensing of these (CDS) derivatives was simple “fraud”. No, it wasn’t – once the Glass-Steagall Act was repealed (unless one interjects the assignment of ‘AAA’ bond ratings as I noted in my article) all such inventions were allowed. The cruel fact and irony of the matter was that Glass-Steagall's revocation ok’d all activities that would be common to an investment bank and that included the creation of novel instruments to enhance yields or returns.
The tragedy is that Glass-Steagall’s repeal enabled the contamination to spread to commercial banking as well. And, as I noted, they are now holding $55 trillion of these toxic assets.
Kort may be further amazed to know that in a number of financial quarters (e.g. The Financial Times, The Economist) clarion calls have been made NOT to outlaw CDS!! If the calls have been made not to outlaw them then clearly they are still valid and legal instruments. You do not demand entities not be outlawed if in fact they are ALREADY outlawed. Hence, their creation cannot be “fraud” and in particular cannot be “willful and intentional fraud”. (Though I do agree that the bond rating of the SIVs or structured investment vehicles – by insurance companies like AIG, most likely was!)
To reinforce this, I refer the Editor to John Dizard’s column on ‘Wealth’ in The Financial Times of Dec. 30 (page 6). Dizard observes:
“Just because we have had a global financial crash caused by a credit meltdown, accelerated by the workings of credit default swaps and their unholy offspring, doesn’t make it quite fair to condemn a whole risk management program”
Dizard instead argues for more transparent information on bond issuers, and rating agencies. As he puts it, if this is done, along with small “lot trading size” then the demand for CDS as a hedging tool will diminish. Again, the point is the existing CDS are not “fraudulent” as Kort makes them out to be, but their hidden use in SIVs and instruments is, if bond ratings do not reflect the risk.
Let’s try to understand what is happening here: the dismantling of a Depression-era law (based on the then experience of investment banks – especially in offering certain vehicles then, known as "investment trusts”) prohibited mixing investment banking and commercial banking. This is deregulation no matter how one (even a Libertarian believer) chooses to parse it.
With the Glass-Steagall regulation gone the way of the dodo, there was nothing to hold back the flood, a point reaffirmed in the FORTUNE article I cited (‘The $55 TRILLION Question', October).
Kort in another paragraph displays a gross misunderstanding of the issue and perhaps this is my fault for not making myself clearer, or expatiating at more length, in my article. He asserts the victims “did not know what they were buying”. But my point was they didn’t know what they were buying because the derivatives were buried (concealed) in the legal instruments or CDOs. (collateralized debt obligations) comprising the quite legit bond funds purchased.(For the gory details on this I recommend Kort and others interested get hold of The Financial Times from Monday, December 17, 2008, wherein they will find – on page 8- the Analysis, ‘Out of the Shadows: How Banking’s Hidden System Broke Down’)
In the same way, I am 100% certain that neither Kort nor any of his Libertarian friends know the extent to which they own untold $$$$ of derivatives (all unregulated by the SEC) in the mutual funds they currently have! These derivatives are so obscure that not even the highest ranking financial advisors are able to fully explain where and how they are integrated into a typical fund or its components. Does this lack of knowledge make Kort cease to purchase mutual funds? I doubt it. Does their lack of SEC regulation and transparency make him scream “Fraud!”? I doubt that too. Since like most other Americans’ he has been conditioned to believe that only by owning equities (usually via mutuals) will he be able to afford retirement. Never mind how the equities as mutual funds are constructed. We don’t wanna know ‘bout that!
As Kort so aptly puts it:
“Hardly a free market of VOLUNTARY transactions based on real value and accountability”
INDEED!
And, of course, inhering in this insight is the core defect of all Libertarianism: that in order to really work to any effect it requires 100% transparency in all transactions and markets. Something that is totally and ultimately a fantasy. It can never happen, nor would ever happen – even if the country were now being run by Ron Paul as President and Jacob Sullum as Veep instead of Obama-Biden whom Kort casts as “authoritarians” – one of the most astounding pieces of hyperbolic aspersion ever rendered. (He also lamely tries to disparage FDR as being the culprit who “prolonged” the Great Depression, totally oblivious to the fact that the Fed’s then deflationary interest rate policy was at the crux. I refer him to Chris Farrell’s excellent monograph: ‘Deflation’, page 103, the Chapter, ‘The Great Depression’)
Another beef I have is this notion, permeating Kort’s remarks, that a “free market” exists. It does not. More Libertarian delusions. What we have is a coercive market. In this sort of perverse artifact, corporations create demand via the gimmick of mass market advertising. They can also create artificial shortages and hence, spike higher costs (say for oil) whenever they want. Having worked in an oil company once, in the late 60s, I can first hand vouch for that. I used to hear the laughter of the honchos echoing from their 7th floor offices as I made my rounds as a geologist’s assistant.
William Wolman and Anne Colamosca in their book: The Judas Economy: The Triumph of Capital and the Betrayal of Work, Addison-Wesley, 1997, detail the coercive market in labor and the horrific costs it has imposed. Chief culprit is the usurpation of the productive economy’ by the speculative one on Wall Street. From the era of “Chainsaw” Al Dunlap companies have had to tow the Street’s line and that usually means cutting workforce to the bone to increase share value. Never mind the poor slobs laid off, in the Libertarians’ dream world they can land on their feet if resourceful enough.
Exhibit A: the de-regulation of the energy industry ca. 1997 and later. Hyped as the greatest benefit of the “free market” ever for the small, residential consumers, since now - for once - the great market would determine cost, and not "greedy local utility companies." But no one could have foreseen or predicted how the likes of Enron would manipulate the energy markets - by shutting down access, energy in one state - and re-selling it in other states at robbery rates. This energy manipulation cost the state of CA more than $4 billion over 2000-001 alone. Not to mention untold customer misery, even as Enron shylocks were caught on tape laughing about how many 'grannies' they managed to get thrown out of their homes'.So much for your great “free” markets.
Kort’s most glaring and egregious misstep is saved for later when he insists:
“the citizens of the Weimar Republic failed to understand that their crisis was the result of government inflicted corruption of the free market”.
He compounds that with an earlier canard that “the Weimar Republic suffered from aggressive interference in its economy by a socialist popular government”
The truer story, as noted by Ian Kershaw in his magnificent account of Hitler’s rise to power (‘Hitler Nemesis’) is that Weimar constituted a weak democracy which had little or no control over the most radical Rightists, especially Hitler’s NSDAP party. They would regularly beat Marxists, socialist, any leftists on the streets while holding up signs that read: “Tot dem Marxem” (Death to Marxists)
With no strong government (a kind of Libertarian ideal, no?) Weimar was hit from pillar to post by the polarizing forces unleashed between Left and Right, after World War I. As Kershaw puts it, a “political culture of violence” had taken root. A political law of the jungle dominated, since inevitably the biggest, baddest and strongest were the ones who wielded power. Who were these bullies? Not any “Socialists” (more often then not the victims along with Jews) but the NDSAP party of Hitler and crew. [1]
Kershaw (p. 328, ‘Hitler Hubris’ – the first volume of his Hitler history) notes that the Nazi leaders didn’t immediately recognize the significance of the stock market crash in the U.S. in 1929. The newspaper, Volkischer Beobachter, did not even mention Black Friday, according to Kershaw. (ibid.)
This didn’t halt the financial carnage, since before long the reverberations struck - given Germany’s dependence on American short term loans. Within weeks, as Kershaw points out, “industrial output, prices and wages began the steep drop that would reach its calamitous low point in 1932.” Coincidentally, it was on July 31, 1932 Hitler and the Nazis achieved their highest ever vote totals in the Reichstag, 13,745,800 votes or 37.4 percent.
A result of Socialist “meddling” in free markets? Hardly. Rather an inevitable result based on a canny understanding of Weimar’s inherent political instability and the exploitation of brute force and propaganda to gain total power and intimidate the actual government. (Another reason why as an unabashed “statist” I advocate powerful central power- with the instant ability to take down bullies in whatever form they may appear) Hitler nonetheless kowtowed to the capitalists and industrialists to finally gain the measure of support he needed to finally attain the Chancellorship (with the unwitting help of Paul von Hindenburg)
How happy were the capitalists and German industrialists? Kershaw again (‘Hitler Nemesis’, p. xxxiii):
“Leaders of big business, though often harboring private concerns about current difficulties and looming future problems for the economy, for their part were grateful to Hitler for the destruction of the left-wing parties and trade unions. They were again ‘masters in the house’ in their dealings with their work force”
Well, looks like a Libertarian capitalist’s wet dream to me! And how exactly did the assorted industries of high capital fare under der Fuhrer? Well, boffo times were afoot except for one little segment. Now, let us hear from Clive Ponting (‘Armageddon: The Reality Behind the Distortions, Myths, Lies and Illusions of World War II', p. 333):
“The only major purge was in the newspaper industry “
Of course, this is the industry charged with reporting the truth to the people. I don’t think it needs to be added that the journalists were also among the first to be dispatched to the concentration camps!
Let’s now move on to Libertarianism itself. Truth is there are so many assorted Libertarian voices of the past and present, one never knows who speaks for most current day followers. One can perhaps look at Ayn Rand, in her treatise ‘The Virtue of Selfishness’, but I’ve had freethinkers Libertarians at cocktail parties tell me in no certain terms I should not use her as the standard for their credos. Rand herself once insisted she was “not a Libertarian”. So who else?
Well, how about Charles Murray writes in What it means to be a Libertarian (p. 6):
“It is wrong for me to use force against you, because it violates your right to control of your person....I may have the purest motive in the world. I may even have the best idea in the world. But even these give me no right to make you do something just because I think it's a good idea. This truth translates into the first libertarian principle of governance: In a free society individuals may not initiate the use of force against any other individual or group”
Of course, this is also undoubtedly where the pet Libertarian canard that “taxes = theft’ comes from. But look at it objectively (not to be confused with ‘Objectivism’) this is arrant twaddle and illogical to boot.
I mean “libertarian principle of governance”! This is an oxymoron! Governance presumes and demands the non-passive act of governing, which means someone is actively setting standards of expected action, and also providing the means to uphold them. Else, what’s the point? It’s all an exercise in mental masturbation. In other words, unless someone (coercively) enforces governance, it will be meaningless. Now, maybe there IS a docile libertarian principle of “governing suggestion”- but this in no way is the same as “governance”!
Anti-statism is a central tenet of libertarianism, but it rests on no foundations, other than the so-called libertarian principles babbled by Murray and others. For example, Frank Chodorov, quoted by David Boaz of CATO Inst. in ‘Libertarianism: A Primer’, goes so far as to write:
“Society is a collective concept and nothing else; it is a convenience for designating a number of people... The concept of Society as a metaphysical concept falls flat when we observe that Society disappears when the component parts disperse”
Boaz himself joins in on what the “individual” means:
“For libertarians, the basic unit of social analysis is the individual.... Individuals are, in all cases, the source and foundation of creativity, activity, and society. Only individuals can think, love, pursue projects, act. Groups don’t have plans or intentions”
But, as Prof. Ernest Partridge puts it in his blog piece on ‘Liberals and Libertarians’ cited in my earlier article:
“Now consider the implications of this denial of the "independent existence" of "the public" and "society." If there is no "public," then there are no "public goods" and there is no "public interest." If there is no "society," then there is no "social harm," or "social injustice" or "social (and public) responsibility." It then follows that government has no role in mitigating "social injustice" or promoting "the public interest," since these terms are fundamentally meaningless. Poverty and racial discrimination, for example, are individual problems requiring individual solutions”.
I can assure Kort and his brethren that if Boaz’ concept held sway and government force was not used in Alabama in Sept. 1963 (JFK nationalizing the Alabama National Guard to enforce school integration) we would still be a segregated nation, with blacks sitting in the back of the bus, ‘colored’ water coolers and restrooms, and the rest. Only someone totally divorced from reality would claim individual African-Americans could have obtained their civil rights with mere individual effort and no government input.
Meanwhile, The Libertarian Party Principles state:
“We hold that all individuals have the right to exercise sole dominion over their own lives, and have the right to live in whatever manner they choose, so long as they do not forcibly interfere with the equal right of others to live in whatever manner they choose.”
Again, more inherently contradictory twaddle and piffle. Interference with the lives of others is permitted, so long as it’s not “forcible interference”. Anti-coercion libertarians do not simply oppose coercion they also claim to legitimately define it. Their definition excludes much that others would see as coercion. To me, the TABOR law in Colorado, because it continuously and aggressively scales back tax support for the public domain (based on the past year’s population and growth) is coercion and very vicious besides. Right now, thousands of disabled people across the state stand to lose their services thanks to TABOR and controls like it. All with the best intentions of course, that we not “take by force” those hard-earned gains of the filthy rich bastards ensconced in one of several of their 45.000 square foot mansions in Aspen!
As one critic has put it (to do with Libertarians’ convoluted principles):
“Libertarians make exceptions for defense of property and prosecution of fraud, and call them ‘retaliatory force’ But retaliation can be the initiation of force: I don't need force to commit theft or fraud. This is a bit of rhetorical sleight of hand that libbies like to play so that they can pretend they are different from government”.
Libertarianism clearly posits initiation of force for what it identifies as its minions interests and calls it righteous retaliation, and uses the big lie technique to define everything else as “evil initiation of force". (As they would certainly call JFK’s nationalization of the AL guard in ’63 to force school integration) They support the initial force that has already taken place in the formation of the system of property (e.g. the seizure of Native American lands and violation of umpteen treaties), and wish to continue to use force to perpetuate it and make it more rigid. It is this inchoate ethics that translates into the system’s weakness and exposes Libertarians as true hypocrites – just maybe a slight cut under the fundagelicals.
The long and short of it is every belief system has its evangelistic “scriptures”, designed to help proselytize the unwashed masses to their cause. The Campus Crusade for Christ uses Josh McDowell’s ‘Evidence That Demands A Verdict’, Scientology uses Ron Hubbard’s ‘Dianetics’, and Libertarians use ‘Libertarianism in One Lesson"’ (I am also cracking up just writing the words)
In the absence of counterargument all these tracts are semi-convincing. However, they can all be easily rebutted because of their weak, exposed flanks: the many exceptions that must be omitted in order for their so-called principles and dogmas to be convincing.
I warrant Libertarianism and its fanciful world of minimal force might work, in a fantasy world-universe where all citizens are equally educated and have equal access to facts and information, and equal opportunities to advance their social-economic station. But that is emphatically not the world we inhabit, whether Kort concedes it or not. This is why Libertarianism will remain the province of the very few, though it is disturbing to behold all the inroads it’s made into the high IQ societies like Mensa and Intertel lately. To read some of the letters or articles is almost like witnessing a collective mind-virus unleashed, and by people whose “bible” is ‘Atlas Shrugged’.
Thankfully there are still many of us who don’t buy this bunkum, no matter who tries to peddle it. Call us proud “statists” if you will, but we will continue to advocate expanding government so that it serves all citizens – not merely the corporations, the rich, and not so rich, or any who can afford the luxury of Libertarian codswallop.
Finally, to anyone out there whose mind hasn’t been infected by the Libertarian mind virus, I commend Paul Kurtz’s excellent Editorial (‘Overcoming the Global Economic Tsunami’) in the February-March issue of ‘Free Inquiry’ magazine, page 4. Kurtz has it exactly right in his proposals, especially when he avers:
“Effective regulation must be reintroduced to protect the public interest”.
[1] It is a somewhat tragic fact that too many Americans, full of naivete and very little historical or political comprehension, mistakenly believe the “National Socialist Party” (NSDAP) of Hitler were valid Socialists. Nothing could be further from the truth! They were out and out FASCISTS who detested Socialists, as well as their kin, the Marxists. Amazing how language misuse can pervert the careless brain!
Friday, December 5, 2008
The Financial Black Hole
"This has become essentially the dark matter of the financial universe" - comparing it to the dark matter discovered in astrophysics.”
Chris Wolf, hedge fund operator, quoted in FORTUNE, October 7.
"The big problem is there are so many public companies- banks and corporations, and no one really knows how much exposure they have to CDS (credit default swap) contracts."
Morgan Stanley derivatives salesman (Frank Partnoy) quoted in FORTUNE (ibid.)
The latest news in The Financial Times has not been encouraging as their headline ('Index Points to Record Default Threat', p. 13, Dec. 2) continues to warn of the unfolding crisis in CDS or "credit default swaps". As described by Chris Wolf, the "dark matter of the financial universe".
Following on from the FT article, alarm bells should be ringing as the Mrkit iTraxx Crossover index rose over 1000 basis points for the first time since its creation and meanwhile, in the U.S., the main credit default swaps indicator (for 125 companies) rose to 271 basis points.
Some of the world's leading investment grade companies now look to be in danger of default according to CDS prices.
What are these esoteric instruments and why are we at such risk from them, especially their being embedded in the mortgage securities market? That is what I want to explore in this blog entry. This entails understanding what the associated term “toxic debt” means and how it factors into the unfolding economic catastrophe that we behold. Almost all of it is tied up in these “credit default swaps”. The sum total of these esoteric financial “black holes” is now estimated to be no less than $55 TRILLION. (See,e.g. 'AIG's Complexity Blamed for Fall' in The Financial Times, Oct. 7, 2008 and 'The $55 TRILLION QUESTION' FORTUNE, October, p. 135).
TO comprehend why these CDSs comprise toxic debt we need to delve into some financial history. In particular, a move made in the 1980s known as “securitization”. Up until then, the banks were the primary holders of mortgage debt. With a government deregulating “green light”, however, banks were able to offload these mortgages (whose defaults always cost the banks dearly) to Wall Street. There, clever people gathered millions of mortgages from across the country and repackaged them into entities called “collateralized mortgage obligations” or CMOs.
These were then inserted into bond funds which were sold to cautious investors as “safe” instruments. After all, bonds are supposed to be safer than stocks, right? Wrong! Bonds, such as U.S. Treasurys are – by virtue of having the name and backing of the U.S. government behind them. But not bond funds, which can be loaded with all manner of financial tripe that can engender losses over the short or long term.
As an example, most bond funds in the 1980s and 1990s were loaded with IOs, or inverse only strips, as well as inverse floaters, and CMOs (referred to as “toxic waste” in bond trader parlance). The IOs pay only mortgage interest. Inverse floaters, meanwhile, pay more when interest rates FALL than when they rise. All these tricks were used to try to juice up yields to lure investors. That, along with touting them as “government securities” - since legally speaking mortgage securities are “government –backed” but that doesn’t mean your investment is FDIC-insured! In this way, the bond fund purveyors could get people to think they were making safe investments when nothing could be further from the truth.
My own wife was in one of these bond funds as part of a 401k “Life cycle” fund about ten years ago. I noticed every quarter, despite being in “bond funds”, she was losing more than $800 each quarter and getting no company match (because they aren’t obliged to match in the case of losses). Upon further scrutiny, I discovered the bond funds were laden with IOs and inverse floaters as well as CMOs. I immediately had her exit the Life Cycle thing and put all her 401k money into fixed income assets. Fortunately, she acted in time – as otherwise she likely would have lost more than 30% with the post-9-11 downturn.
We now move ahead to the late 1990s, and CMOs have transmogrified into CDOs (collateralized debt obligations) though the basic meaning is the same. Again, these represented millions of repackaged mortgages now sold as “securities” as part of bond funds.
Sometime in the early 2000s, a gaggle of “quants”- gifted mathematical types based in investment banks- got the idea for a creation that could juice up huge profits for their banks, and based on unregulated derivatives. Thus were born the “credit default swaps”. These were basically devised as “side bets” made on the mortgage securities market and the performance of the CDOs therein.
We all know what a “side bet” is. For example, if you travel to a Vegas Sports book, you will find you can not only make bets on a particular game, say Giants beating the Patriots in the Super Bowl- but also ancillary happenings to do with the game. For example, one can bet on: how many first downs the Giants will make in the first quarter, or how many sacks the NE defenders will make in the game, or how many rushing first downs a particular player will make – say Sammy Morris of the Pats. Any and all side bets are feasible.
In the case of the CDS realm, side bets were allowed on all sorts of things, such as whether particular CDOs would lose money, or the interest rate (average) on a segment of them would drop one half percent, or whether there would be at least 100,000 foreclosures in the third quarter of the financial year.
In the case of the credit default swap, all that was needed to make the bet formal was a counter-party. Thus, the “party” renders the bet and the amount wagered, and the counter-party takes the bet. The actual exchange, as already noted, was often done on cell phones and no formal records other than what the cell phone statement showed were available.
Now, the investment banks’ quants realized that the bets as such might not grab the interest of the mainstream banks they needed to buy into them. After all, the banks could LOSE on many of these bets and it would be to their unending detriment. Thus, the quants took the CDSs and repackaged them along with regular mortgage securities – with CDOs, into what they called “structured investment vehicles”. Or SIVs.
These were then sliced and diced and sold to the mainstream, Main Street banks as safe securities. To make this “kosher” so to speak, bond rating companies (like AIG) were asked to give a bond rating and preferably the safest (AAA) to signal to the mainstream Banks these were A-OK purchases.
Despite the fact that the rating agencies had not the faintest or foggiest clue what the SIVs contained, they sold the things to the banks and the banks happily bought them up unaware of what was actually in them. By 2003 the total of credit default swaps in the financial system was estimated to be around $6 trillion. By August of this year, it had reached $55 trillion.
That is, $55 trillion in hidden and subjective financial BETS buried into mortgage securities as SIVs, with no formal tracer available! Couple this now to a bona fide debt, such as a car loan or mortgage from approved bank or mortgage loan company. Everything is spelled out in detail so that even a person of average intelligence can see what he or she is getting into.
In the case of the mortgage, for example, a full amortization schedule -table is available to show monthly payments, and the principal vs. interest. There is no guessing, no doubt. The debtor knows his obligations and what he has to do to make good on them.
By contrast, with the CDS (credit default swaps) nothing is known other than that the instrument has some subjective worth at one time. But HOW MUCH? TO WHOM? We have no clue since none of the esteemed quants who invented them knows where the “bodies are buried” so to speak! I am not even sure, if they were compelled to complete a typical ISO-9000 process form, they could replicate exactly HOW their esoteric instruments were created!
What we see here, and which is abundantly evident even to the most hard-core libertarian ideologue, is that credit default swaps and the instruments into which they have been buried and disseminated are indeed “toxic waste” by any rational financial measure. I am not even sure one can call them “debt” – although to the banks that now have them on their books they represent humongous debt! Since each quantity of these things lowers the value of the bank’s assets by some factor, and increases its liability.
To make this more understandable I refer to the graphic at the top of this entry- which compares two banks with roughly the same volume of assets, but different equities – since one bank (A) has fewer CDS.
Now, since banks owning the instruments into which credit default swaps have been buried will not readily disclose their extent, then it stands to reason one bank – say Bank A – cannot know how much “bad debt” or “toxic assets” the other one owns or has on its books. If this is the case, a bank with relatively higher equity (Bank A in Fig. 1- at top) will be unwilling to lend capital to a bank for which the toxic asset volume is unknown. After all, if it lends in good faith then the other banks fails because of the higher CDS proportion, it will have only itself to blame.
It is this unknown which has directly engendered the current credit freeze. Because no bank knows the volume of CDS any other holds, it cannot know the extent of any other bank’s equity position or credit worthiness. Thus, has the LIBOR rate recently exploded – this is the London Interbank Offered Rate- which is a measure of bank to bank lending confidence. It most certainly will not begin to go down, reflecting higher lending confidence, until some agent steps in and proceeds to buy all the CDS now on the banks’ books.
WHO is in the position to do this? Well, certainly no private entity has the resources! The only one is the government, and more specifically the quasi-governmental entity known as the Federal Reserve which can, if it must, create enough money by fiat to buy all the CDS and get rid of this toxic sludge once and for all.
Now, some libertarians will no doubt exclaim ‘Why not just do nothing?’ but in asking that they are clearly not cognizant of the degree of financial collapse that would precipitate from such folly. We are talking here of credit seizing up everywhere! No more money for student loans, at any price, no loans for businesses to meet payroll or plant improvement and you can forget about any expansions! No money for home construction, to purchase new cars, to do home renovations, to re-fi a mortgage……NADA! In effect, as Nobel Prize winning Princeton economist Paul Krugman has noted, one would usher in a Second Great Depression – and this one – by virtue of the global banking effects, would make the first look like the proverbial walk in the park.
Hence, bottom line, there is no option. The $55 trillion must be purged and it must be done before banking collapses proceed like falling dominoes. Now, no one is arguing here that full value must be paid for all those toxic assets, I mean even 20 cents on the dollar would be better than nothing – though even that would add $11 trillion to the existing bailout deficit. But doing nothing is not an option, and only the most financially obtuse, who have no remote clue of what is transpiring now, would even propose it.
Finally, in the wake of this catastrophe - which will probably take four to five more years to unfold- it is clear that all the credit default swaps which caused this mess need to be outlawed. Further, all derivatives, irrespective of where or how they are used, need to finally come under SEC regulation.
We cannot afford another event like the credit default swap mess, ever again! For stock investors, the future will be bloody bleak as Stephen Roach noted in his 'Market & Investing' FT column three days ago. As he notes the "post-bubble" world will see a very anemic recovery. Not any of this market bursting forth back up to where it was within months, or even years....possibly decades.
In the long deleverage process, with all asset bubbles punctured, no fund or stock will be able to jack up yield by using tricks such as stacking investments with derivatives, IOs or other crap. People simply won't buy them. In the future investment world the snake-bitten will reach only for what is understandable and transparent.
In a way this is a good thing since the stock market was always designed more as a financial casino for the wealthy, not for ordinary Jacks and Janes to park their precious retirement money.
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