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An Unfair World

herb the verb's picture

Here you have a guy who basically invented modern banking, and what does he get? A Nobel Laureate? The top job at Treasury? Free parking?

No, sadly the world is not fair.

From wiki:

While at Continental Illinois, Fastow helped pioneer a system of raising capital by selling notes backed by risky loans. The practice spread across the industry "because it provides an obvious advantage for a bank," noted the Chicago Tribune. "It moves assets off the bank's balance sheet while creating revenue." Continental became the largest U.S. bank to fail during the Savings and Loan crisis.

Based on his work at Continental, Fastow was hired in 1990 by Jeffrey Skilling at Enron Finance Corp.

Now this seems like old news, right? I mean this goes back in the way, way, way back machine to the Savings and Loan Crisis and everybody knows that is just so long ago that we can't possibly hope to remember THAT. Although it is horribly sourced, I urge you to read the wikipedia Savings and Loan Crisis link. I defy anyone to not find similarities.

So having laid the groundwork, I have to ask the question: is a financial meltdown a bug, or a feature? is doing the exact same thing, and expecting different results not a definition of insanity? Or are they doing the exact same thing in order to HAVE the exact same results? Which is more likely, that the S&L crisis was a trial run to see how the winners and losers shook out, or that collective amnesia infected every part of the professional banking and financial world.

Having lost my faith in humanity, I'm not sure which is worse or more frightening, but apparently it is the later.

Prophylactic: the following quote is out of the mouth of the world's largest boob, Tom Friedman:

You know, a question I've been asking myself. Who are the two smartest investors I've ever met in my life? Prince Alwaleed of Saudi Arabia, Warren Buffett of Omaha. Let's look at their behavior.

Last January, Prince Alwaleed bought into Citibank. He put -- he bought in at $30. He thought he'd swallowed the canary, thought he got the bargain of a life. Citibank today? Four dollars. OK?

Six months later -- Warren Buffett was patient. And there's no smarter investor than Warren Buffett. I'm not trying to be critical, but it shows you what's new. He bought into Goldman Sachs at $115. And he got warrants and all this other stuff. Never mind. Goldman Sachs today, in the 50s? I don't know, high 40s?

So, you have to say to yourself, something's going on that the smartest investors in the world didn't see.

Like I said, it's an unfair world.

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herb the verb's picture
Submitted by herb the verb on

Our nation lifts its lonely, beatdown eyes to you. Frenchdoc reviews Paul Jorian's Le Monde article (and I had just been hoping that someone who read French here would do so before I realized....)

A radical reconsideration of the role of Central Banks is in order. Within a capitalist framework, Jorion states, the capitalist provides capital to an entrepreneur whose activity will generate a surplus which will be shared by both. However, since the mid-1970s, investors (the capitalists) and business managers have pushed for the substitution of consumer credit for the declining share of the surplus that used to go to wager earners. We are experiencing now the price to pay for such greed.

Central banks played a special part in this scheme by becoming one of the favorite weapons (in the class war) beholden to investors only, through the manipulation of interest rates to force entrepreneurs into compliance through the threat of bankruptcy, and wage earners through the threat of unemployment.

The manipulation of interest rates is central here. Interests are the reward for the capital advance capitalists extended to entrepreneurs. For these interests to be collected, these advances have to have created actual value, real wealth. However, in the case of consumer credit, that is not what happens. Interests are collected on the salaries of borrowers, the product of labor, and not generated through the surplus generated thanks to capital advances. If wages decrease, households borrow more. These capital advances are not productive advances but a way of compensating for declining wages. As Jorion puts it, households now manage their budget like "the cavalry". At some point, it hit a wall as wages decline further. That is what happened."

When wages stopped rising (with inflation(!) thank you Bernanke), when all of the equity in their(our) houses was tapped, when they (we) were finally able to borrow no more consumer credit to survive, the plug was pulled on the the global investors bathwater and it went shooting down the drain. With very little productive activity (return on entrepreneureal investment) and no wage income left to tap (Sopranos style bust-out), the financial crisis is absolute.

When the equilibrium is re-established (what goes down the drain equals what fills the tub), the depression will start turning around.

Don't hold your breath.

herb the verb's picture
Submitted by herb the verb on

would surely follow.....


Submitted by jawbone on

Certainly we know there was a huge discrepancy between median housing price and median income--this chart is very clear on that. (Chart at link.)

The Dangerous Disconnect Between Home Prices and Fundamentals
Published Jul 09, 2007

Price increases are nothing new, since home values tend to go up over time. What makes this housing bubble different (besides the fact that it is the largest bubble in U.S. history) is the dangerous disconnect between home prices and the basic fundamentals that typically rule the housing market.

For example, increases in home prices typically keep pace with increases in wages. But this has not happened. National median home prices have increased by more than 45 percent in the last decade (when adjusted for inflation). Median wages per worker, on the other hand, have only increased by 10 percent in the same period.

As a result, for almost the first time ever, individuals who are making the median household income cannot afford to buy a median priced home.

In order to qualify buyers for loans, lenders loosened credit regulations and encouraged risky mortgage products like interest-only loans, negative amortization loans and ARM loans. This made it easier to get a mortgage, but admittedly much harder to keep it.

But no one could have imagined what's happening today.... Like Big Banker Boyz. Heh.