Meaning Of And In The Financial Collapse
[ED: This is real. dlaw isn't the only one relating the impact of today's events back to the Great Depression. Time for the panic button? I dunno. read and decide. A.R.]
[UPDATE: See changes, comments and quiz.] Those of our friends here who are fortunate enough to have a little something put away (and I hope that is many) but have that put away in stocks and stock mutual funds (and I hope that is very few) will find tomorrow a little jarring. Jarring, that is, unless you had the foresight to go short the market some time last week. If you did go short, you are buying the drinks. If you didn't, you are probably going to need a drink as you ask: "What the ----?????" I don't have the wherewithal to go short anything and I sure don't have the dough to buy enough drinks, but I will answer your question about what the ---- is going on and what it means. The financial stuff is my own rambling but the connection to Web 3.0 and the meaning of the project this financial catastrophe will force us all to undertake I got from the Web Sherpa here known as "Microveldt".
"Credit Default Swap" - add this term to your financial vocabulary along with "Sub-Prime", "Securitization", "Collateralized Debt Obligation" and "Structured Investment Vehicle". In fact, put "Credit Default Swap" in the front of the list, because you will be hearing a lot about them. And if you haven't heard of the companies MBIA and Ambac, look them up before they're gone.
Why? Well, two winters ago the "notional" amount of the securities and loans represented by Credit Default Swaps - artificial financial derivatives - was about 14 trillion dollars and then one winter ago it was about 28 trillion dollars and this winter it was about 43 trillion dollars. Sunday, billionaire editor Mort Zuckerman of US News and World Report predicted banks will suffer 250 billion dollars of losses in these instruments and that we are in for a credit crisis surpassed only by that suffered during the Great Depression. Credit default swaps are meant to be risk protection. The definition is here but what you need to know is that these agreements will force already beleagured banks to accept large amounts of troubled loans and securities onto their teetering balance sheets. The large cash payments that are promised by some of these credit default swaps are cold comfort for those on the receiving end as the amounts are so huge and the risk so widespread that these cash demands simply hurt the entire banking system. Nobody can be saved individually. MBIA and Ambac were primarily in the business of insuring bonds. Bond insurance companies enter into agreements that they will provide cash to bondholders in case a municipality or corporation misses a payment for some reason. These companies allow bond issuers to be sure and maintain the high credit ratings of their bonds. But then MBIA and Ambac got into insuring mortgages and then they entered into more complicated finance. In 2007 their stocks were soaring. Then people realized that they were in over their heads. Their business, it turns out, was predicated on the assumption that many clients would not have problems simultaneously. But financial bubbles and crises are created exactly because people act simultaneously. And the other problem is that these companies cannot simply be subject to the whims of market valuation. They MUST maintain a AAA credit rating. If they don't, then the credit ratings of the bonds they insure goes down and then those municipalities and companies who issued the bonds can't borrow money cheaply and their business slows down and becomes less profitable and their credit rating goes down and so on and so on. Christian Noyer, governor of the Bank of France and a member of the European Central Bank's governing council, talked of "all banks in the world still in the process of marking down assets." If that sounds innocent, consider that his statement was credited for helping trigger the worst slide in global stock markets since 9/11. Because as assets are "marked down" after a bubble the process gathers the same kind of momentum to the downside that the bubble had to the upside.
What this all means in the short term is that markets of all kinds are going to drop and governments are going, once again, to have to step in to rescue financial institutions - probably in the form of creating a public bond insurance agency. The question is how much damage will be done, but the answer is more interesting than you might think. Many have questioned the value of financial markets. What do they really do? My pal Doug Henwood over at Left Business Observer likes to point out that most investment companies do really comes out of their profits and he claims in his book "Wall Street" that the financial markets don't really add that much value to the economy. But since the 1980's the world has undergone an American-led bonanza of financial innovation. Beginning with the creation of a market for high-yield corporate bonds (aka "junk" bonds, now one of the most common debt instruments there is), then moving to the broad adoption of the practice of pooling mortgages and loans into big funds and selling portions of these funds like bonds or "securitizing" them (there is now a larger market for securitized American mortgages than there is for U.S. Treasury Bonds), and doing all this with increasingly sophisticated and broad-reaching Information Technology, America created modern finance. Did that create value? Well, if you live in Ballard, you know it did. The American real estate boom could not and would not have happened without the cash made available from the whole world through these sophisticated financial methods. Even if development (and certainly prices) got ahead of themselves, things of real, tangible value were created that had not been there before. That doesn't mean real estate prices won't fall into a crater, but that's the way it goes when even positive development happens too fast. The more uncertain question is what else of value was created in the creation of these new financial markets. As the amounts of things that could be traded increased so vastly, sophisticated offshoot or "derivative" contracts meant to hedge risk were developed. As the trade in these became brisk, speculative opportunities began to abound. The American Revolution in finance (or, perhaps, Anglo-American, as London is the world's other great financial capital) began to flood the world with information, cash, and ways to bet that cash on all the changes in all those numbers. But did this have any value? The rhetoric of this financial revolution is important. The theory is that a global financial system can spread risk across the world so that a boom in one region can be a boom for all and a bust in another region need not be so bad as this financial safety net spreads pain and gain around the world. Well if that's not what was really happening up to now, we had better make it happen for real. It's starting to look as though, (aside from the now-old-fashioned innovations that made American mortgages more "liquid" and therefore allowed an American home buyer to borrow more cash from more people at lower cost) so much of this "derivative" trading was just exchange among banks (who, by definition, already have enough money and are looking to lend it out). Did all this exchange of and trade in esoteric financial information mean anything? If it collapses will it really affect us that much? The answer is that if it doesn't mean anything now, we had better make it mean something.
If this Web 2.0 financial world has been about an explosion in access to information, the next phase of Web 3.0 must be an explosion of meaning. We the taxpayers and citizens are going to have to rescue the financial system at a huge cost, so we better get some meaningful change out of it. It looks like the bankers have, once again, gotten bored with regular banking and started to play with the depositors' money with wild trading schemes. It seems to happen pretty regularly. The S&L crisis was the last time. So as we create something like another Resolution Trust Corporation we had better get our priorities represented. If these CDS's and CDO's and SIV's and all the alphabet soup of securitized, structured and derivative financial "products" are presently a blather of economic information (that people bet on like roulette wheels withing roulette wheels within roulette wheels) we had better give them some meaning. If the bankers won't do it, we the citizens had better get down to business. We know now that there are global risks that require global solutions. And those global solutions require cooperation, planning, and the exchange of meaningful information. If the punters of Wall Street and London's "The City" can't do something meaningful with this information, then as we create the governmental structures to bail them out once more, we had better make sure that the potential of what they created for fun becomes a real, meaningful tool. We must undertake the serious business of investing in our global future. What self-interested, self-centered, short-sighted speculators have created, let Progressives take hold of and use. Now is the time to show who has the greatest ambition and who the greatest resolve. Now is the time to give meaning to their madness.
Meaning Of And In The Financial Collapse | 17 comments (17 topical)
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