I really like the idea of plain creating a universal default on all CDSes but I think there is going to be a problem. Many of the CDOs are based on the mark-to-market value of CDSes (which is insane by itself) so hell fine by me, but they should switch out those CDOs with historical data of the actual assets instead of the CDS values...
I think that could be done but they have all of this crap in software black box packages which no one understands (it appears). But they need to do something with that massive derivative shadow fictional money system right now so that assuredly sounds like a start to me..
and hell, is it possible to create an open exchange with the rest of these CDOs and let them find their own equilibrium without the CDSes daily values? Might be.
Great post NDD, I hope you won the challenge. These are common sense solutions predicated on an honest evaluation of where we are and how we got here. I have wondered for months why at least some of these were not implemented, even on a temporary basis, in conjunction with the repeated bailout measures.
What I suspect (and probably many others here would agree) however, is that Wall Street will write the "new" rules. The conspicuous involvement of Goldman Sachs at so many turns in the evolution of this crisis is a giant alarm, as far as I am concerned. Earlier today I posted this comment in another thread here. It is unconscionable to me that naked default swaps would, or should, be allowed.
All I heard from Geithner today at the HFSC hearings was an attempt to attain more power to act unilaterally and completely circumvent Congressional oversight. If I could add one other item to your approach, the Federal Reserve Act of 1913 should be revised and the FRB should become a part of the Treasury.
... have been economies with the structural external imbalances that have not had the luxury we have had of being able to sell large volumes of debt denominated in our own currency.
While that is true, just how stupid do you think the other countries are? Do you think for an instant we will continue to be able to issue debt in our own currency for infinity?
Heck, I'd put China as being stupid to accept US debt at all FOR THE PAST 10 YEARS.
-------------------------------------
Moral hazards would not exist in a system designed to eliminate fraud.
Backs up their risk with military power, which is forbidden to individuals.
Of course, that's sovereign government, or government by and for the people. Government purchased by corporations works somewhat differently because corporations would rather change the laws to eliminate risk rather than actually *USING* the results of risk.
-------------------------------------
Moral hazards would not exist in a system designed to eliminate fraud.
Unemployed Americans want their jobs back from India and China. Obama promised that he will bring back our jobs. It looks like his phone buddy Bill Gates got to him. Forget about the American middle class they don't need those low paying jobs. They just need high paying Green Jobs. The only green jobs out there are landscaping and selling marijuana. Sometimes these politicians really think they can sell us the Brooklyn bridge. Extremely disappointed with Obama.
Just because it's unthinkable and yes the U.S. dollar is the world's reserve currency, do not discount the possibility.
This is why Goolsbee, Geithner being "open" to a new world currency is so incredibly naive to say in public...
for if the U.S. dollar was removed as the world's reserve currency, we would be a much greater risk...
So, while I will assume there is no way this will happen....
I think it prudent to not really look at the remote possibility....
BruceMcF, I'm having to deal with a bunch of issues and there is a butt load of things happening right at this moment...
the biggest being the House may "push through" as in within 1 week, sweeping new powers to the Treasury to seize non-financial, financial institutions.
If you or anyone else is in the writing mood to go into some of what's going on that would really help "feed" EP and keep it all current.
The hearing is still happening in the house as I type.
That's when you get the scenario of larger amounts of local currency needs to meet overseas obligations, driving down the exchange rate, leading to larger amounts of local currency to meet overseas obligations, when the external balances are out of kilter and there is no real sustainable way for the country to acquire the foreign exchange to meet those debt obligations.
US sovereign debt is almost entirely in US$, and so while the exchange rate may slump, and we face the risk that in the future we may have to issue sovereign debt denominated in foreign exchange, if the US$ loses its status as the global reserve currency as the result of national financial mismanagement ... we do not face any immediate prospect of that kind of sovereign-debt exchange rate melt-down which is followed by default.
And given the severity of this recession, demand-driven inflation is no serious risk for this year and, if we hit the trough before the end of this year, for next year either. And if we don't hit the trough by the end of this year, the risk is almost entirely the much more serious risk of deflation.
Most "zOMG hyperinflation" is based on Milton Friedman's monetarist theories or some variant of them, and have nothing to do with the actual creation and disposal of money in the real world. Real World hyperinflationary episodes ...
... Zimbabwe right now, Argentina this decade, Brazil in the 80's, the Weimer Republic with its export markets to the east destroyed by WWI and heavy foreign-currency denominated reparations payments, the Confederate hyperinflation as cotton bonds lost their status as investment grade assets in London over the course of the Civil War ...
... have been economies with the structural external imbalances that have not had the luxury we have had of being able to sell large volumes of debt denominated in our own currency.
As an update to my earlier comment, during Tim Geithner's appearance before the House Financial Services Committee this morning, the subject of naked credit default swaps came up. Check out this enlightening video of the brief exchange between Rep. Joe Donnelley (D-IN) and Secy. Geithner (h/t Jane Hamsher).
If anyone has any doubts as to the lethal potential of naked cds's, check out this short film about the demise of Bear Stearns.
To not heavily regulate, if not outright ban, naked credit default swaps would be criminally negligent.
I generally agree with you on this topic, but you missed a huge point. Vienna has 1.7 million residents spread across 415sqkm versus Phoenix, Arizona, with a population of 1.5 million spread across 1,230sqkm!!! Your desire to spend $3 trillion on rail only reinforces unsustainable sprall. US population densities (in may areas) just don't support rail service (forget about the environment). We have to change that if we're going to have sustainable rail and or cities.
The only investments that can be called "our investments" are those undertaken by the government.
And what I'm saying is that perhaps we need an entirely different system- where investment is done by the government alone, since the markets seem to be unable to actually handle risk.
-------------------------------------
Moral hazards would not exist in a system designed to eliminate fraud.
I've been importing garbage from China for the last 5 years. And what my experience tells me is that we (Importers) have dug our own grave and we have helped our countries to become full of toxic crap (literally) and full of toxic money. We failed to tell the truth to our fellow citizens. We saw easy money to be made and forgot that we had to protect ourselves and preserve our own economic biases. Please, he who does not have a Chinese useless piece of crap at home or in his car, raise the left arm.
Oh! I do not see any one. That's your answer... part of the money you had, had gone there. Then I borrowed it from my bank and my bank borrowed it from THERE.
Now they have to try purchase their own crap because we have no money to do it, but they fail.
yep seeb!
The problem is that the world had become a global group... it is not a sum of the countries anymore. Group theory says group is its own worst enemy. Individual countries like USA are sticking to the global group, following the global tendency, borrowing assets from the global group, purchasing goods and services from the global group, even training member elements of the global group and delivering goods and services to the global group. What they fail to understand is that the answer to a problem can't be found inside the system which created it. You have to, either introduce an alien element to the group in order to solve the problem or get out of the system which created the problem, hence the answer is: go away from the global group…. Get out of the crowd.
If anyone needed yet another reason to regulate and break up these gargantuan firms, this is it. They are built for ponzi schemes in their current configuration and no regulation. IMO, we can never attain a sustainable form of capitalism with this financial structure.
Do you wonder doubt that this will be on Geithner's new regulatory agenda? Afterall, he's just an apparatchik in our kleptocracy.
They have determined that they will be bailout regardless so, if true, why not take more risks - they got nothing to lose and everything to gain at our expense.
Please start formatting your links! I've asked now many times. Look here is the user guide and I cannot make it more easy to format posts. Would you please read it and follow the directions? Thank you.
Or we do things the other way- by actually diversifying our investments so that if one investment goes down, no big deal.
The only investments that can be called "our investments" are those undertaken by the government. Other than that, there are only "my investments", "your investments", and "his investments". Diversification is not a cure-all. Many small business owners have no way to diversify, all of their capital is tied up in that business. Farmers literally "bet the farm" on each year's harvest. And corporations focus their efforts toward their core competencies. They need some form of insurance, as it makes no sense for these people to diversify away from the areas where they are strongest.
I'm not defending the current state of the CDS market. It is a shameful example of hubris and shortsightedness. But, in order to have a modern and efficient economy, there must be some way to transfer risk to those who are most willing and able to bear it. That is what insurance does.
Thomas Goeghegan suggests that much of our current labor problem can be traced to usury (legislated back in the 70s that made manaufacturing a low ROI). See: http://www.harpers.org/archive/2009/04/0082450
Insurance is a necessary precondition for technological advancement. When we passed the technological point where we needed multi-billion dollar research facilities, decade-long research time-lines, and decades of production before the research costs are returned, we have needed insurance to hedge against the multitude of risks involved in advancement.
Or we do things the other way- by actually diversifying our investments so that if one investment goes down, no big deal.
Even farmers are huge beneficiaries of hedging. The futures market allows farmers and food processors to lock in prices well in advance of the harvest, eliminating the flood of produce hitting the market at one time, and reducing the risk (and higher consumer prices resulting from that greater risk). Modern farming, with its resulting abundance, would be impossible without some form of insurance.
Of course, there's also another way to do that- set cost+ pricing. Instead of letting the free market set the price of goods, let the manufacturer do it and take the risk that nobody will buy at the price that allows him to make a profit. Since the price is set by the farmer's costs, he can't lose money on the deal.
Unhedged risk increases costs for everyone. Insurance, in its more traditional form or options, reduces the risk associated with doing business, and reduces the cost to society. Eliminate insurance and you will raise the costs.
I'm not so sure that the cost of managing the insurance company hasn't totally swamped that benefit at that point. One could also say that paying protection money to the mob reduces the risk of getting your property hit, but in the long run, it's a losing proposition.
-------------------------------------
Moral hazards would not exist in a system designed to eliminate fraud.
I really like the idea of plain creating a universal default on all CDSes but I think there is going to be a problem. Many of the CDOs are based on the mark-to-market value of CDSes (which is insane by itself) so hell fine by me, but they should switch out those CDOs with historical data of the actual assets instead of the CDS values...
I think that could be done but they have all of this crap in software black box packages which no one understands (it appears). But they need to do something with that massive derivative shadow fictional money system right now so that assuredly sounds like a start to me..
and hell, is it possible to create an open exchange with the rest of these CDOs and let them find their own equilibrium without the CDSes daily values? Might be.
Great post NDD, I hope you won the challenge. These are common sense solutions predicated on an honest evaluation of where we are and how we got here. I have wondered for months why at least some of these were not implemented, even on a temporary basis, in conjunction with the repeated bailout measures.
What I suspect (and probably many others here would agree) however, is that Wall Street will write the "new" rules. The conspicuous involvement of Goldman Sachs at so many turns in the evolution of this crisis is a giant alarm, as far as I am concerned. Earlier today I posted this comment in another thread here. It is unconscionable to me that naked default swaps would, or should, be allowed.
All I heard from Geithner today at the HFSC hearings was an attempt to attain more power to act unilaterally and completely circumvent Congressional oversight. If I could add one other item to your approach, the Federal Reserve Act of 1913 should be revised and the FRB should become a part of the Treasury.
While that is true, just how stupid do you think the other countries are? Do you think for an instant we will continue to be able to issue debt in our own currency for infinity?
Heck, I'd put China as being stupid to accept US debt at all FOR THE PAST 10 YEARS.
-------------------------------------
Moral hazards would not exist in a system designed to eliminate fraud.
Backs up their risk with military power, which is forbidden to individuals.
Of course, that's sovereign government, or government by and for the people. Government purchased by corporations works somewhat differently because corporations would rather change the laws to eliminate risk rather than actually *USING* the results of risk.
-------------------------------------
Moral hazards would not exist in a system designed to eliminate fraud.
But why would you need a "good bank" if we protect the banks such as UMB. Receivership-type plan could take care of the "bad banks".
Unemployed Americans want their jobs back from India and China. Obama promised that he will bring back our jobs. It looks like his phone buddy Bill Gates got to him. Forget about the American middle class they don't need those low paying jobs. They just need high paying Green Jobs. The only green jobs out there are landscaping and selling marijuana. Sometimes these politicians really think they can sell us the Brooklyn bridge. Extremely disappointed with Obama.
Just because it's unthinkable and yes the U.S. dollar is the world's reserve currency, do not discount the possibility.
This is why Goolsbee, Geithner being "open" to a new world currency is so incredibly naive to say in public...
for if the U.S. dollar was removed as the world's reserve currency, we would be a much greater risk...
So, while I will assume there is no way this will happen....
I think it prudent to not really look at the remote possibility....
BruceMcF, I'm having to deal with a bunch of issues and there is a butt load of things happening right at this moment...
the biggest being the House may "push through" as in within 1 week, sweeping new powers to the Treasury to seize non-financial, financial institutions.
If you or anyone else is in the writing mood to go into some of what's going on that would really help "feed" EP and keep it all current.
The hearing is still happening in the house as I type.
... it is denominated in someone else's currency.
That's when you get the scenario of larger amounts of local currency needs to meet overseas obligations, driving down the exchange rate, leading to larger amounts of local currency to meet overseas obligations, when the external balances are out of kilter and there is no real sustainable way for the country to acquire the foreign exchange to meet those debt obligations.
US sovereign debt is almost entirely in US$, and so while the exchange rate may slump, and we face the risk that in the future we may have to issue sovereign debt denominated in foreign exchange, if the US$ loses its status as the global reserve currency as the result of national financial mismanagement ... we do not face any immediate prospect of that kind of sovereign-debt exchange rate melt-down which is followed by default.
And given the severity of this recession, demand-driven inflation is no serious risk for this year and, if we hit the trough before the end of this year, for next year either. And if we don't hit the trough by the end of this year, the risk is almost entirely the much more serious risk of deflation.
Most "zOMG hyperinflation" is based on Milton Friedman's monetarist theories or some variant of them, and have nothing to do with the actual creation and disposal of money in the real world. Real World hyperinflationary episodes ...
... Zimbabwe right now, Argentina this decade, Brazil in the 80's, the Weimer Republic with its export markets to the east destroyed by WWI and heavy foreign-currency denominated reparations payments, the Confederate hyperinflation as cotton bonds lost their status as investment grade assets in London over the course of the Civil War ...
... have been economies with the structural external imbalances that have not had the luxury we have had of being able to sell large volumes of debt denominated in our own currency.
As an update to my earlier comment, during Tim Geithner's appearance before the House Financial Services Committee this morning, the subject of naked credit default swaps came up. Check out this enlightening video of the brief exchange between Rep. Joe Donnelley (D-IN) and Secy. Geithner (h/t Jane Hamsher).
If anyone has any doubts as to the lethal potential of naked cds's, check out this short film about the demise of Bear Stearns.
To not heavily regulate, if not outright ban, naked credit default swaps would be criminally negligent.
What makes you think that the government (which was complicit in the entire CDS debacle) is any more able to manage risk than individuals?
I generally agree with you on this topic, but you missed a huge point. Vienna has 1.7 million residents spread across 415sqkm versus Phoenix, Arizona, with a population of 1.5 million spread across 1,230sqkm!!! Your desire to spend $3 trillion on rail only reinforces unsustainable sprall. US population densities (in may areas) just don't support rail service (forget about the environment). We have to change that if we're going to have sustainable rail and or cities.
And what I'm saying is that perhaps we need an entirely different system- where investment is done by the government alone, since the markets seem to be unable to actually handle risk.
-------------------------------------
Moral hazards would not exist in a system designed to eliminate fraud.
I've been importing garbage from China for the last 5 years. And what my experience tells me is that we (Importers) have dug our own grave and we have helped our countries to become full of toxic crap (literally) and full of toxic money. We failed to tell the truth to our fellow citizens. We saw easy money to be made and forgot that we had to protect ourselves and preserve our own economic biases. Please, he who does not have a Chinese useless piece of crap at home or in his car, raise the left arm.
Oh! I do not see any one. That's your answer... part of the money you had, had gone there. Then I borrowed it from my bank and my bank borrowed it from THERE.
Now they have to try purchase their own crap because we have no money to do it, but they fail.
yep seeb!
The problem is that the world had become a global group... it is not a sum of the countries anymore. Group theory says group is its own worst enemy. Individual countries like USA are sticking to the global group, following the global tendency, borrowing assets from the global group, purchasing goods and services from the global group, even training member elements of the global group and delivering goods and services to the global group. What they fail to understand is that the answer to a problem can't be found inside the system which created it. You have to, either introduce an alien element to the group in order to solve the problem or get out of the system which created the problem, hence the answer is: go away from the global group…. Get out of the crowd.
If anyone needed yet another reason to regulate and break up these gargantuan firms, this is it. They are built for ponzi schemes in their current configuration and no regulation. IMO, we can never attain a sustainable form of capitalism with this financial structure.
Do you
wonderdoubt that this will be on Geithner's new regulatory agenda? Afterall, he's just an apparatchik in our kleptocracy.They have determined that they will be bailout regardless so, if true, why not take more risks - they got nothing to lose and everything to gain at our expense.
Please start formatting your links! I've asked now many times. Look here is the user guide and I cannot make it more easy to format posts. Would you please read it and follow the directions? Thank you.
The only investments that can be called "our investments" are those undertaken by the government. Other than that, there are only "my investments", "your investments", and "his investments". Diversification is not a cure-all. Many small business owners have no way to diversify, all of their capital is tied up in that business. Farmers literally "bet the farm" on each year's harvest. And corporations focus their efforts toward their core competencies. They need some form of insurance, as it makes no sense for these people to diversify away from the areas where they are strongest.
I'm not defending the current state of the CDS market. It is a shameful example of hubris and shortsightedness. But, in order to have a modern and efficient economy, there must be some way to transfer risk to those who are most willing and able to bear it. That is what insurance does.
Thomas Goeghegan suggests that much of our current labor problem can be traced to usury (legislated back in the 70s that made manaufacturing a low ROI). See: http://www.harpers.org/archive/2009/04/0082450
Or we do things the other way- by actually diversifying our investments so that if one investment goes down, no big deal.
Of course, there's also another way to do that- set cost+ pricing. Instead of letting the free market set the price of goods, let the manufacturer do it and take the risk that nobody will buy at the price that allows him to make a profit. Since the price is set by the farmer's costs, he can't lose money on the deal.
I'm not so sure that the cost of managing the insurance company hasn't totally swamped that benefit at that point. One could also say that paying protection money to the mob reduces the risk of getting your property hit, but in the long run, it's a losing proposition.
-------------------------------------
Moral hazards would not exist in a system designed to eliminate fraud.
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