posted
Jun 17, 2010 by News Gatherer
There are places like Walmart that sell “shitty clothing”. When the car breaks down a year later you don’t blame the seller for selling you a shitty car – you knew what it was when you bought it and the value it sold for reflected that. Selling something that you think is “shitty” doesn’t demonstrate malevolence or malfeasance. There are used-car lots and craigslist sellers who sell “shitty cars”. A “shitty car” could be a great deal if it’s worth more to the buyer than he paid for it. Suppose I buy a car for three hundred bucks or a shirt for five bucks – nobody in this deal is expecting stellar product quality. It often shows just the opposite, in fact. That is a valid specialty. In the case of the “shitty deal”, the Congressman is failing to understand that *prices matter*.
It is high time for meaningful reform that addresses the root cause of this economic debacle, and it begins with a drastic rollback of deregulation across ALL markets. I haven’t commented in a while here but wow what a great article! I’m hoping the spate of losses in recent primary contests is a sign of things to come, that NO incumbent or establishment ringer, Republican or Democrat, is safe; that the public is fed-up, FED-UP, with the dog-and-pony show that Washington has become. And finally, FINALLY, let us lay to rest the notion of the 40th president of this country as some kind of vaunted saint. Take a look at almost every problem the U.S is facing today and see that all roads lead to Ronald Reagan: http://www.youtube.com/watch?v=kiazwyRMGT8.
The only reason we can have the Welfare-Warfare state that we do is because we print reams of increasingly worthless dollars backed by nothing to maintain the illusion, but like all fiat currencies, it will collapse, first in Europe, then here. This whole heathcare scheme is “financed” with money we don’t have. Social security is a bigger ponzi scheme than Madoff. It was first FDR, then Nixon who took us off the Gold Standard that made our money worthless over time and is about to bring about the great Weimar style hyperinflation in the next couple years. It is the fed as lender of last resort that will bail out the “too big to fails” that allows firms to to take outlandish risks because like Chrysler and the Savings and Loans crisis before this latest meltdown, they will never be punished for stupidity and greed, just given a handout at taxpayer expense. We don’t have a free market. It is the fed setting artificially low interest rates against the wishes of the market that creates the sub-Prime fiasco. The Fed is the engine of our crushing debt. It is the central planning of the fed that floods the market with cheap credit that creates the bubbles. Woodrow Wilson’s bringing in the Federal Reserve, which is a private bank that prints our currency against the wishes of the original constitution and lends it back to us with interest, that is the real head of the snake. You’re don’t even have the half of it, Roger. Now we are bailing out Greece. This whole idea that the “free market” created this is just wrong. We have State Capitalism.
It is basically planned failure of a certain number of mortgages. Of course, they always plan for some failures, but here the plans went to an extreme that placed no value on the stability of the market. When that happens, the problem is not “shiftless homeowners.” The problem is that the system is stacked against homeowners, creating more homeowners unable to pay than before. Again, something very big happened here – foreclosures and bankruptcies on a level that far exceeded anything we’ve seen before. How many can fail before the system collapses? Let’s test that limit.”. “We plan on some people failing but we can make money off of that. If we can make money on that, then it’s in our interests to make more deals, even those we know more of them will fail. It was all lend and make money now, deal with the consequences later.
It can be shown mathematically via the Efficient Market Hypothesis, even in its weak form, that financial markets function more efficiently and assets are valued more accurately if investors have a variety of instruments of this sort to trade. It is the same process, mutatis mutandis, for calls. Moreover, none of these practices is remotely new; they are about as old as stock markets themselves. If the price declines, say, to $3, the option is exercised by buying the stock at $3 and selling it at $5 to fulfill the put contract. In economic nomenclature, buying an asset because you think its value will increase is called “buying long.” Its counterpart, based on the belief that the asset’s value will decline, is known as “selling short.” In this case, assets are borrowed from a third party with the goal of repaying them later with assets purchased at a lower price. Other types of transactions include “puts” and “calls,” which are options to sell and buy, respectively, assets at a particular price. In the first case, one buys low and sells high; in the second case one sells high and buys low. There is nothing intrinsically better or more moral about buying long than about selling short. For example, one contracts a put at $5 per share. This is an option to sell the stock at $5 per share. A call is a bet that the asset’s value will rise, at which point the contract will be exercised. The put is a bet that the asset’s value will fall, at which point the option is exercised. I agree with your excellent essay, and with the movie’s position as you have described it. However, there seems to be a misconception out there that betting that an assset’s value will decline is somehow shady per se. The stock is not owned when the contract is made, and it is only owned on paper when it is bought at the low price and immediately sold at the higher one when the put is exercised. Credit default swaps and other such contrived instruments should be abolished.
When you look at the loss of new home sales, we spent $268 billion for new homes in 2003 and $134 billion in 2008. But our increase in oil spending was OVER FIVE TIMES greater than our loss in new home sales at $900 billion: or combined with existing homes sales, the aforementioned $163 billion dollars, the loss is compared to the $760 billion rise in oil expenditures: which is still FIVE TIMES greater. The total value of the housing market (existing home sales combined with new home sales) was $785 billion in 2003 compared to $622 billion in 2008, which is only a $163 billion dollar decline at its worse. We only lost a few hundred billion dollars.
Yes, capitalism encourages innovation. The free market is a unicorn: a lovely, magical idea that no intelligent adult believes exists. Corporations that achieve dominance in the marketplace cannot guarantee that they will always be able to maintain dominance through continued innovation, and so they will use other means to insure their position. They will crush or buy out competitors via marketing and via their access to government. They will fix prices. They will form trusts. But innovation is change, and change is unpredictable.
But they are not natural, and indeed they could never survive in the wild because their hair never stops growing and they don’t shed. Capitalism is like that: trained, disciplined, and groomed regularly it’s a great system. Standard poodles are great dogs: bred as water retrievers (the reason for that ridiculous cut some show-dogs have), they are amazingly intelligent, affectionate, and can be be trained to do almost anything except be seeing-eye dogs (too curious, generally). I called the free-market a unicorn. Left on its own, without intervention, it dies and gets replaced by oligarchy because the goal of those who achieve a dominant position in an industry is to maintain that position at all costs. After a year, they wouldn’t even be able to see. Actually, the better analogy might be to say that capitalism is a standard poodle.
At the top of the market, the credit default swaps were actually marketed as greatly underpriced insurance polices. Insuring all 1000 million against default cost less than 20 million. In some cases, the bonds went bad less than a year after they were created so they’d have 1000 million on a 30 million investment in less than a year. Magnetar et al helped structure and bought the 10 million bad piece, paid the 20 million to insure the whole 1000 million (even though their insurable interest was only the 10 million they owned) and then received 1000 million from the insurer when the bonds went bad.
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