Derivative trading rears its ugly head...AGAIN

[wiggin]

It's a sad commentary when tax payers having full disclosure and transparency for OUR OWN MONEY is considered "politicizing". Perhaps it's the other way around---that a "non-political" arm of the government can only do their job when it's done in secrecy?

The issue isn't disclosure or transparency - the GAO audits every year are given to Congress. The issue is that if Congress (or another body) is given the power to investigate monetary policy decisions of the Fed (as opposed to other parts of the audit, such as making sure the Fed isn't stealing money, which is perfectly reasonable), it will open the door to political/partisan control of the central bank. We've seen what this can do in other countries - just look at Argentina's woes right now, let alone a whole host of other countries. Politicians see monetary policy as a very powerful lever they can pull to mask other deficiencies in their economy. If it destroys the long term competitiveness and solvency of their country, what do they care? Monetary policy is best left to technocrats.


BTW, as for LIBOR and TIBOR, obviously everything is related (though not directly tied) to the price of money set by a central bank. But banks decide on their spread, which is limited by competition. You seemed to think it moronic that someone might think a bank set the interest rate they offer, when in fact they actually do.

[ar81]

It's a sad commentary when tax payers having full disclosure and transparency for OUR OWN MONEY is considered "politicizing". Perhaps it's the other way around---that a "non-political" arm of the government can only do their job when it's done in secrecy?

Secrecy exists to favor those who have information (bankers). Financial business produces nothing, so it works like a casino. What some people lose, some others will gain.

FED's monetary policy has been to make dollar expensive and highly desirable. It makes people to be likely to pass assets to dollar. Problem is that an expensive dollar also makes US workers undesirable.

In concert with central bank rates. My point was that many Americans aren't very well informed about buying debt, using credit, or even know the difference between escrow or equity. Let alone why mortgage rates go up or down.

In a time of crisis, people should run away from debt and start saving money. People confuse debt and wealth. People who think about debt are aiming to be poor. You may like to read this:

The Economic Thought of Frederick Soddy by Herman E Daly, Louisiana State University
http://billtotten.blogspot.com/2009/...ick-soddy.html

You also may like to look for an online copy of David C. Korten's book "Agenda for a New Economy: From Phantom Wealth to Real Wealth". You may read it here:

http://books.google.co.cr/books?id=X...wealth&f=false

[GGT]

The issue isn't disclosure or transparency - the GAO audits every year are given to Congress. The issue is that if Congress (or another body) is given the power to investigate monetary policy decisions of the Fed (as opposed to other parts of the audit, such as making sure the Fed isn't stealing money, which is perfectly reasonable), it will open the door to political/partisan control of the central bank. We've seen what this can do in other countries - just look at Argentina's woes right now, let alone a whole host of other countries. Politicians see monetary policy as a very powerful lever they can pull to mask other deficiencies in their economy. If it destroys the long term competitiveness and solvency of their country, what do they care? Monetary policy is best left to technocrats.

Aye, but our monetary policy IS already politicized. We just don't know all their holdings or accounting practices....and everything I've read admits the GAO audit is heavily redacted before congress even sees it all. Political neutrality is the given reason, so it's circular logic. Banks and the "Wall Street" crowd have viewed the Fed as a powerful lever they can pull for a while now, and anyone paying attention sees it play out in real time.

I don't know which came first (the chicken or the egg), but even Dimon's latest "testimony" before banking committees saw him giving "advice" to legislators and the Fed. We have an incestuous relationship between SIFI and Fed's Board of Governors. Less focus on traditional banking and more focus on financials, including newly created "tools" (that aren't well understood even by the people who created them :bulb)

The regional governors who dissent are often from that traditional banking sector, and lock heads with those who come from financial sectors. Seems like terminology, but it's really more about philosophy. They all view themselves as technocrats, to some degree, so that's become a misnomer. Canada's system has more "bankers" than "financiers", and they weathered the storm better than we did. Our Fed has the weird dual mandate that includes "full employment" rates....which signals straight away that labor is driven by monetary policy in a "trickle down" fashion.

As if people getting cheap loans from the banks, who got cheap loans from the Fed....will keep our debt-driven and borrowing-dominant economy humming along. Credit cards, home mortgages, car loans, business loans, equity loans, educational loans, etc. Technocrats can talk about that as a philosophy of an economy until the cows come home, but it doesn't work in all scenarios. Especially not after a mammoth and global FINANCIAL CRISIS when consumer debt is anathema.

BTW, as for LIBOR and TIBOR, obviously everything is related (though not directly tied) to the price of money set by a central bank. But banks decide on their spread, which is limited by competition. You seemed to think it moronic that someone might think a bank set the interest rate they offer, when in fact they actually do.

Not really. But I do think there appear to be more US "morons" than in Europe (or Canada). Not just based by what's in the news, but what comes from forum posters. Banks decide their spread profits, of course. But on this side of the pond, they also used predatory lending, robo-signing, fees-as-profits, and fuzzy math about CDOs and counterparty risks....that almost brought down the global financial system.




edit to AR, appreciate the links. I'll read them one of these days

[wiggin]

Not really. But I do think there appear to be more US "morons" than in Europe (or Canada). Not just based by what's in the news, but what comes from forum posters.

As usual when we discuss these issues, I am going to give up because we're talking past each other. But I wanted to quote this for posterity; I do indeed agree some American posters seem to have a poor grasp of how our financial system works.

[GGT]

Giving up isn't the answer. Talking past one another isn't an excuse for giving up. Our financial and banking systems are now inextricably linked. Globally. Those we call experts or technocrats don't agree on...much of anything.

[agamemnus]

What is SIFI?

[GGT]

"Systemically Important Financial Institutions".

[ar81]

Giving up isn't the answer. Talking past one another isn't an excuse for giving up. Our financial and banking systems are now inextricably linked. Globally. Those we call experts or technocrats don't agree on...much of anything.

The problem of being linked is not the problem. The problem is speculation. Those who buy or sell push prices up or down. If the amount is big money, the price variation will be big in a short time. Price variations have an effect on people. Raising prices cause people to lose buying power, falling prices cause companies to fire people as they have problems to make profit. So the result of every price variation is economic unstability, poverty and a harder time for CEOs and people, the winners are speculators who make money with financial transactions that get a gain out of this unstable economy. This is why Baron Rothschild said "Buy when there's blood in the streets, even if the blood is your own". It means that the best time to make a gain without producing anything is when everything is so bad that the only way it can go is up. It means of course that you buy at cheap price from those who are suffering misery.

If you check who are the richest people at a given time you will realize they are speculators, people who make money without producing anything. A good way to tackle the problem of speculation is to impose a Tobin tax. It not only discourages speculation, but it also discourages economic unstability caused by speculation. Also, government gets some extra money.

The problem of speculation by itself is that it encourages to make money without hard work, without producing anything. If you see what a speculator named Kostolany said, he used to diminish the value of hard work: "speculator goes deep into himself, without contact with the public, without dirtying his hands with a humiliating job, far away from any goods, dusty warehouses, free from the daily confrontations between merchants and traders". So speculation is the easy path of getting money without working.

For capitalism, money was supposed to be an incentive to work. This was abolished with speculation.

If you see an economy where people do not want to produce, where money is not the result of hard work, where people's property is siezed by a greater power, and that greater power has privileges over the rest of population, you see it is a communist state. Well, banker speculators are the new politbureau of the planet.

[GGT]

I disagree (to an extent).. "Speculation" isn't monolithic. Neither are "derivatives". The problem is that 'markets' have intertwined themselves in ways that the 'average' person can't fully understand. Thanks to Banking and Finance having blurred the edges, a 401-K or IRA are tied to municipal bonds, t-bills, currency trades, and institutional or soveign investments *that include credit default swaps*.

There are differences between rational or toxic speculation, rational or toxic derivatives...but most people can't see/understand the differences when their retirement fund includes both. Banking has been dominated by Finance, and financiers. I've been complaining about that for years now, and want to separate "traditional banking" from "financial investments".

*edit: Farmers, manufacturers and distributors should have their own industry exchange, that could preclude non-paticipatory and non-holding speculators. Rather like the grain exchanges that used to operate on a membership basis before all commodities, and all speculation, was lumped into one big Financial glob.*

Consumers and lay people shouldn't be forced to decide if their earned wages work better under the mattress, in zero interest cash bank deposits, or employer-subsidized retirement investment funds . Our economy can't sustain itself that way.

[ar81]

I think you are seeing things from a microeconomic point of view. But if you see it macroeconomically, you may start to see some structural system design flaws.

Financial business produce nothing, so there is an incentive to bypass the effort of actually working and producing something. So it promotes laziness, people with a culture of taking it easy. It damages the real economy as people start to move from hard work to laziness, and that will not make an economy more dynamic, it would create a culture of work like the one that existed in USSR during communist regime. The idea of "passive income" means making money without working, "be lazy and make money".

Also, speculative business increase the demand of a certain currency, making it more expensive as it becomes more desirable. A more expensive dollar means Americans are more expensive and people from other nations are cheaper. So it helps to keep unemployment high in the US as jobs are sent overseas as companies need lower costs. The speculative price variations (that make speculators rich) makes long term planning hard for CEOs in the real economy, and it discourages R&D as it requires long term certainty. So the only certainty you may have would come from government spending that would be the only certain thing in an unstable economy. So unless government funds R&D, US will gradually fall behind other nations in R&D.

Unlike a real investment where you put your money for years, speculation keeps the money at a given place for a few days or even hours. It does not help the real economy at all to have money there for a few hours. Not only these short term operations create price variations that create economic unstability that give a hard time to entrepreneurs from real economy, but it also it gives a hard time to people who lose their jobs and lose buying power. In a real investment you do not care about econoy in the short term, but long term performance of a company. In a speculative investment if it hit bottom it is time to buy, and if price went up to the top it is time to sell. In macroeconomic terms, speculation makes an economy look better than it really is as it inflates volume of operations.

The whole idea of effort and hard work to make being undesirable came from feudalism, where those who worked hard were inferior. US was built on hard work from colonists, real economy, real wealth, not financial ghost wealth. The problem of finances is that it does not value hard work, and its system sends jobs overseas by design. So from a macroeconomic point of view the choice is simple, either you want a job as a citizen and a strong real economy, or you want high unemployment, unstability and financial business that produce nothing.

Do you know why Argentina is thriving now? It is not that they suddenly have very competent politicians. They have real economy jobs that used to be in Europe and US. They have a strong real economy and they are discouraging speculation, just like Brazil. they have cheap currencies that make workers somehow cheaper.

How do you know there is not a bubble in the currency market? If the wages of americans are about average in the planet (currency is not very expensive or very cheap), it means currency has the right value. You can recognize a bubble when people buy because an item price goes up, and it goes up because people are buying. That's precisely what speculation is about. The Fed is not interested in having a cheap dollar to bring jobs back to US as it wants to keep monetary control on the planet. Blaming China for being a currency manipulator will not fix anything. If yuan goes up, jobs will go to other Asian countries that are also very cheap.

[GGT]

There's a lot to unpack there, AR. Agreed with much of your macro points, that we've got structural flaws --- especially since financial wizards created "synthetic tools", monetized debt and even the 'insurance' products for those...products. Agree that shadow banking, dark pools of money, and what you call "ghost wealth" is a problem for economies that want employment, and people with paychecks to keep the train running.

We've had debates about the terminology before, but I've not had much success in explaining the differences (in my view) between "good" or "bad" speculation or derivatives. Let alone explaining that commodities trading has changed since exchanges merged, that farmers/producers (and CEOs as you said) are competing with HFT and day-traders, and have changed what speculation means. That new synthetic derivatives have changed what derived from means, when there are so many counterparties buying/selling debt as profit and don't know the value of the underlying thing, or if it's even real. (ie mortgages)

I suppose, technically, any investment could be considered a speculation of sorts. Even if it's buying/holding for value over decades in hopes a company grows and profits. Even buying treasurys or parking cash in a bank could be called 'speculative', regarding the value of a currency, a country's policies, solvency of the bank or gov't guarantees on deposits. Unfortunately, the gambling and naked betting has gotten mixed in the soup. Saving isn't enough to keep up with inflation, and all sorts of "regular folks" are forced into volatile and speculative markets.

Retiring seniors are told to divest of stocks and buy municipal bonds or annuities (also facing future insolvency or risk), with fees that can eat any miniscule profit or tax deduction. Working age employees are told to put their salaries into 401Ks or mutual funds, with matching contributions, and watch the value plummet during a financial meltdown. Anyone with a pulse is told to buy a home with mortgage debt, then get an equity line of credit to start a small business, and finds themselves underwater with a home they can't sell, and debt they can't pay. Enough dominoes fall and their small business fails, too, when consumers stop consuming. Students are told to 'invest' in college education, using loans to get those degrees (often in industries that are shrinking or not hiring), and find they've got a ton of debt they can never discharge with a minimum wage job.

It's a sad scenario when we find nations debating what kind of capitalism to 'incentivize', because money (capital) has become dissociated from productive labor and work, financiers profit from trading other peoples' money and never "lose", a majority of citizens have too much debt but not enough retirement savings, and Saving isn't enough to take earned money into the future...without losing money.



/rant

[Veldan Rath]

As usual when we discuss these issues, I am going to give up because we're talking past each other. But I wanted to quote this for posterity; I do indeed agree some American posters seem to have a poor grasp of how our financial system works.

And how does GGT fall into that? Poor, Fair to Midland? Good?

[wiggin]

And how does GGT fall into that? Poor, Fair to Midland? Good?

No comment.

[Veldan Rath]

Point taken.

[Loki]

Give it back.

[Veldan Rath]

No, you have too many points and I am just spreading the wealth around.

[Loki]

You wouldn't say that if I were a stay-at-home point maker.

[Veldan Rath]

I might if I thought I could buy your vote...

[Steely Glint]

You wouldn't say that if I were a stay-at-home point maker.

It'd explain your post count.

[Veldan Rath]

Yowsa!

[Steely Glint]

I know, right?

[ar81]

There's a lot to unpack there, AR. Agreed with much of your macro points, that we've got structural flaws --- especially since financial wizards created "synthetic tools", monetized debt and even the 'insurance' products for those...products. Agree that shadow banking, dark pools of money, and what you call "ghost wealth" is a problem for economies that want employment, and people with paychecks to keep the train running.

We've had debates about the terminology before, but I've not had much success in explaining the differences (in my view) between "good" or "bad" speculation or derivatives. Let alone explaining that commodities trading has changed since exchanges merged, that farmers/producers (and CEOs as you said) are competing with HFT and day-traders, and have changed what speculation means. That new synthetic derivatives have changed what derived from means, when there are so many counterparties buying/selling debt as profit and don't know the value of the underlying thing, or if it's even real. (ie mortgages)

I suppose, technically, any investment could be considered a speculation of sorts. Even if it's buying/holding for value over decades in hopes a company grows and profits. Even buying treasurys or parking cash in a bank could be called 'speculative', regarding the value of a currency, a country's policies, solvency of the bank or gov't guarantees on deposits. Unfortunately, the gambling and naked betting has gotten mixed in the soup. Saving isn't enough to keep up with inflation, and all sorts of "regular folks" are forced into volatile and speculative markets.

Retiring seniors are told to divest of stocks and buy municipal bonds or annuities (also facing future insolvency or risk), with fees that can eat any miniscule profit or tax deduction. Working age employees are told to put their salaries into 401Ks or mutual funds, with matching contributions, and watch the value plummet during a financial meltdown. Anyone with a pulse is told to buy a home with mortgage debt, then get an equity line of credit to start a small business, and finds themselves underwater with a home they can't sell, and debt they can't pay. Enough dominoes fall and their small business fails, too, when consumers stop consuming. Students are told to 'invest' in college education, using loans to get those degrees (often in industries that are shrinking or not hiring), and find they've got a ton of debt they can never discharge with a minimum wage job.

It's a sad scenario when we find nations debating what kind of capitalism to 'incentivize', because money (capital) has become dissociated from productive labor and work, financiers profit from trading other peoples' money and never "lose", a majority of citizens have too much debt but not enough retirement savings, and Saving isn't enough to take earned money into the future...without losing money.



/rant

I would say speculation is when you make money without producing anything. In a long term investment stock prices go up because company has more solid profit that is the result of producing something and adding value to a customer with that what you produced, and it is not determined by price variations caused by short term operations. Speculation involves very short term, investment involves long term.

When I talk about "producing" I refer to "value added" that takes place when you physically transform something useless that has low value into something useful that has higher value for a customer. For example, you turn useless rubber and steel into a car. Profit comes from the change of usefulness of raw materials into finished product. Even in what you call "service" you conduct physical transformation. In a hotel you turn useless dirty sheets into useful clean ones. In a restaurant you transform raw ingredients you can't eat into a great meal. The real value of a restaurant is not how well they treat you, it is the food. It would be useless if you had very polite people serving you while your food has dirt and some rats, and your bed has sheets that have not seen a washing machine in a couple of months after hotel had lots of guests there.

Banks and financial business are mostly a department that handle contracts, another handle collections and another one deals with data. They produce nothing. They make money as you pay them more that what they pay to you. Money is just a concept, almost a metaphysical entity. Making money with money, selling or renting money is like selling spiritual blessing.

The exception to the rule of "you pay more, they pay less to you" takes place with banks and fractional reserve system that allow banks to print fake money in their accounting books. This money is lend to people and when people repay they replace this fake money with real money, so the Ponzi scheme is not evident. The money that is printed by banks is what covers the gap between monetary base and money supply.

Money supply = Monetary base + Money printed by banks

When money can't be collected, fake money remains fake and impossible to replace with real money, and then you have a toxic asset. The way in which banks get rid of toxic assets is with money injections that have different names like TARP, bailout, recapitalization, restructuring, quantitative easing (QE), etc. Toxic assets can also be produced with bets that failed.

Derivatives are bets. You buy an insurance that is paid if your neighbor suffers an accident. You are indeed betting that he will have an accident, as you make money if it happens. Derivatives are just bets in a financial casino. The problem of those bets is that people can bet on something and then cause it. It just happened when Goldman Sachs bet against their customers who bought synthetic CDOs, they made a bet against their own subprime mortgages and won.

One of the biggest problems of the current system is that by 2007 bond market was 3 times the size of world GDP, and derivatives market was 10+ times bigger than world's GDP. Bonds and derivatives are debts that are not backed by world GDP, by real wealth. So if a time to pay debts come, the money lots of people had would be revealed to be just a toxic asset, fake money. Another problem is that banks where you have savings should not be allowed to bet, as it creates a conflict of interest between the role of deposit banking and investment banking as they are merged in one.

Americans were convinced about the idea that once you make money, you could make money just by moving money from one place to another in the financial table of the casino. Problem is that just like in any casino, there is always a smart guy who finds a way to keep all the money.

But the biggest problem of all is that bankers are being granted freedom in a way in which banks have all the rights and people have all the obligations. So people and bankers are like cows and farmers.

[Steely Glint]

I mean, like, pssssssttt.

[Dreadnaught]

Do you know why Argentina is thriving now?

The only thing thriving in Argentina is their inflation rate.

[GGT]

....One of the biggest problems of the current system is that by 2007 bond market was 3 times the size of world GDP, and derivatives market was 10+ times bigger than world's GDP. Bonds and derivatives are debts that are not backed by world GDP, by real wealth. So if a time to pay debts come, the money lots of people had would be revealed to be just a toxic asset, fake money. Another problem is that banks where you have savings should not be allowed to bet, as it creates a conflict of interest between the role of deposit banking and investment banking as they are merged in one.

That's the huge elephant in the room, that total derivatives are multiple trillions and exceed global GDP. I agree with you on the problem of mixing retail and investment banks, and bank-holding status for firms like Goldman Sachs. Not only is it a conflict of interest, but it can put our money at risk every time there's a "bail-out" or QE.

Americans were convinced about the idea that once you make money, you could make money just by moving money from one place to another in the financial table of the casino. Problem is that just like in any casino, there is always a smart guy who finds a way to keep all the money.

Not limited to Americans. Other countries did the same things, selling mortgage-backed securities multiple times, pumping housing bubbles, profiting from default insurance swaps, flooding the Private Mortgage Insurance with claims they couldn't pay, investors holding CDOs tangling up the foreclosure process in court....

Iceland was bankrupted by that type of "high finance".


But I'm sure *cough* other posters have a better grasp of the topic, with so much insight they can only make one-line jabs.

[ar81]

The only thing thriving in Argentina is their inflation rate.

Yes inflation is thriving. World economy is designed in a way in which countries must choose between inflation or unemployment. The Fed produces the reserve currency of the world as well as banks (money supply), and it increases the amount of money faster than the world can make its GDP to grow. It causes that more money used to buy less things push some inflation in a planetary level. To get rid of inflation, US sends dollars to other nations that produce goods. Of course it causes lots of inflation in countries with a thriving real economy that exports goods.

In the end Fed and bankers win, as dollars continue to be desirable and expensive compared to other currencies, but it makes American workers more expensive. The only problem of exporting inflation is that inflation destroys buying power of locals, making them cheaper, so jobs are likely to be exported with inflation. As you may have realized, Argentine strategy is strongly based on real economy these days. Also Argentina and Brazil have taken measures to tackle speculation to prevent importing inflation that is not caused by exports and still they suffer inflation.

Brazil imposed a Tobin tax that helps to reduce government deficit and discourages speculation to a certain degree. Argentina has restricted the ability to buy dollars to prevent currency speculation, so it increases the demand of local currency, and it brings inflation as exports are converted to local currency as Argentine government needs to keep a dollar reserve.

By march 2008 Argentina already achieved a record of 50,009 million dollar reserve to keep exchange rate competitive. Reserves act like a shield against any problem in world economy and it is considered by Argentina as one of the pilars of economic policy. Accumulation of dollars is intended to be used against "anticyclic problems" to cover debt with reserves. By april 2012, M2 to reserves was about 1.83, which means that reserves are about 54% of money supply, which is good for Argentina. But it does not come with some problems as M2 is smaller than 20% of GDP while other countries had an average of 85% in 2009. However, it is clear that there is not an excess of reserves, but a thriving real economy that shows a GDP that is very high compared to M2.

Since the culture of other countries consider speculation as a good thing, and it can only be done where prices may have sudden jumps that bring instability with a liberalized market, it is clear that Argentine policy is not seen positively by foreign media with an ideology that favors speculation. So press only shows the negative side without presenting the whole macroeconomic context. Since most of people are ignorant about macroeconomics, or they see speculation as something positive, they think Argentina is having an awful economic policy.

Argentina reduced unemployment from 21,5% (2002) to 8,5% (2007), and poverty from 57,5% (2002) to 26,9% (2006). (Source: http://www.unicef.org/argentina/span...view_11123.htm ). Social improvement despite inflation is something that keeps the president as a very popular character, and also she is very charmy and good to express ideas before the media.

Between inflation and unemployment, US keeps choosing unemployment and this is why through monetary policy that makes dollars more desirable and expensive to protect assets of the rich and banks, Americans are not seen a job recovery. QE is producing money that ends up in other countries.

The core of an economy is a consumer. A company can't live without customers. Government collect taxes from customers and companies. Lending is only good if company profit exceeds bank profit... With less companies and less jobs, the result is less taxpayers and a shrinking economy that it excluding people from economy (they can't buy, they can't make money). In a few words, it is antieconomy to protect the value of assets of the rich. Having an expensive dollar is bad for Americans, and the alternative under the current system design is inflation.

That's the huge elephant in the room, that total derivatives are multiple trillions and exceed global GDP. I agree with you on the problem of mixing retail and investment banks, and bank-holding status for firms like Goldman Sachs. Not only is it a conflict of interest, but it can put our money at risk every time there's a "bail-out" or QE.

Not limited to Americans. Other countries did the same things, selling mortgage-backed securities multiple times, pumping housing bubbles, profiting from default insurance swaps, flooding the Private Mortgage Insurance with claims they couldn't pay, investors holding CDOs tangling up the foreclosure process in court....

Iceland was bankrupted by that type of "high finance".

But I'm sure *cough* other posters have a better grasp of the topic, with so much insight they can only make one-line jabs.

Derivatives are debt. Bankers are having "financial creativity" to find new ways to create debt. In case of a crisis where banks are forced to pay their debts, a huge percentage of derivatives would not be anything but numbers in an accounting book with no real money backing them (toxic assets). This kind of problem already happened with Long Term Capital Management (LTCM) that miscalculated events in their planet finance and ended up with tons of toxic assets. Derivatives are bets. In a bet either the casino or the one who bets lose. Derivatives crisis would take place if a casino miscalculates events and is forced to pay for the bets, something like AIG.

The problem is that fractional reserve system creates toxic assets that create a need for a bailout (currently the fake EU crisis is a panic campaign to make Europe to bailout banks) that injects real money that will be used to create even more toxic assets.

A good solution to avoid the production of toxic assets is to nationalize all banks. Government should lend money only for production purposes after conducting feasibility studies, so profit margin should be higher than interest rates. Interests would become some sort of taxes, and all the money created by those banks would be backed by the value added produced under government contracts. Of course, bankers will not like it as they would have the wage of a government employee.

EU and PIIGS are not having a debt crisis. Greece is only 1/4 of the size of Spanish economy (and it is shrinking) and Spain debt to GDP ratio is far smaller than US ratio. US was ranked as 7th worst debt/GDP in the developed world, with Japan as 1st and Greece as 2nd. Spain was not among the top 10. If PIIGS had a real problem and Euro was in danger, ECB would have issued a QE, as the loss of value of Euro caused by a QE would be smaller than the loss of value of having a PIIGS crisis.

Also, if PIIGS had a debt crisis, it is not logical to ask them to get more debt. This is precisely what they did with Greece and Ireland. They did not bailout nations. They lend money to governments (more government debt) so they can bailout banks. So as you may figure, Greece has a significantly bigger debt problem now than before the bailout. PIIGS crisis is a hoax used to tell Americans that they will not fix US crisis because there is a fake PIIGS crisis there that threatens American economy, a smoke screen.

One-line jabs? I do not worry. There are plenty of people with ideology. Ideology is a belief, like believing that rain dance will make it rain. Unfortunately, reality is not an obstacle for ideologists to accomodate reality to ideology, instead of the opposite. And I do not mean forum posters. i mean some people who are supposed to be considered as serious. For example, in Spain you have Jesus Huerta de Soto, who has a very impressive resume (usually presented at the beginning of his speech to silence people) who believes that the solution to the problem is to give companies (bankers included) even more freedom to use their "creativity" and the money they make out of it should not be "taken" by anyone, including government with taxes, or any kind of social responsibility contribution to the society. Quite a facepalm character.

[GGT]

Between inflation and unemployment, US keeps choosing unemployment and this is why through monetary policy that makes dollars more desirable and expensive to protect assets of the rich and banks, Americans are not seen a job recovery. QE is producing money that ends up in other countries.

It's baked in the cake with the Fed's dual mandate to control inflation and unemployment.

Derivatives are debt. Bankers are having "financial creativity" to find new ways to create debt. In case of a crisis where banks are forced to pay their debts, a huge percentage of derivatives would not be anything but numbers in an accounting book with no real money backing them (toxic assets). This kind of problem already happened with Long Term Capital Management (LTCM) that miscalculated events in their planet finance and ended up with tons of toxic assets. Derivatives are bets. In a bet either the casino or the one who bets lose. Derivatives crisis would take place if a casino miscalculates events and is forced to pay for the bets, something like AIG.

Yep, and people (our culture) has been confused about the differences between "good debt" and "bad debt", "good speculation" and "bad speculation". The financial crisis and meltdown might have been less destructive if there had been better accounting rules, more transparency, higher capital requirements, and limits on leveraging. If "planet finance" had operated like a legitimate gambling casino, they would have had trillions of cash on hand to cover the bets (margin calls). If groups like AIG had operated like a legitimate insurance company, they'd have been prevented from insuring or re-insuring financial derivatives that couldn't be priced, or they'd have charged much higher fees to cover trillion-dollar bets, and they'd have been required to have massive cash reserves. Just like property insurers are required to actually pay claims after a disaster....

I don't think we need to nationalize all our banks, but I wouldn't mind having ONE national bank (like Canada) as an option. I wouldn't even BAN speculation or derivatives, but would segregate them into specific entities that can't mess with retail banking, retail investing, or put any taxpayer money on the hook. We should fully audit our Fed to see just what's on their books, change their congressional dual mandate, narrow what defines a Bank or bank-holding company, and limit who can borrow their (our) cheap money.

[ar81]

Yep, and people (our culture) has been confused about the differences between "good debt" and "bad debt", "good speculation" and "bad speculation". The financial crisis and meltdown might have been less destructive if there had been better accounting rules, more transparency, higher capital requirements, and limits on leveraging. If "planet finance" had operated like a legitimate gambling casino, they would have had trillions of cash on hand to cover the bets (margin calls). If groups like AIG had operated like a legitimate insurance company, they'd have been prevented from insuring or re-insuring financial derivatives that couldn't be priced, or they'd have charged much higher fees to cover trillion-dollar bets, and they'd have been required to have massive cash reserves. Just like property insurers are required to actually pay claims after a disaster....

I don't think we need to nationalize all our banks, but I wouldn't mind having ONE national bank (like Canada) as an option. I wouldn't even BAN speculation or derivatives, but would segregate them into specific entities that can't mess with retail banking, retail investing, or put any taxpayer money on the hook. We should fully audit our Fed to see just what's on their books, change their congressional dual mandate, narrow what defines a Bank or bank-holding company, and limit who can borrow their (our) cheap money.

The problem that prevents banks from having cash is that banks are allowed to print money. I think I will start a thread to present you some interesting things that you only find in literature in non english articles and materials.

[GGT]

Guess I'll add Barclay's here. It's not really about toxic derivative products per se, but since they're a component of the global financial system and shouldn't be ignored as the WMD they are:

Rigged Rates, Rigged Markets

Marcus Agius, the chairman of Barclays, resigned on Monday, saying “the buck stops with me.” His was the first departure since the British bank agreed last week to pay $450 million to settle findings that, from 2005 to 2009, it had tried to rig benchmark interest rates to benefit its own bottom line.

Mr. Agius was right to go and the bank’s chief executive, Robert Diamond Jr., should follow him out the door. But the investigations cannot stop there.

The rates in question — the London interbank offered rate, or Libor, and the Euro interbank offered rate, or Euribor — are used to determine the borrowing rates for consumers and companies, including some $10 trillion in mortgages, student loans and credit cards. The rates are also linked to an estimated $700 trillion market in derivatives, which banks buy and sell on a daily basis. If these rates are rigged, markets are rigged — against bank customers, like everyday borrowers, and against parties on the other side of a bank’s derivatives deals, like pension funds.

http://www.nytimes.com/2012/07/03/op...s.html?_r=1&hp

[GGT]

http://www.marketwatch.com/story/pos...ftc-2012-07-10

Post-AIG derivatives rules unleashed by CFTC
Record-keeping, reporting and clearinghouse rules triggered

WASHINGTON (MarketWatch) — The nation’s commodity futures regulator on Tuesday voted to define which derivatives will be considered swaps, letting loose a slew of transparency-focused regulations for the $650 trillion global industry, considered a key contributor to the financial crisis of 2008.




It's a start at least. One of the comments hinted that capital requirements are gone or loosened, though.