First, dash over to Salon and read this Tom Tomorrow cartoon. It establishes some context for the bail out proposal. Now let’s look at derivatives — investments (or “bets”) that are meant to spread and reduce portfolio risk. Thanks to RB for forwarding this, it originated here.
Analogies are never perfect, but here’s one using horse racing. Don’t expect a perfect correspondence to the banking situation, but I think it is close enough for government work.
Joe goes to the track and bets $2 on a horse.
Two guys standing nearby get into a discussion and Fred says to Sam, “I’ll bet you $5 that Joe wins his bet.”
Next to them are Bill and Bob. Bill says: “I’ll bet you $10 that Fred welshes on his bet if he loses.”
Next to them is Sally. Sally says: “For $3 I’ll guarantee to Bill that if Bob fails to pay off, I’ll make good on the bet.”
Sally then goes to Mary and borrows the $7 needed in case she has to ever pay off and promises to pay back $8. She doesn’t expect to every have to pay since she believes Bob will always make good. So she expects to net $2 no matter what happens to Joe.
A quick calculation indicates that there is now 2+5+10+3+7 = $27 riding on the outcome of the horse race.
Question how much has been “invested” in the horse race?
Answer:
$50,000 by the owner of the horse who is expecting to recoup his investment from the winnings of the horse and other future deals. Everyone else is gambling, not investing.
The author goes on to say: “…when you hear everybody saying this is a crisis caused by the housing collapse, be skeptical. We are in the midst of a classic pyramid or Ponzi scheme and there is no way out except for people to lose a lot of money. All that is different this time is that it is the taxpayers who are being asked for the cash.”
Somebody seems to have gotten the message, because instead of the quick banking industry bail out that would have merely been a first installment on the American tax payers paying down (for the “greed is good” crowd) the trillions of dollars worth of casino-like losses on derivatives that are emerging due to the mortgage crisis, today the bailout was rejected by the House of Representatives. Congress has finally told GW Bush, “Fool me once, shame on me, fool me again and again, well f**k you.” It remains to be seen what government will do, but in any case they won’t get it done before the end of the quarter tomorrow, so we can expect some rocky third quarter reports from the corporate world.
Some indication of [the derivative market’s] anatomy has been revealed in a report released this month by the Bank of International Settlements (BIS) in Basel, Switzerland. These guys should know, because BIS is the mother of all central banks. It lends money to central banks of other countries, clears international give and take and generally keeps track of financial markets.
According to its quarterly report, the total amount outstanding in the derivatives market was $677 trillion at the end of 2024.
Half the world’s derivative trading takes place in the US. How much of the trillions of dollars worth of vapor produced by the gamblers in the derivatives market is toxic? How much links directly to institutions and institutional clients that are sinking or have been sunk by the mortgage mess? I’ve seen estimates of five to eight trillion dollars, but have no clue what those were based on. Suffice it to say that the “bail out” would probably have been a 10% down payment on covering the markers that the free marketeers have outstanding.
If this kind of thing happened on the street, somebody would have broken kneecaps by now. As it is, the corporate elite feel entitled to a “bail out.” This brings us back to the Tom Tomorrow cartoon. If we don’t bail them out, they threaten to take all of us down with them. A collapse of insurance funds, pension funds, devalued equities held by the widows and orphans that Wall Street has always been so proud to serve — these things could pauperize a sizable chunk of the middle class. What will Congress do to cushion the impact?
So, what is to be done?
No one likes the bailout notion.
Do the house Dems pass the bailout without house Republicans thereby loosing the election for Obama?
No one likes the bailout notion.
Do Dems make a new bailout with ability of bankruptcy judges to modify conditions of foreclosed mortgages, and to formally and finally forbid naked shorting?
What the Repubicans were holding out for was another tax cut on capital gains (so the speculators who bought bad paper can now not pay taxes on the gains they get from higher valuations after bailout?) They (house republicans) are after all, principled folk). Should the house dems bow to that tax cut to get a 50/50 vote on this deal?
What happens if we don’t do a bail out? I mean, it’s easy enough to say that the economy is in serious trouble, and it’s George’s fault. Sure, who wouldn’t disagree with that?
But, that doesn’t answer the question of what is to be done now.
I grew up on a historiography that blamed the Great Depression on speculators and crooks and lack of regulation. It blamed the depth and worldwide spread of Depression on lack of timely govt intervention by “free market” Hoover. It praised the New Deal for fixing it through innovative intervention by FDR. Others said that actually the only thing that stopped the free fall of the Great Depression was WWII. That solution isn’t really available to us now (yes, thanks to George). So….
Now do we say Democratic party should step aside and watch the crash just to show how bad George is? It could be really bad, and then who’s fault will it be for not acting?
Or, do we let the market fall until the next administration and give a bailout to someone else in the hope that non-timely intevention in the market will resolve it?
We’re between a rock and a really hard place. We can fuss about the bruising, but how DO we get out of it? “A pox on both their houses” doesn’t get us anywhere.
Where I live unemployment is already 11%. Months of fires this summer meant that our businesses lost all of their tourist season. Our County government and the only hospital within an hour’s drive are already on the brink of bankruptcy.
I don’t know the answer to this question.
So, did you know you could submit questions for the next Presidential Town Hall Meeting?
Log into Mydebates.org and submit your questions. Today (Tuesday) is the last day.
Here are the ones I’ve submitted.
1. IRAQ:
To: Senator McCain: “You speak often of departing Iraq only with “Victoryâ€. What does “Victory†in Iraq mean to you?â€
To: Senator Obama: “What conditions in Iraq would lead you to begin an orderly withdrawal? What is your expectation of what will happen there after such a withdrawal?â€
2. ECONOMY:
We now face the worst financial crisis since the Great Depression. Historians and Economists differ on their assessment of the causes for the Depression and the reasons why it became as deep and long lasting as it did.
To Both Candidates: “What is your assessment of what caused the Great Depression, and why it became as long and deep as it did?
What parallels do you see with the current crisis, and how do they affect your position on the Wall Street Bail Out?â€
3. HEALTH CARE
Health and Human Services Department recently proposed a ruling (HHS OS 2024-0011-000) intended to strengthen Provider Conscience protections with respect to medical service providers. A NY TIMES Op. Ed piece on 9/19/08 “Blocking Care for Women†asserted that it will reduce availability and accessibility of birth control prescriptions.
To Both Candidates: “What is your view with respect to an appropriate balance between Provider Conscience protections and Women’s Reproductive Rights?â€
What would you like to ask the candidates? You can post them to the debate site, who knows, maybe they’ll be asked.
Hi Betty Jo,
Regarding your first comment, a friend passed me a link to William Greider’s take on the economic situation. Greider’s conclusion is,
Thanks for the second comment. I didn’t know about the Presidential Town Hall Meeting, but now I’ll give some it some thought and maybe submit a question or two. I think I’ll just copy your questions on Iraq. I think they’re great.
Regarding “The Economy,” I’ll probably ask something like, how would you use government influence and control to guide or regulate the financial markets to correct the recession and prevent future “greed is good” advocates from destroying middle class savings and retirement programs?
Health Care? When are you bozos going to convert the present pay-to-play health care delivery system that bankrupts so many people (who, when faced with a life or death choice, choose expensive treatment) into a decent program of socialized medicine? That’s what I’ll ask, but I may leave out the “you bozos” part.
The graphic in this blog post sums it reasonably neatly for me.
Good graphic! Good post.