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October 10, 2008

Erectile Dysfunction in the Worst Way

Filed under: Media — baseball91 @ 4:46 AM

Earning reports are the catalyst that drive a stock market.  Up.  There is nothing to drive this market up except the truth.  Bill White is an economic adviser to of the Bank of International Settlements, the world’s clearinghouse for central banks in Basel, Switzerland.  He said last week, in what is about the best common sense I have seen, “But in the end, if the fundamental position is that there is too much credit in the system, something has to give.”  And lower interest rates are not the answer.  In the flood of credit, some people are now gonna drown.  They should drown.  The AIGs.  The Morgan Stanleys.  Goldman Saches.  The rescue was not offered to Lehman Brothers.  They caused this mess.  So did Merril Lynch, Morgan Stanley, Goldman Sachs.  And Bear Stearns.  Henry Paulson and the former treasury secretary in the Clinton Adminstration, Paul Rubin, aboth ran Goldman Sachs.  Rubin is now advising Senator Obama.  So we are all gonna drown with the 5 investment banks in the $531 trillion dollars in liabilities created with all of these derivatives.    



In an article on March 10, 2008, PAUL B. FARRELL



In Warren Buffett’s 2002 letter to Berkshire shareholders, he warned of a future that many others chose to ignore.  Fresh on Buffett’s mind was his acquisition of General Re four years earlier, about the time the Long-Term Capital Management (LTCM) hedge fund with a relatively small $5 billion trading loss which almost killed the global monetary system. LTCM nearly killed the system with an amount that was peanuts compared with $531 trillion dollars of subprime-credit write-offs now making Wall Street’s big shots look like amateurs.


In five years, derivatives metastasized into a massive bubble, from about $100 trillion to $516 trillion by 2007, according to the most recent survey by the Bank of International Settlements, the world’s clearinghouse for central banks in Basel, Switzerland. According to the New York Times, the derivatives market is$531 trillion, up from $106 trillion in 2002 and from a relative pittance of that of just two decades ago. The financial contract “derives” value from underlying assets like stocks, bonds and commodities. Derivatives were created to soften — or as a “hedge” — investment losses. Some of the contracts protect debt holders against losses on mortgage securities. It is my understanding a point of reference is needed to be created for the performance of the market against which the derivative contracts are priced.  In the case of property derivatives, value is derived from the value of an underlying real estate asset, with a. the reference used by Standard and Poors of the S&P Case Shiller, or the Investment Property Databank and the FTSE index in the United Kingdom.  Many individuals own a common derivative: the insurance contract on their homes.


To put that $516 trillion in the context of some other domestic and international monetary data:

  • U.S. annual gross domestic product is about $15 trillion
  • U.S. money supply is also about $15 trillion
  • Current proposed U.S. federal budget is $3 trillion
  • U.S. government’s maximum legal debt is $9 trillion
  • U.S. mutual fund companies manage about $12 trillion
  • World’s GDPs for all nations is approximately $50 trillion
  • Unfunded Social Security and Medicare benefits $50 trillion to $65 trillion
  • Total value of the world’s real estate is estimated at about $75 trillion
  • Total value of world’s stock and bond markets is more than $100 trillion
  • BIS valuation of world’s derivatives back in 2002 was about $100 trillion
  • BIS 2007 valuation of the world’s derivatives is now a whopping $516 trillion

Derivatives have become the world’s biggest “black market,” exceeding the illicit traffic in stuff like arms, drugs, alcohol, gambling, cigarettes, stolen art and pirated movies. Why? Because like all black markets, derivatives are a perfect way of getting rich while avoiding taxes and government regulations. And in today’s slowdown, plus a volatile global market, Wall Street knows derivatives remain a lucrative business.


The folks at BIS tell me their estimate of this $516 trillion “notional” value (maximum in case of a meltdown) doesn’t include private deals between two “non-reporting entities.” But includes “transactions in which a major private dealer (bank) is involved on at least one side of the transaction,” adding that their reporting central banks estimate that the coverage of the survey is around 95% on average.  Also, keep in mind that while of the deals is a good measure of the market’s size, the 2007 BIS study notes that the $11 trillion “gross market values provides a more accurate measure of the scale of financial risk transfer taking place in derivatives markets.”



That “domino effect” is now repeating many times over, straining the world’s monetary, economic and political system as the subprime housing mess metastasizes, taking the U.S. stock market and the world economy down with it.


Bill Gross is the best bond fund manager in the world.  Pimco’s bond fund king said “What we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August 2007.” In short, not only Warren Buffett, but Bond King Bill Gross, our Fed Chairman Ben Bernanke, the Treasury Secretary Henry Paulson and the rest of America‘s leaders can’t “figure out” the world’s $516 trillion derivatives.


Gross says we are creating a new “shadow banking system.” Derivatives are now not just risk management tools. As Gross and others see it, the real problem is that derivatives are now a new way of creating money outside the normal central bank liquidity rules. How? Because they’re private contracts between two companies or institutions.


Columnist Jesse Eisinger’s $300 trillion figure came from an earlier study of the derivatives market as it was growing from $100 trillion to $516 trillion over five years. Eisinger concluded: “There’s nothing intrinsically scary about derivatives, except when the bad 2% blow up.” Unfortunately, that “bad 2%” did blow up a few months afterwards, even as Bernanke and Paulson were assuring America that the subprime mess was “contained.”


BIS is primarily a records-keeper, a toothless tiger that merely collects data giving a legitimacy and false sense of security to this chaotic “shadow banking system” that has become the world’s biggest “black market.”  Central banks require reserves like stock brokers require margins, something backing up the transaction. Derivatives don’t. They’re not “real money.” They’re paper promises closer to “Monopoly” money than real U.S. dollars.  And it takes place outside normal business channels, out there in the “free market.” That’s the wonderful world of derivatives, and it’s creating a massive bubble that could soon implode.


Op-Ed Columnist

That Hissing Sound


Published: August 8, 2005

This is the way the bubble ends: not with a pop, but with a hiss.

Housing prices move much more slowly than stock prices. There are no Black Mondays, when prices fall 23 percent in a day. In fact, prices often keep rising for a while even after a housing boom goes bust.

So the news that the U.S. housing bubble is over won’t come in the form of plunging prices; it will come in the form of falling sales and rising inventory, as sellers try to get prices that buyers are no longer willing to pay. And the process may already have started.

Of course, some people still deny that there’s a housing bubble. Let me explain how we know that they’re wrong.

One piece of evidence is the sense of frenzy about real estate, which irresistibly brings to mind the stock frenzy of 1999. Even some of the players are the same. The authors of the 1999 best seller “Dow 36,000” are now among the most vocal proponents of the view that there is no housing bubble.

Then there are the numbers. Many bubble deniers point to average prices for the country as a whole, which look worrisome but not totally crazy. When it comes to housing, however, the United States is really two countries, Flatland and the Zoned Zone.

In Flatland, which occupies the middle of the country, it’s easy to build houses. When the demand for houses rises, Flatland metropolitan areas, which don’t really have traditional downtowns, just sprawl some more. As a result, housing prices are basically determined by the cost of construction. In Flatland, a housing bubble can’t even get started.

But in the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions – hence “zoned” – makes it hard to build new houses. So when people become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles.

And Zoned Zone housing prices, which have risen much faster than the national average, clearly point to a bubble.

In the nation as a whole, housing prices rose about 50 percent between the first quarter of 2000 and the first quarter of 2005. But that average blends results from Flatland metropolitan areas like Houston and Atlanta, where prices rose 26 and 29 percent respectively, with results from Zoned Zone areas like New York, Miami and San Diego, where prices rose 77, 96 and 118 percent.

Nobody would pay San Diego prices without believing that prices will continue to rise. Rents rose much more slowly than prices: the Bureau of Labor Statistics index of “owners’ equivalent rent” rose only 27 percent from late 1999 to late 2004. Business Week reports that by 2004 the cost of renting a house in San Diego was only 40 percent of the cost of owning a similar house – even taking into account low interest rates on mortgages. So it makes sense to buy in San Diego only if you believe that prices will keep rising rapidly, generating big capital gains. That’s pretty much the definition of a bubble.

Bubbles end when people stop believing that big capital gains are a sure thing. That’s what happened in San Diego at the end of its last housing bubble: after a rapid rise, house prices peaked in 1990. Soon there was a glut of houses on the market, and prices began falling. By 1996, they had declined about 25 percent after adjusting for inflation.

And that’s what’s happening in San Diego right now, after a rise in house prices that dwarfs the boom of the 1980’s. The number of single-family houses and condos on the market has doubled over the past year. “Homes that a year or two ago sold virtually overnight – in many cases triggering bidding wars – are on the market for weeks,” reports The Los Angeles Times. The same thing is happening in other formerly hot markets.

Meanwhile, the U.S. economy has become deeply dependent on the housing bubble. The economic recovery since 2001 has been disappointing in many ways, but it wouldn’t have happened at all without soaring spending on residential construction, plus a surge in consumer spending largely based on mortgage refinancing. Did I mention that the personal savings rate has fallen to zero?

Now we’re starting to hear a hissing sound, as the air begins to leak out of the bubble. And everyone – not just those who own Zoned Zone real estate – should be worried.

From Dave Smith’s Economics website…” Bill White is a Canadian economic adviser to the Bank for International Settlements (BIS), the Basel-based central bankers’ bank.   Alan Greenspan appeared to be aware of the danger. He watched with alarm as each time the debt bubble threatened to burst.  However, Greenspan and his fellow central bankers around the world, rather than accepting a temporary downturn in their economies, pumped up the bubble even more by cutting interest rates. “What amazed me was how each time they managed to rejuvenate the system by reducing interest rates,” Bill White said last week. “But in the end, if the fundamental position is that there is too much credit in the system, something has to give.”  In June 2007, two months before the present global financial crisis broke into the open with devastating effect, White warned in the Bank for International Settlements’ annual report that, just as “no one foresaw the Great Depression of the 1930s”, so it was possible that mainstream economic opinion was understating the dangers from toxic debt.  It was a common view that “busts” could be swiftly tackled by central banks cutting interest rates, White noted. But just because that had worked in the recent past did not mean it would in the future.


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