The real problem with the economy
The subprime home mortgage industry isn’t the half of what got us into this mess. I’m no expert on economics but I do know how to read and what we are seeing today has more to do with a new and improved shell game brought to us by the bankers themselves. Specifically, instruments called credit default swaps developed by a JP Morgan banker named Blythe Masters.
In 1997, she and a team developed many of the credit derivatives that were intended to remove risk from companies’ balance sheets. The idea was to separate the default risk on loans from the loans themselves.
The risk would be moved into an off-balance sheet vehicle. The product was called Bistro, otherwise known as broad index secured trust offering.
In a guide to understanding the instruments she had created, Masters sung their praises: “In bypassing barriers between different classes, maturities, rating categories, debt seniority levels and so on, credit derivatives are creating enormous opportunities to exploit and profit from associated discontinuities in the pricing of credit risk.”
In the classic con, the operator places a pea under a shell and then shuffles the shells around. He tells his mark that he can double his wager if he picks the shell with the pea but the mark never wins and the operator keeps the cash. That’s exactly what’s happened in our market except the shells are replaced by fudged balance sheets, the pea with debt and the playing surface is worldwide. The problem is that now nobody knows quite how to fix it or even what’s out there.
All that you’re hearing about the subprime mortgage business is really just a small part of the con and it’s being explained like it is so we can get pissed off about perceived irresponsibility of our neighbors. It’s meant to be divisive so you don’t look at the truth. And the truth is that fancy, schmancy bankers have once again fucked the common man and they will continue doing so with the government’s blessing.
Thank your weak representatives and stock up on lube ‘cuz $700 billion is just the start of what we’re in for. (Ok, truthfully, I didn’t stock up on lube but I did hit Sam’s club to stock up on household stuff at today’s dollar value.)
(For more about JP Morgan, start here and follow the rabbit hole.)
Great post, but there’s way more to it than that. I place square blame on the government who made banks make loans to bad risks via the Community reinvestment act. The market adapted to government mandates by offering derivatives, which, in an ideal world, would reduce risk exposure by transfer to speculators.
Jeff
This is very true…both posts. I also feel that there is more. I put all the blame on the banks and government. For these reasons here and the fact that a large chunk of that really nice $700bil went to the banks. Now….what the heck are they gonna do with that money??? are the going to buy products??? are they gonna put it to good use???? No….they will stick it in there already large pocket books. What should have happened was we, the people, should have gotten it. Why you ask? Well…what are people really good at doing with money? Spending it!!! Invest it!!! And what does this do? it raises product demand…so the companies need to produce more…so they hire more people to keep up with demand….so they are taken care of. When you buy a product from a retail store….they keep employees to keep up with their jobs…and the retail store gets money….they are taken care of. They buy cars….dealer gets their chunk….and the car makers need to make more…theres more jobs….they are taken care of. People would also pay off bills….so then the banks and gov get their money. People would also invest it….giving money to the banks to invest and loan out….so they are taken care of. But no….they gave the money to the banks and look at where we are now.
Jake