Topic: Economics
SUB-PRIME CREDIT PROBLEMS Sub-prime credit market problems. Cause, Size and Result - Part 1 - Introductionby Jim ODonnell
(libertarian)
Tuesday, November 27, 2007
Well now I have done it. This effort which I have placed upon myself is a little like trying to get a handle on creation from A to Z and to explain it in 100 words or less. But I will do it, none the less, but not in 100 words or less. Lets start at the beginning an give it a go.
Most are aware of the ability of central banks to create money out of thin air, so I will take it for granted that you already know about this process. Many are also aware that this process also creates problems in the economy. Ludwig von Mises referred to this as monetary inflation and the inevitable "crack-up-boom" which follows eventually.
As this process involves all economic entities, namely people, companies, banks, etc., it is unbelievably complicated in actual fact. It is almost impossible to analyze fully since no can have access to all the facts. What is seen occasionally is some particular instance of the problem where it has isolated itself.
I'll use the example of Enron, which is still not fully understood, but the fact is that a multi-billion dollar company went "poof" right before our eyes. It destroyed the company, thousands of employees jobs and retirement funds, and thousands of investors who put their money in the company. People are still wondering how this could possibly happen when there are so many so called "checks and balances" to prevent such a thing. Well the truth is that there are no checks or balances to prevent these things from happening.
If fact most regular forces at work in the economy are geared to make sure that it does happen. The financial media was paid via Enron advertising to ignore any problems, as were the accounting firms who audited their books, the banks who were in collusion with the company had every reason to keep mum, and on and on. Well such is the process which we are currently experiencing which has be labeled as the "Sub-prime Problem."
But as with most things today this is not the real problem but only a very small part of the problem. As we shall see it should be called in a more general sense the "Derivative Problem." But I like small words so I will use the term "mess." To first put things into perspective I will let a person who you all know give his opinion on this matter:
"Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: we view them as time bombs, both for the parties that deal in them and the economic system." "The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear""In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."Warren Buffet, February 21, 2003
He came to this opinion after he bought GeneralRe and was in the process of dealing with about $8 billion in derivatives on their books. Here is one of the smartest financial gurus on the planet pulling his hair out about how to deal with his mess. Have I got your attention yet?
Well this is just my introduction to the problem as this is going to take several articles to get through. I will try to be a good reporter, if possible, and answer all the "Who, What, When, Where and Whys" when I can. Let me finish this part by trying to provide a general scope of the problem.
Inflating the currencies of the world is the general world wide solution of all central banks, and if they perceive any problem the solution is more inflation, and then more inflation. So there are bubbles upon bubbles upon bubbles ad nausea. All this "crap" money needs to go somewhere and for at least the past decade much of it has gone into derivatives of all different kinds.
I bet you all think that a mortgage on real property is not a derivative, right? Wrong!
The best one that I have run across was very common in California and was called a NINJA mortgage. The acronym NINJA stands for " No Income, No Job or Assets." The only real collateral for the mortgage "was" the never ending increase in the value of real estate. This was the beginning of the "Sub-Prime Mess." It was our current Enron so to speak as it is what we saw first.
But this is only the first part of the mess as there are, around the world, about $460 trillion dollars of derivatives hiding in every thinkable dark corner of someone's books. Whose books? Everyone's whether they know it or not and most do not know. How big is the number $460 trillion? Well it is well in excess of 10 times the annual gross production of every living entity on the planet. Seems to me to be a real big deal.
I will try to write the additional parts in compact parts and will also try to do this on a timely basis as the discovery of the problem is going on like topsy. I have no idea how long this will take as I haven't written them yet but I will finish them, hopefully before the mess destroys us all.
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The views expressed in this
article are those of Jim ODonnell only and do not represent
the views of Nolan Chart, LLC or its affiliates. Jim ODonnell is
solely responsible for the contents of this article and is not an
employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.
I have a feeling that I am going to have bitter-sweet feelings about this series, as I am personally a victim of the sub-prime "mess". I have been fighting for the last 7 months to try and purchase my home, and the shady dealings of a few beurocrats has royally screwed me over. I do look forward to reading.
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