Friday, January 30, 2009

Where Did All The Money Go?

Just a year or two ago it seemed that everyone was flying high. Money was plentiful, interest rates were cheap. Today the $ signs are used as a measure of debts and deficits instead. So what happened, where did all that money go? If you're curious, check out this informative presentation from The Guardian:

The notional value of all derivatives, including credit default swaps, is estimated as high as EIGHT HUNDRED AND SIXTY THREE TRILLION DOLLARS! Impossible, you say? Well, you're right and you're wrong. We've entered an era where fiction and reality have combined.

Take credit default swaps, for example. They're a recently decriminalized form of bogus insurance. The Wall Street house wanted to sell you derivatives - hodgepodge bundles of bits of countless mortgages. You wanted extra protection so, to cinch the sale, the Wall Street house sold you a side bet called a credit default swap. The Wall Street house was, for pennies on the dollar, promising to insure your investment.

Now here's the thing. Anyone in his right mind who looked at these mortgage derivatives and the associated credit default swaps would know the Wall Street houses never had the mountain of retained assets that would be needed to make good those credit default swap insurance policies.

All of a sudden you have both notional assets plus notional debt obligations. It's not a lot better than buying a billion dollar IOU from the bum begging on the street corner.

I still maintain that the global financial crisis would be manageable if all this notional debt was parcelled out of the equation and recognized as debt only to the value actually paid for these swaps, pennies on the dollar. These were assets that were worthless to begin with. Why should anyone, especially innocent tax payers footing the bill, recognize them for a dime more than that? In fact you could argue that they should just be declared null and void. The mind boggles.

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