UPDATE link below.
From every industry, trade or profession we are confronted with words, phrases and titles that are only primarily understood by those who work in those industries, trades or professions. Nothing new or profound about that.
During the course of our nation's financial implosion, we have heard new titles and phrases….ones we've never heard before….or at least, most of us haven't. Credit default swaps….collateralized debt obligations….structured investment vehicles…..all stuff that might as well be in Swahili, unless, of course, you work with those names every day.
Yet, the financial activity behind those strange titles have brought about America's worst financial disaster in 70 years. What those titles represent is at the heart of our national meltdown.
Let's consider only one of those strange finance-industry titles. Credit default swaps. For non-expert people, like The Reverend, simple metaphorical explanations of complex issues…are helpful. Like this one…
"Imagine being able to insure a car that you don’t own or use. Imagine it’s the car your neighbors will let their teenage son drive, when he gets his license in a few weeks — and you know the kid is a reckless brat.
Now imagine that, by using financial derivatives called swaps, you can purchase as many insurance policies on this car as you can afford to pay premiums on.
When that car is eventually trashed and scrapped, you — and any friends you clued in on the deal – might collect millions, even billions, of dollars. By contrast, your neighbors, who bought real insurance on a real vehicle, get only its Blue Book value." Link
Let that sink in for a minute….or reread it just for the hell of it. Why? Because the above explanation is the very reason why approximately $100 billion of tax money was handed over to AIG…..and they still aren't out of the woods yet.
If the Masters of the Universe,…..those oh-so-wise-and-highly-sophisticated directors of money…..those who, you know, move and shake our once-great economic engine….created such a system as outlined above….who are we…the non-expert, unsophisticated sluggards that we are….to argue?
While the corporate controlled media, night after night, puffs itself up with faux-rage over junkets, bonuses, and guys named Madoff and Stanford…..nothing, not one peep, is said that explains this about credit default swaps….
"There’s still no rule against them, nor a wisp of regulation."
The foreign sounding title….credit default swaps….in the real world, allowed for the Masters to amass bets against mortgage backed securities even though those placing the bets had no stake, whatsoever, in those securities. Just like unlimited buying of car insurance on the neighbor's teenage kid when it's not your kid and not your car.
As mortgages began to fail over the last couple of years, thus deteriorating the worth of mortgage backed securities, those who didn't own any mortgage backed securities…had no skin in the game, as it were,….began collecting their bets, exhausting most of the capital that AIG (the insurers) had. The government rushed in, with boat loads of our tax dollars, to rescue this still-ongoing Sophisticated financial activity.
Although credit default swaps are only one piece of the overall meltdown puzzle, they are a big piece.
I often hear and read conservative stuff still suggesting that an unfettered free market is the pathway to national prosperity. Let the market breathe freely, they still say. Deregulation is still being advocated.
Credit default swap wizardry is the direct result of an unfetttered, deregulated, 'trust us' approach to the financial industry.
Now, we're all paying for the wreckage.
UPDATE: Demostrating, one again, that The Reverend is slightly ahead of the curve….here's today's (Sunday) New York Times.
{ 8 comments… read them below or add one }
Another great peice of legislation signed in by Pres Clinton. They will only use what they have been allowed.
I blame the WHORE Democrats.
I KNOW they erupted the last time,
Leaving the 70's a waste-land.
The Republicans saved the U.S. (us),
From the grief of debt.
We now live in the straight jacket,
Fabric of tax and spend!
When the soft swaddle,
Of supply side spending,
Could lull us (U.S.) to slumber.
Halifax…..what have I told you about taking your meds? Huh? You simply must take those meds.
Have you been attending hip-hop poetry classes, again? Was Michael Steele in your class?
Rev, I used to hang around HooKa houses with beatniks that wrote poetry like Hal. All we need is the drummer in the background. Haha. Do you remember them?
Sure do. Good times.
Halifax has something going on there. I'll have to see more of his stuff before I sic 911 on him.
Five months ago This American Life did a show on this subject. It well worth paying the $.95 cents to listen to it. Entertaining and educational.
http://thisamericanlife.org/Radio_Episode.aspx?sched=1263
Act One. The Day the Market Died.
Alex Blumberg and Adam Davidson recount the 36-hour period, two weeks ago, when the credit markets froze. Plus, what it’s like now for businesses to get short-term loans, and how the hardship is spreading to every sector of the economy. (16 minutes)
Act Two. Out of the Hedges and Into the Woods.
One more confusing financial product that’s bringing down the global economy. And one of way to think about this product is this: If bad mortgages got the financial system sick, this next thing you’re about to hear about, helped spread the sickness into an epidemic. These are "credit default swaps." Alex explains. (19 minutes)
Act Three. Swap Cops.
Ira talks with Michael Greenberger, a former commodities regulator, who tells the story of when it was decided not to regulate credit default swaps. And how that decision was emblematic of the way we didn’t regulate a lot of the toxic financial products we’re hearing about now. (8 minutes)
Looks like the Reverend left out some crucial information. Again.
Credit Default Swaps became exempt from regulation with the Commodity Futures Modernization Act of 2000, signed into law by President Clinton in December 2000. The subprime loans were also the result of legislation signed into law by President Clinton late into his second term, which allowed investment banks (Wall Street) into the mortgage loan arena that only commercial banks played in prior to that. The investment banks were the first ones to collapse. Add Democratic playtoys Fannie Mae and Freddie Mac to the mix to bundle and sell half the loans in the country, and we created a market where nobody was responsible for their own actions, and kaboom, a financial crisis the second the housing market turned downward.
So much for blaming it on Bush. I wonder why Obama never points this stuff out when he talks about the failed policies of the past. Never mind, I already know why.
And Rev, I've never heard one conservative in my entire life advocate an "unfettered" free market.
Nice try, though.
If that's so…than why do I keep hearing cries to deregulate? Fetter and regulate are synonyms.