by frog
Here’s a mind-boggling picture from the IMF of a financial disaster in the making-unregulated trading in credit default swaps. The chart maps how some of the major financial institutions in the USA are linked through this innovative form of debt insurance. Unlike real insurance, however, investors can trade in credit default swap instruments without actually having to own the debt. In other words, unconnected investors can gamble on each other’s solvency.
An analogy: Imagine frog taking out his own insurance policy on one of Tony Friedlander’s separately insured trucks. I pay my premiums. Tony pays his premiums. And we both collect when Tony crashes, which I expect is likely, hence my gamble. When this happens enough between big players like major banks, there emerges a problem where banks become too connected to fail. Enter the taxpayer.
In the IMF’s own words:
The ongoing crisis has shown how financial innovations have enabled risk transfers that were not fully recognized by financial regulators or by institutions themselves, complicating the assessment of a “too-connected-to-fail” problem. It is thus essential to improve our understanding and monitoring of direct and indirect systemic linkages.
Published in Environment & Resource Management by frog on Thu, April 23rd, 2009
Tags: credit default swap, financial crisis, too-connected-to-fail
on the trolls and those who are unable to keep on topic
This from a regulated economy.
Where were the SEC?
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“Part of the problem”.
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Those look like lilly leaves floating on the frog pond.
All this crap would have been fine if the credit rating agencies had been doing their job of exposing the dead rats that were being traded. But they either were completely unaware of the bad smell or were corrupt and ignored the stink.
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This has been going on for years and i’m sure everyone was cheering it on when the banks were releasing their financial statements saying they were profitable. Of course financial statements are an art form in and of themselves its amazing our a little accounting standard can turn a billion dollar loss into a billion dollar profit. Accounting standards need major overhauls. Of course the Greens don’t have any accounting standards policy due to the party not actually having any accountants.
Of course New Zealanders I believe take the cake for retarded investors. Look at how many people rushed to buy Fontera bonds?? I mean come on you are buying bonds in a company that is issuing debt to pay for operational expenses at the same time the company is stockpiling mountains of milk powder which it can sell. I call that the GM business model and it doesn’t work.
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You’re looking at a symptom, not the underlying cause.
Throughout the capitalist world (but especially in English speaking countries), people have been convinced that home “ownership” is essential and a house is a guaranteed way to make money. Look at the amount of house pr0n on the telly. Hence house prices have shot up to levels where they are unaffordable to ordinary people borrowing prudently. Thus, people have demanded to borrow money they can’t afford to repay on the strength of ever-increasing house prices.
The banks just found ways to meet those demands. In NZ, where the banking system is less sophisticated, we had the finance companies operating to con mum and dad investors into lending them money, which they lent on to their mates.
The only real fix to this is to stop house price inflation through fiscal policy and get a lot more housing into community rather than private ownership.
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Big government bailed ‘em out with taxpayers’ money.
That would be the big government that you lefties devoted your political lives to creating and enlarging.
So thanks very much.
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Just where has BJchip been these last months? I miss his take on these matters.
Rich d, there is nothing wrong with home ownership, it’s buying in the expectation of capital gains that’s the problem. It’s non productive money chasing non productive money.
Capital gains tax at the same rate as other forms of income should level the playing field.
Ban foreign ownership maybe?
Then housing would be used as housing.
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And given we’ve got projected deficits of 20%-45% of GDP, where, pray tell, are you going to get the money? Keep borrowing?
And where are you going to build these slum…..erm….houses?
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The housing problem isn’t that simple. We’ve got a stock of three -bedroom family homes yet society is changing. There are lot more single people living alone, divorces, smaller families, etc. People want more choice (apartment, city, lifestyle, etc)
Supply needs to increase. In the States – the states where they have less land and housing regulation – you haven’t seen huge price spikes.
So the solution is for the government to get out of the way.
But that’s not your style, is it.
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The best way for the government to get out of the way is to tax house speculation the same as income. People will make more rational investment decisions, like investing in finance companies!
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But they do tax house speculation.
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yeah right
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If they’re letting it go, then surely the problem is one of enforcement.
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In any case, capital gains tax doesn’t keep the price low. Every country had housing booms, including those with capital gains and various land transaction taxes.
I don’t see how New Zealand would be any different.
The problem really comes back to land supply. In NZ, land scarcity is artificial. That problem is caused by government/environmentalists.
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House pricing is at the very heart of the current global financial mess.
Whereas it is surely true that house prices rise, the mistake everyone makes is thinking that houses rise in value. They dont. The only way to get a genuine increase in value or any good is to literally “add value” which is almost always a process of taking some “thing”, doing work with it and/or adding other things, and selling the resultant new thing. Turn a cow into a hamburger, and you’ve added value.
So anything that can be done to stop house price inflation would be very useful. Taxing investment properties at 105%, and limiting house loans to individuals to a sensible multiple of their household income would go a long way to restoring sanity. The goal is to make houses somewhere where people live and nothing else.
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I think we need to rethink houses, we should tell real estate agents to shut up!!! We should see a house as a device which (eg) traps energy and streets as devices which improve not just the ability to move around but social interaction.
I wonder what could be achieved if the city/ town owned the land and people bought the lease. This would allow a process of total renewal of nieghbourhoods with capital gains and losses held by all (perhaps?).
China built factories and coal fired power stations the US built houses; China is building Anti ship ballistic missliles the US builds Hummers and gas guzzlers.
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