Amerindia US Blog

What’s wrong with the world economy? A lot of things, many of which we will discuss. But one of the most appalling, and preventable, are the practices of banks – large, international banks in particular. The good old notion of banks lending money, and making their living by charging interest seems to have long gone by the wayside. In its place the banks have gone mad, and we have let them do it, by their descending into what is essentially gambling. Case in point, as we have mentioned in a previous blog entry, derivatives and credit-default-swaps.

No one says it better than an in an excerpt (below) from a NY Times article. Would banks and bankers be so greedy, so depraved as to make a bet that pays them preposterous profits at the expense of destroying an entire country? It seems so.

The Queen of Amerindia

Banks Bet Greece Defaults on Debt They Helped Hide

By NELSON D. SCHWARTZ and ERIC DASH
Published: February 24, 2010, New York Times

Bets by some of the same banks that helped Greece shroud its mounting debts may actually now be pushing the nation closer to the brink of financial ruin.

Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.

These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit.

“It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich.

“We didn’t truly know the dangers of the market, because it was a dark market,” says Brooksley Born, the head of an obscure federal regulatory agency — the Commodity Futures Trading Commission [CFTC] — who not only warned of the potential for economic meltdown in the late 1990s, but also tried to convince the country’s key economic powerbrokers to take actions that could have helped avert the crisis. “They were totally opposed to it,” Born says. “That puzzled me. What was it that was in this market that had to be hidden?”

At the time Brooksley Born was trying to propose regulation it is estimated that 594 Trillion in OTC derivatives were being sold in “black box” markets. “Black box” means no regulation, and actually no recording of who is selling what to whom. There were derivatives, derivatives of derivatives, and derivatives of derivatives of derivatives being sold. And neither the individuals selling, or the buyers, understood what a derivative really was.

A derivative is, as best we can understand, a form of “insurance” that is in essence a form of betting. A simple example is that one could take out insurance on an neighbor’s house, without the owner’s knowledge. And then one could bet against it – sell it short (because of hidden knowledge of its real worth) – in essence, set fire to your neighbor’s house, and then collect the insurance.

Also, derivatives were (are) sold in such secret, that the buyers didn’t (don’t) know how many people have bought the same derivative. So there might be several buyers wanting to collect on a single derivative, while there is only enough to pay one. The complex mathematics of determining a derivative creates a kind of imaginary financial product, with no real money to pay anything.

Derivatives have payed up to 40% profit to the black box buyers. Since the time of Ronald Regan, who elevated Alan Greenspan to Chairman of the Federal Reserve, this market has been growing. Those that got in, sold, and then got out, got the money. The rest of it is a large vacuum with no real money to cover the crisis. Sound like the crash of 1929, with no real money and runs on the bank? We think, yes.

But Brooksley Born knew, warned, tried to stop it, but was defeated by the powers in Washington. Even after this meltdown, the financial lobbyists in Washington are still winning. Regulatory proposals have been written up, but are stalled. The time to move on shutting down further money drain is passing.

US citizens could be asked to poney up yet more money for the unregulated securities and derivative black box deals that go bad, since all this stuff is “too big to fail.” And they will get the apology of having to live in hard times, but not much else. We used to write about and believed that our biggest problem was the players in oil. At least that was one issue that we could see. But the financial games now being played, on a national and worldwide scale that boggles the mind – and brings down whole countries – is what worries us most at this time.

Without transparency and regulation, money that should go to the people who earned it, will continue down the black box hole. How much more financial blood can the average American donate. We are very, very worried to think.

This is a 55 minute program by Frontline of PBS see “The Warning.” After seeing this, we may not understand the mathematics of derivatives, but we do understand the problem. Obama, can you overcome the financial lobbyists and lift up your country?
Frontline: The Warning

The Queen of Amerindia

In the US, and the rest of the world economy it seems, corruption and mismanagement are running rampant. It would be much to cover the entire scope of this topic, but in short, it would seem that there is a fundamental lack of transparency, greed and self interest that knows no bounds, and astonishing little attempt at regulation. The “solution” seems to point out the worst offenders, and hand out fines or punish with an increase in taxes. We Amerindians are quite frankly baffled by this limp slap on the wrist, and surprised that it’s not obvious that the cost of any punitive measure will be passed on to those who are paying too heavy a bill already.

We feel that it might help, even if governments don’t, if people get together with their own solutions. The main idea is to keep money from reaching the pockets of big interests in the first place.

1. One way is to focus on buying locally. Besides cutting the energy footprint of purchases, many middle men payments will be eliminated, as well as the insane super payments to corporate giant leaders.

2. Invest in farm shares or local markets. Or at least patronize them. Again, this eliminates the middle man price increase, and cuts into the control that giants like agra business (ConAgra) have over what we eat, what we know about what we eat, and what we pay for the privilege of ingesting food products that are often less nourishing than the over-packaging that they are delivered in.

3. Social Lending. This can be avoiding large banks (like the ones too big to fail) in favor of small local banks, co-ops, credit unions, and even person to person lending with no banks involved.

We think that of course there are many other ways that could be suggested. But the basic idea is not to punish big corporations, but to think carefully about what we need to buy, where we keep and manage our money – and keep it close. In other words, don’t let it get to the big interests whenever there is another option.

The Queen of Amerindia