The Economic Crisis in Europe

[Kobi]

Originally Posted by Miss Tick

Actually I was just poking fun at how the US always declares war on inanimate objects like drugs, terror and poverty. I don't actually expect anyone to declare war on Wall St.

Although it would be nice...

I don't expect anything to change at all. There are no restraints being put on these people and there is no intent by our government or our elected officials to ever do so. And clearly no one in Europe is prepared to call the bluff of hedge funds. Nobody is going to put a stop to or some controls on derivatives.

The only change I can see is that, because derivative got a bad name with the people who actually understand the housing market debacle wasn't about some people getting loans they couldn't afford and some people who couldn't pay their mortgages destroying the world's financial system, we won't hear the term derivatives thrown around much anymore. But rest assured they are alive and well and pointed directly at the heart of our financial security. Credit default swaps are derivatives. Very, very dangerous derivatives. And still no restraints in sight.

Dang it Tick. Here I am thinking you had some clandestine plan to help people to regain control of their minds, country and economics. Instead, it was a poignant rhetorical question. Poop. Me bad. Me have doofus moment.

The interesting part of this to me, is these complex,virtually incomprehensible investment instruments were concocted by mathematicians and statisticians who redefined economic possibilities and probabilities to Las Vegas style packages for the masses.

We must find more of these wizards. But, they must be the few with a conscience, whose focus is towards the good of the whole rather than the coffers of the few.

We need Harry Potter, invisibility cloaks, moving maps, hogwarts (Newt doesnt count), and all things magical to reverse the course and the curse.

I must ponder this further while my brain cells are still soaked in the soothing and illuminating nectar of NyQuil.

[Cin]

Originally Posted by Kobi

Dang it Tick. Here I am thinking you had some clandestine plan to help people to regain control of their minds, country and economics. Instead, it was a poignant rhetorical question. Poop. Me bad. Me have doofus moment.

The interesting part of this to me, is these complex,virtually incomprehensible investment instruments were concocted by mathematicians and statisticians who redefined economic possibilities and probabilities to Las Vegas style packages for the masses.

We must find more of these wizards. But, they must be the few with a conscience, whose focus is towards the good of the whole rather than the coffers of the few.

We need Harry Potter, invisibility cloaks, moving maps, hogwarts (Newt doesnt count), and all things magical to reverse the course and the curse.

I must ponder this further while my brain cells are still soaked in the soothing and illuminating nectar of NyQuil.

LOL. I wish I had an plan.

I read somewhere how it used to be the sciences that tried to recruit all the great minds of a generation but now it's the financial sector.

Wizards with a conscience...if only...

Ah if only these wizards would use their powers for good instead of evil.

But the thing is the minute you begin to do good your powers start to fade until eventually they disappear completely.

It really a strange new world.

[Ciaran]

Originally Posted by Miss Tick

LOL. I wish I had an plan.

I read somewhere how it used to be the sciences that tried to recruit all the great minds of a generation but now it's the financial sector.

Wizards with a conscience...if only...

Ah if only these wizards would use their powers for good instead of evil.

But the thing is the minute you begin to do good your powers start to fade until eventually they disappear completely.

It really a strange new world.

There's nothing new about financial engineering. It's been with us for many centuries via secondary markets which led to (in)famous scenarios such as the Dutch tulip crisis in the 17th century and the South Sea Bubble the following century.

The terminology, such as credit default swaps and derivatives, has got more complex and technical but the same concepts have been around throughout modern history. The may appear mystical but, intrinsically, instruments such as credit default swaps are ways to better manage risk - in other words, to ensure that the investor doesn't lose money.

The issue isn't, therefore, the instrument or the technology behind it. Rather, the issue is a much more basic one of borrowing of resources to speculate i.e. speculators will borrow significantly on positions with the result that, if their positioning is wrong, not only do they lose out but others do too. Sometimes this has significant negative consequences as we've seen recently.

On the issues you mentioned above of credit default swaps and how hedge funds are holding Greece to ransom. It's not hedge funds holding Greece to ransom. Rather, it's parts of the European Union apparatus that do not want an actual default of Greek sovereign debt for fear that this will have a domino effect sending the "house of cards" that is the Eurozone crashing down through similar defaults in other Eurozone countries, most likely Portugal & the Republic of Ireland and, more worryingly due to scale, Spain and Italy.

I have significant sympathy for the hedge fund position on this as investors are effectively being asked to agree to a default that is optically not to be called a default, with the effect that the credit default protection does not kick-in. Are there investors using this process for their short-term speculative purposes? Of course, but that doesn't take away from the fact that we're in an "emperor's clothes" scenario where the European political establishment is trying to orchestrate the inevitable Greek default through a "smoke & mirrors" approach whereby no official default is registered.

If I were an investor, who had CDS protection, I certainly wouldn't agree to that but, then again, I'm not an advocate of this European project and have a loathing of the European Union.

Furthermore, there already is significant financial regulation in place and prospective regulation that is being introduced over this coming decade. The key, from my perspective, isn't necessarily more regulation. Rather, it's about better regulation which can sometimes be less regulation as less is often more. This regulation needs to embrace a very simple and straightforward concept - that is the concept of moral hazard which, in simple terms, is you either pay back your debts or you suffer real consequences as a result.

This needs to be enshrined as regards all speculation, whether it's the large faceless fund using technical instruments in an attempt to make many $ millions or the man or woman who buys a condo with a 90%+ mortgage in the hope of capital appreciation.

[Cin]

Originally Posted by Ciaran

There's nothing new about financial engineering. It's been with us for many centuries via secondary markets which led to (in)famous scenarios such as the Dutch tulip crisis in the 17th century and the South Sea Bubble the following century.

The terminology, such as credit default swaps and derivatives, has got more complex and technical but the same concepts have been around throughout modern history. The may appear mystical but, intrinsically, instruments such as credit default swaps are ways to better manage risk - in other words, to ensure that the investor doesn't lose money.

The issue isn't, therefore, the instrument or the technology behind it. Rather, the issue is a much more basic one of borrowing of resources to speculate i.e. speculators will borrow significantly on positions with the result that, if their positioning is wrong, not only do they lose out but others do too. Sometimes this has significant negative consequences as we've seen recently.

On the issues you mentioned above of credit default swaps and how hedge funds are holding Greece to ransom. It's not hedge funds holding Greece to ransom. Rather, it's parts of the European Union apparatus that do not want an actual default of Greek sovereign debt for fear that this will have a domino effect sending the "house of cards" that is the Eurozone crashing down through similar defaults in other Eurozone countries, most likely Portugal & the Republic of Ireland and, more worryingly due to scale, Spain and Italy.

I have significant sympathy for the hedge fund position on this as investors are effectively being asked to agree to a default that is optically not to be called a default, with the effect that the credit default protection does not kick-in. Are there investors using this process for their short-term speculative purposes? Of course, but that doesn't take away from the fact that we're in an "emperor's clothes" scenario where the European political establishment is trying to orchestrate the inevitable Greek default through a "smoke & mirrors" approach whereby no official default is registered.

If I were an investor, who had CDS protection, I certainly wouldn't agree to that but, then again, I'm not an advocate of this European project and have a loathing of the European Union.

Furthermore, there already is significant financial regulation in place and prospective regulation that is being introduced over this coming decade. The key, from my perspective, isn't necessarily more regulation. Rather, it's about better regulation which can sometimes be less regulation as less is often more. This regulation needs to embrace a very simple and straightforward concept - that is the concept of moral hazard which, in simple terms, is you either pay back your debts or you suffer real consequences as a result.

This needs to be enshrined as regards all speculation, whether it's the large faceless fund using technical instruments in an attempt to make many $ millions or the man or woman who buys a condo with a 90%+ mortgage in the hope of capital appreciation.

You say that if you were an investor, who had CDS protection, you certainly wouldn't agree to a default that wasn't going to be technically called a default, I read it as simply lowering the payments to where Greece could afford it, but either way, you also said you should either pay back your debts or suffer real consequences. Don't people who buy bonds, like the hedge funds who bought Greek bonds fall under the category of deserving to suffer real consequences? I mean they bought the bonds promising ridiculous yields from a country that is crumbling. WTF is that about. Well it's about betting against the very bonds they are buying with freaking credit default swaps. To me if you are playing the investment game then you need to man up and take your loses when they happen. I'm sick of this insurance crap. I'm not an advocate of double dipping, taking ridiculous risks, getting bailouts as well as having insurance so you can't lose any which way the cookie crumbles and never having to take a loss no matter what happens to the world around you.

Credit default swaps, credit derivatives and derivatives in general have not, to my knowledge, nor to anyone's knowledge that I can find, been around for centuries and they certainly haven't been around in this form. They have been around since the 1990s with increased usage after 2003. They are not better ways to manage risk in my opinion. They are ridiculous ways to eliminate risk for the lender. They are ways to make bets and turn the financial sector into a gambling casino.

The idea that you pay back your debts or suffer real consequences as a result is wonderful especially if you have insurance in the form of a credit derivative which means you get your money back no matter what. Why you might even want to see people default on their loans or mortgages. While these kinds of investments are made, betting against the loans you yourself make, how will everyone suffer real consequences? They won't. The idea is ludicrous. More regulation is the answer in my mind. Bring back the days when you don't get money unless you have security, collateral to back it up, unless it is quite likely you will be able to pay back your loan. Right now lenders can make loans at will because there is no danger to them, just danger for the poor fools who borrow from them and the rest of the world. But the reality is that this gambling and this notional debt has destablized the economy. And there is a danger. A danger to everyone.

[Ciaran]

Originally Posted by Miss Tick

You say that if you were an investor, who had CDS protection, you certainly wouldn't agree to a default that wasn't going to be technically called a default, I read it as simply lowering the payments to where Greece could afford it, but either way, you also said you should either pay back your debts or suffer real consequences. Don't people who buy bonds, like the hedge funds who bought Greek bonds fall under the category of deserving to suffer real consequences? I mean they bought the bonds promising ridiculous yields from a country that is crumbling. WTF is that about. Well it's about betting against the very bonds they are buying with freaking credit default swaps.

If an investor has purchased sovereign debt and the appropriate protection via CDS, they should be able to avail of that protection. The issue is that CDS spreads on European sovereign debt were typically priced too low, given the inherent risks.

If I'm an investor with the appropriate insurance policy (which is what a CDS effectively is) then I want the CDS to kick-in when the default occurs. Simple as that.

Originally Posted by Miss Tick

Credit default swaps, credit derivatives and derivatives in general have not, to my knowledge, nor to anyone's knowledge that I can find, been around for centuries and they certainly haven't been around in this form. They have been around since the 1990s with increased usage after 2003. They are not better ways to manage risk in my opinion. They are ridiculous ways to eliminate risk for the lender. They are ways to make bets and turn the financial sector into a gambling casino.

CDS and derivatives have not been around for a long time but off-balance sheet instruments to manage risk which can / have been used for speculation have been around for centuries. These instruments may be more prevalent now but so is the financial services sector, and secondary markets, in general.

We've had casino banking in various forms throughout modern history. As I noted in my earlier post, the South Sea Bubble also destroyed much of the, then, British Empire and, separately, Scottish effectively lost its independence and became a part of the United Kingdom as a result of financial speculation.

The Wall Street crash of 1929 and its after effects is another appropriate example.

Originally Posted by Miss Tick

Right now lenders can make loans at will because there is no danger to them, just danger for the poor fools who borrow from them and the rest of the world.

Whatever manifesto or propaganda you're reading, you're three and a half years out of date here. The ability to securitise lending has been significantly impacted by the example of the off-balance sheet securitisations of residential and commercial mortgages and their value destruction in 2008.

The market isn't there for securitisations with the exception of significantly lower risk assets and, even then, the market is much less liquid.

[Kobi]

Ciaran this is very interesting stuff but still very problematic in my way of thinking.

In theory, all this stuff works well. In theory, it is all quite fascinating and intriguing. If the convoluted instruments and their equally convoluted risk minimizers work, it sets off an "irrational exuberance" of similiar and even more risky instruments. It becomes a feeding frenzy, almost a hysteria of one upmanship and pushing the limits of the game into unchartered territory in the quest for more and more.

Problem is, eventually, someone has to pay the price cuz the momentum of illogical instruments, insurance built-ins or not, can not be maintained over time. It is unsound speculation with no basis or foundation in reality. Paper money, paper profits, investment illusions with nothing of substance to back them.

The ones who end up paying in a global meltdown like was created this time, are the taxpayers and the citizens. Cost the US taxpayers, so far, over a trillion dollars to sure up an illusion with no basis in sound economic principles and no colleral. Sound economic principles deal in tangibles i.e. acceptable collateral of equal value.

The problem, to me, is multifaceted:

1. Risks one takes with ones own resources is ones own business. When others are dragged in, on a domestic or global basis, the ramifications are astounding - good or bad.

2. Instruments developed to exploit a market is one thing. Creating a market just to exploit it, is unacceptable and unethical in my mind.

3. The people, who end up holding the bag, should have protections to curb this irrational exuberence and keep it grounded in reality and tangibles. That, to me, is the responsible thing for both companies and governments to do.

Money and its accumulation is not an even playing field. Big companies and businesses can hedge their bets and offset potential losses with insurance stuff. Even that doesnt matter much when the ultimate insurer of bad investments is the taxpayer period.

You and I do not have that luxury. We pay the ultimate price. We lose our homes and jobs and belongings and lives AND IN ADDITION we are saddled with even more debt to bailout the booboos.

I dont know about you but to me that is a royally f***ed up way of treating people, doing business, and running the economics of a country.

4. Regulations are put in place for a reason - to curb the irrational exuberence that assign unacceptable and uninformed risk to an unsuspecting people. To dismantled them on a "trust us" basis or "we can regulate ourselves" basis is illogical. Regulations were instituted because it was proven this self regulation was a farce.

People being people have the tendency to take advantage of others for their own enrichment. It is a very sad but very real phenomemon.

[Cin]

Originally Posted by Ciaran

If an investor has purchased sovereign debt and the appropriate protection via CDS, they should be able to avail of that protection. The issue is that CDS spreads on European sovereign debt were typically priced too low, given the inherent risks.

If I'm an investor with the appropriate insurance policy (which is what a CDS effectively is) then I want the CDS to kick-in when the default occurs. Simple as that.

I just don't think this is sensible or even ethical. Again hedge funds purchased these bonds from a country on the verge of bankruptcy and then purchased insurance to cover their ass in case Greece defaults and it looks more and more like they actually want Greece to default. It's really despicable to me. I guess it's a good thing I'll never be an investor.

CDS and derivatives have not been around for a long time but off-balance sheet instruments to manage risk which can / have been used for speculation have been around for centuries. These instruments may be more prevalent now but so is the financial services sector, and secondary markets, in general.

We've had casino banking in various forms throughout modern history. As I noted in my earlier post, the South Sea Bubble also destroyed much of the, then, British Empire and, separately, Scottish effectively lost its independence and became a part of the United Kingdom as a result of financial speculation.
The Wall Street crash of 1929 and its after effects is another appropriate example.

My team just won and I want to celebrate and I really don't have the energy to tell you the difference between the crash of '29 and what is happening now. Besides I think you already know. And seriously I think credit derivatives are relatively new forms but whatever. They are toxic in their present incarnation. Toxic and dangerous. And we need more regulation. These financial terrorists have no consciences. They are out of control. And they won't be jumping out of any buildings like they did in 1929. It's not the investors who are losing everything.

Whatever manifesto or propaganda you're reading, you're three and a half years out of date here. The ability to securitise lending has been significantly impacted by the example of the off-balance sheet securitisations of residential and commercial mortgages and their value destruction in 2008.

What like the Communist Manifesto? I am not reading out of date news articles. I'll post some links.

The market isn't there for securitisations with the exception of significantly lower risk assets and, even then, the market is much less liquid.

No, the market isn't there for securitisations? Then what pray tell are credit default swaps? That's not secure? That's not securing an investment? They give risky loans or buy risky bonds or take whatever risks and then insure themselves from failure. With risky loans like what happened with the housing market they can bundle these bad debts sell them and somebody insures them and hopes the loans are defaulted on. I bet in some cases they do even more than just hope. I bet they set it up so defaults happen. Maybe by giving risky loans. Wait isn't that the collapse of the housing bubble. Old news I will agree. But still quite timely. And let's not forget the double dipping that goes on in the form of bailouts.

But here are some more current articles.

http://www.alternet.org/story/153795...y/?page=entire

http://www.economywatch.com/economy-...gedy-27-2.html

http://www.guardian.co.uk/world/2012...imf?intcmp=239