I have been reading my weekend section of the FT this afternoon and came across two unrelated articles that struck a chord with me with respect to the financial markets. Some items that are notable, 1) Treasuries, since the credit crises, have been the only acceptable collateral in the "repo market" 2) There are still non financial companies out there that are writing off huge losses in derivative "investments" that are way out of proportion to the revenues they had as functioning companies, making me think more non-financial companies than I originally thought got hood-winked by Wall Street into derivative positions way out of line with the regular functioning of their business.
So what does this mean?
First, the huge demand for US Government debt over the last year, despite a normal economic view that any nation running the kinds of reckless borrowing and printing of money the US has been would make rational investors run the other way, is a direct response to the fact that only treasures are being accepted as collateral in the global credit markets and the US Dollar is "reserve currency" by default. Hence, there is a very large demand component to treasuries that is unrealistic, unsustainable, unhealthy and explainable only within the context of the crash of the credit markets. Low US interest rates cannot be sustained much longer without GREAT cost to our financial system, as we know it. The Trillions of dollars in subsidies being offered by the Fed to the credit markets make the billions of dollars of reckless subsidies to say gasoline in Iran or bread in Egypt look like paltry handouts, yet those subsidies are often referred to as dangerous to those countries balance of payments and government debt ratios. Go figure.
Second, after seeing companies like chicken producer Pilgrims Pride go bankrupt largely due to derivative contracts in corn which went bad costing them millions, I realized that real companies that produced real products were pulled into the derivative markets (along with investment funds like Harvard University's Endowment) with promises from Wall Street Firms to "hedge" their operations at levels that were completely out of context with the needs to do so in their every day operations. So when I read that GM, the Bankrupt now Government owned US Automaker, just pumped $413 Million (Won 491 Billion) into it's Korean joint venture with Daewoo, called GM Daewoo, after GM Daewoo had it's "entire equity base (cash) wiped out by Won 2.3 Trillion of currency derivatives losses", I realized this problem has not gone away.
So how do these two seemingly unrelated articles jog my brain? Well, first, I have presumed for some time that the increasingly oligopolistic nature of American business does some things well. They become extremely inefficient and difficult to manage but hugely profitable due to their purchasing power with very large scale orders(evident by the ability of these companies to lay huge amounts of their work force and turn out higher profits with lower revenues); they are entirely responsible for driving manufacturing out of the US with their desire to constantly lower the cost of inputs to meet needs for quarterly profits; they become faceless, unwieldy and largely wrapped up in getting as large as possible by squeezing out any and all competitive elements while colluding with the other oligopoly members on pricing; the collective "tax" these companies call "profits" begin to look like a tax because no longer are these companies benefiting their many individual owners and pools of investors like when there are many players of all sizes in an industry, but these companies start to look like mini socialist governments, taxing their "customers" with fixed prices, lying to, cheating and outright stealing from their customers (at least 1 out of every 3 grocery store visits I make I have to return and get a refund on an item that was overcharged at the register); paying exorbitant salaries to the "apparatchik" (crony insiders) selected to run the organizations; paying their "workers" lower and lower wages and most importantly, generating HUGE amounts of cash which then must be "invested"; the cash generated is so large only Wall Street firms have the wherewithal to handle the money.
This is where Wall Street and Hedge Funds come in. Where does all the cash generated by these oligopoly companies go? It appears much of it found it's way into the same esoteric products that financial and insurance companies were buying and selling which means huge losses on the books of some companies. This is truly where Wall Street hits Main Street and it is only possible when Main Street has become an oligopolistic town with profits large enough to play with the big boys in New York and Off Shore. Now even these huge companies, which have shown a great penchant for halting internal "investment" and "growth plans", cutting dramatically their "inventory levels", laying off huge numbers of employees and hence creating very large cash balances, need to "play it safe" and buy treasuries as there is uncertainty in the economy and lack of any other "instrument" to invest in due to the collapse in the credit markets. The lack of liquidity from “productive industry” (those who make and sell tangible products) in the US is further exasborating the crises and forcing the Fed to offer more support then would otherwise have been needed.
I sense a great deal of resentment building towards the dollar and treasury markets by countries forced to continue to hold both when they know it is no longer economically wise to do so.
I sense companies are going to continue to accumulate cash and hence buy treasuries as a cushion to a potential continued decline in the economy.
I assume there are still huge amounts of esoteric derivative products on the books of many a financial institution (and otherwise) that are basically worthless but being recorded as having value to avoid a collapse in the institutions.
I assume everyone knows these worthless assets are worthless but have stopped pressing for more collateral because there is no more collateral so nobody sees any benefit in continuing to bleed a turnip dry since losses on one party's books simply reverberate into losses in everyone else’s as well.
I figure, there is no near term end to the financial crises because it will take years for all of the worthless paper to be "wound down" so to speak while companies try to "earn" their way out of the financial mess.
What does all this mean? Is somebody going to blink? The markets now only have to drop 100 points for every man in Washington to find a podium and announce a new "program" or "reinforce their support" of the credit markets or "ensure no change in liquidity or interest rates" or whatever to "calm" the markets so they can continue their rise straight out of the stratosphere. It used to take Paulson 300 points to do the same. One needs little more evidence that the smoke screen being sold the public by the media conglomerates and PR spinsters in Washington is a total lie.
The global financial system is still a complete mess. Wall Street is celebrating every time a company "beats" some arbitrary analyst "prediction" of how much earnings and profits would drop over last year. Yes "drop" over last year. So if my profits are only down 18% and revenues down 10% when the street was looking for profits down 20% and revenues down 12% then my stock is going to a 52 week high! Yes I can celebrate that my stock is worth as much as in early 2008 even though my company is doing 30% or so less business than January 2008.
This is all liquidity driven. I love seeing the CNBC pundits all acting like everything is normal again. They talk stocks and earnings like the credit crises never happened. There is no need to discuss the fact that the Fed IS the Residential Mortgage Market, Commercial Mortgage Market, Consumer Credit Market, Student Loan Market, Auto Finance Market not to mention the other myriad of "support systems" in place to keep other markets from crumbling. The interest rates we are all paying on our credit cards, mortgages, and auto loans are all massively subsidized right now by the Fed and FDIC. The rates are COMPLETELY divorced from "market reality" which to an economic minded person like me no longer resembles "reality" at all.
Companies still being brought to their knees by bad derivative bets; trillions of dollars in "assets" on the books of thousands of banks, companies and hedge funds that are in the best case scenario worth $.30 on the dollar; hundreds of billions of dollars in government debt being sold every couple weeks by the Fed to finance the massive stimulus and deficit spending by the government being soaked up by institutions with no where else to turn to put their dollars; commodity prices completely divorced from economic demand realities; stock market valuations 20-40% elevated from fundamental realities, what does this mean?
Simple, we are seeing global inflation of ALL dollar-based assets, which is reflecting as we speak the massive loss in purchasing power of the dollar. Yet the dollar itself is only marginally off against a basket of currencies from last year's dramatic fall then rise again and the Fed is telling us that consumer prices in the US are stable to falling. How much longer can the relative value of the US Dollar maintain stability while the amount of dollars needed to purchase all commodities priced in dollar continues to rise?
If the US economy faces a second dip and other countries economies follow, especially the few developing nations that have held up relatively well during this latest recession, the underlying demand for commodities priced in dollars would drop further putting downward pressure on the price, but will this result in an actual drop in the dollar price of these assets or will the dollar price for commodities simply continue to rise as institutions increasingly seek to get out of their dollars by buying other assets?
This is the big money question. How far will the equity markets rise before someone decides to take his or her cash out in a big way? With all these dollars floating around now and the obvious inflation in the price of every global asset priced in dollars, the absolute dire state of the credit markets has held the Fed's hand in removing liquidity and getting interest rates back to normal levels. Where is the break point?
Removing liquidity will force reckoning by all those firms with worthless assets on their books and could put credit markets back in crises mode. Not removing liquidity is causing the inflation of all dollar-based assets globally. We are paying a huge, unrecognizably destructive price for being both the global reserve currency and the source of the global financial crises. We screwed ourselves and everyone else and there is no turning back. By not allowing the markets to work out the derivative driven credit crises, not matter how immediately painful it would have been, we have simply delayed the inevitable market correction while simultaneously created a new asset bubble fed by to many dollars floating around. The next move will be a double whammy. I cannot wait.
Sunday, October 25, 2009
Sunday, October 18, 2009
Health Care Remarks 4
I once owned a small business I started while at university. I plowed all of what I made back in the business keeping only what I needed to pay my small bills at the time. In 1991 I hired my first “employee”, an intern from my university.
I was faced with my first dilemma. If I was going to pay someone who works for me a regular salary, shouldn’t I do the same for myself? Dilemma 2; health insurance.
It was a few years late with 8-10 employees that I revisited the health insurance question and ultimately offered a managed plan and picked up 80% of the cost for full time employees. It was the mid 90’s and the Clinton Administration put the fear of God into the rapidly growing and immensely profitable health care racket, I mean industry. The side benefit to this debate was slower increases in heath care cost.
Once the health care racket had sufficiently damaged the administration and rendered our legislators impotent, my insurance costs began to climb exponentially, from the low single digits to low double digits to 20-30% a year. Eventually I had to back down my percentage covered to as low as 50% of a monthly cost that rose nearly 150% in under 10 years. The costs became down right prohibitive for a company with fewer than 25 employees to cover.
Fortunately the state of MD, like many other states frustrated at the impotency of the Federal Government to get anything done, instituted reforms that forced insurers to allow new employees to opt in without restrictions and banned certain other discriminating practices by health care companies.
From the late 1990’s on the health care racket was going through mergers, buyouts, consolidations and making Billions of dollars in profits each quarter. They were paying their CEO’s Dotcom salaries and offering generous stock rewards. I knew something was amiss.
Well America, something is still amiss and the “corporate super citizens” are spending millions of dollars as we speak to convince YOU that universal health care is a “bad idea”. Any wonder why?
It is time you tune out the corporate funded, hyper subjective, emotionally charged and orchestrated “debate” and vote for universal health care today!
Watch video here.
I was faced with my first dilemma. If I was going to pay someone who works for me a regular salary, shouldn’t I do the same for myself? Dilemma 2; health insurance.
It was a few years late with 8-10 employees that I revisited the health insurance question and ultimately offered a managed plan and picked up 80% of the cost for full time employees. It was the mid 90’s and the Clinton Administration put the fear of God into the rapidly growing and immensely profitable health care racket, I mean industry. The side benefit to this debate was slower increases in heath care cost.
Once the health care racket had sufficiently damaged the administration and rendered our legislators impotent, my insurance costs began to climb exponentially, from the low single digits to low double digits to 20-30% a year. Eventually I had to back down my percentage covered to as low as 50% of a monthly cost that rose nearly 150% in under 10 years. The costs became down right prohibitive for a company with fewer than 25 employees to cover.
Fortunately the state of MD, like many other states frustrated at the impotency of the Federal Government to get anything done, instituted reforms that forced insurers to allow new employees to opt in without restrictions and banned certain other discriminating practices by health care companies.
From the late 1990’s on the health care racket was going through mergers, buyouts, consolidations and making Billions of dollars in profits each quarter. They were paying their CEO’s Dotcom salaries and offering generous stock rewards. I knew something was amiss.
Well America, something is still amiss and the “corporate super citizens” are spending millions of dollars as we speak to convince YOU that universal health care is a “bad idea”. Any wonder why?
It is time you tune out the corporate funded, hyper subjective, emotionally charged and orchestrated “debate” and vote for universal health care today!
Watch video here.
Health Care Remarks 3
I had a conversation with my mother the other day and when the issue of health care came up, an otherwise intelligent and somewhat rational human being began spouting all kinds of propaganda propagated by the mouthpiece of the “corporate super citizen” from the media landscape that dominates her suburban Jacksonville Florida home.
I was distraught when every intelligent example I tried to interject into the conversation was immediately dragged down to the lowest common denominator; druggies who shoot each other and how she does not feel the need to cover “their” health care; the homeless or addicts who cost the health care system and emergency rooms time and money, obesity inflected illnesses robbing our system’s health care dollars and so on…
Never could I get her to focus on the 60% of Americans who may have some kind of health insurance but are also living a pay check or serious illness away from loosing both their jobs and insurance, and who live with constant stress of losing their insurance, esp. if they have or are expecting children. (I am not including the 30% of Americans who have access to higher education, health care and other semblances of a 1st world economy without worry nor the 10% of Americans who live in chronic poverty, drug addiction, diseases and other societal woes reminiscent of a third world nation.)
This 60% or so of Americans would experience an immediate improvement in their quality of life with just the Knowledge that they can live and not expect a life catastrophe due to a sudden illness or accident or whatever.
Heck, some of these 10s of millions of Americans may actually have the confidence to make the career changes that will get them a leg up. Perhaps many will start that new business they always wanted to have, move to that town they fell in love without risk of losing their health insurance keeping them from doing so. Perhaps parents could afford to allow their children to partake in more extra curricular activities, or save money for their child’s education…
Who knows the possibilities? The key is we need universal health insurance and we need it now.
Watch Video here.
I was distraught when every intelligent example I tried to interject into the conversation was immediately dragged down to the lowest common denominator; druggies who shoot each other and how she does not feel the need to cover “their” health care; the homeless or addicts who cost the health care system and emergency rooms time and money, obesity inflected illnesses robbing our system’s health care dollars and so on…
Never could I get her to focus on the 60% of Americans who may have some kind of health insurance but are also living a pay check or serious illness away from loosing both their jobs and insurance, and who live with constant stress of losing their insurance, esp. if they have or are expecting children. (I am not including the 30% of Americans who have access to higher education, health care and other semblances of a 1st world economy without worry nor the 10% of Americans who live in chronic poverty, drug addiction, diseases and other societal woes reminiscent of a third world nation.)
This 60% or so of Americans would experience an immediate improvement in their quality of life with just the Knowledge that they can live and not expect a life catastrophe due to a sudden illness or accident or whatever.
Heck, some of these 10s of millions of Americans may actually have the confidence to make the career changes that will get them a leg up. Perhaps many will start that new business they always wanted to have, move to that town they fell in love without risk of losing their health insurance keeping them from doing so. Perhaps parents could afford to allow their children to partake in more extra curricular activities, or save money for their child’s education…
Who knows the possibilities? The key is we need universal health insurance and we need it now.
Watch Video here.
Health Care Remarks 2
Some years ago I coined a term called “the commercial truth”.
I don’t like to call capitalist enterprises “liars” when they use their “super citizen” legal structure to play undue influence in the messages about our nation spouted to it’s citizenry through mass media, so I coined the term “the commercial truth” to help people understand that all messages they receive from the mass media come from the mouths of “super citizen corporate entities”. Through their creation of foundations and think tanks “super citizen corporate entities” orchestrate messages to the citizenry that tell a “story” based on their interest, not truth, not what is best for the nation, it’s citizenry or your future but the “commercial truth” the point of view that best serves “their” interest.
If you buy into the “super citizen corporate message” with respect to health care you are undeniably buying into a message that best serves them, not you, not your neighbor, not your fellow citizen, not your nation.
To live in a nation that purports to consider itself part of the league of 1st world nations, yet to have it’s citizens still contemplating whether or not basic health care should or should not be a right of every citizen, does nothing but put a giant mirror onto the faces of it’s millions of citizens who have been sold that somehow health care is not a right and part of what defines a “civilized” citizenry and reflects the sheer ignorance of that citizenry and the immense power of it’s “corporate super citizen” elite who have managed for ¾ of a century to dominate the discussion about health care.
The United States is NOT a first world nation. Don’t kid yourself. The United States is a second world nation with first world guns and our lack of universal access to health care is but ONE glaring example of this reality.
Vote for universal health care for America and it’s citizens. Defeat the “corporate super citizen” now.
Watch video here.
I don’t like to call capitalist enterprises “liars” when they use their “super citizen” legal structure to play undue influence in the messages about our nation spouted to it’s citizenry through mass media, so I coined the term “the commercial truth” to help people understand that all messages they receive from the mass media come from the mouths of “super citizen corporate entities”. Through their creation of foundations and think tanks “super citizen corporate entities” orchestrate messages to the citizenry that tell a “story” based on their interest, not truth, not what is best for the nation, it’s citizenry or your future but the “commercial truth” the point of view that best serves “their” interest.
If you buy into the “super citizen corporate message” with respect to health care you are undeniably buying into a message that best serves them, not you, not your neighbor, not your fellow citizen, not your nation.
To live in a nation that purports to consider itself part of the league of 1st world nations, yet to have it’s citizens still contemplating whether or not basic health care should or should not be a right of every citizen, does nothing but put a giant mirror onto the faces of it’s millions of citizens who have been sold that somehow health care is not a right and part of what defines a “civilized” citizenry and reflects the sheer ignorance of that citizenry and the immense power of it’s “corporate super citizen” elite who have managed for ¾ of a century to dominate the discussion about health care.
The United States is NOT a first world nation. Don’t kid yourself. The United States is a second world nation with first world guns and our lack of universal access to health care is but ONE glaring example of this reality.
Vote for universal health care for America and it’s citizens. Defeat the “corporate super citizen” now.
Watch video here.
Health Care Remarks 1
Coming from the perspective of someone who does not have TV, I must say I find it troubling that the issue of universal access to health care in a nation that claims to be part of the 1st world economy is an issue it all
While spending time in the Air Force as a young man (where I had universal health care) I was fortunate enough to witness how societies can be hard wired into a set of beliefs that did not serve their common interest, but served the interest of those in “power” instead.
In South Korea I witnessed a nation wired to believe authoritarian government was good for its people as long as the great looming threat by their “hostile neighbor” to the north was evident.
In England I witnessed a nation where the economic reality of the vast majority of it’s citizens resembled second world nation, yet the English were wired to believe they were citizens of an “empire” that should travel to undeveloped nations and tell impoverished people there how to improve their livelihood.
Here in the United States I see a citizenry wired by corporations who make hundreds of billions of dollars every year off the backs of their illnesses that the idea of universal access to health care is some kind of evil idea that takes their rights away. The notion is absurd.
If you are currently event debating whether or not the citizens of this great nation deserve equal access to health care I urge you to remove yourself from all media, radio, TV, Internet, whatever your media vice, for at least 6 weeks and use this time to read and think about why you have government; what human needs, characterizations and expectations come from the word “civilization”. I am confident you will find collective care for the well being of one’s people / citizens i.e.; Health Care, to be a major part of what a civilized society is all about.
Watch a video here.
While spending time in the Air Force as a young man (where I had universal health care) I was fortunate enough to witness how societies can be hard wired into a set of beliefs that did not serve their common interest, but served the interest of those in “power” instead.
In South Korea I witnessed a nation wired to believe authoritarian government was good for its people as long as the great looming threat by their “hostile neighbor” to the north was evident.
In England I witnessed a nation where the economic reality of the vast majority of it’s citizens resembled second world nation, yet the English were wired to believe they were citizens of an “empire” that should travel to undeveloped nations and tell impoverished people there how to improve their livelihood.
Here in the United States I see a citizenry wired by corporations who make hundreds of billions of dollars every year off the backs of their illnesses that the idea of universal access to health care is some kind of evil idea that takes their rights away. The notion is absurd.
If you are currently event debating whether or not the citizens of this great nation deserve equal access to health care I urge you to remove yourself from all media, radio, TV, Internet, whatever your media vice, for at least 6 weeks and use this time to read and think about why you have government; what human needs, characterizations and expectations come from the word “civilization”. I am confident you will find collective care for the well being of one’s people / citizens i.e.; Health Care, to be a major part of what a civilized society is all about.
Watch a video here.
Wednesday, October 14, 2009
Interest Rate Rise NOW!
I have been doing some thinking lately and analyzing the Fed's rate action since 2000 and have decided the biggest problem created by the Fed was not bring rates to historic lows after the 9/11 terrorist attacks. The problem began when the jacked up rates in early 2000. Then after realizing they “goofed” dramatically reversed course in 2001 only to overshoot to the down side where they left rates to low for to long. When realizing this, the Fed followed with a draconian attempt to return the rates back to "normal" beginning in 2004, which wrecked havoc with the credit markets and economy.
It takes a while for the markets (and the economy) to react to both lower interest rates and higher interest rates. This is Econ 101 stuff. If rates are set at an abnormal level either on the high side or low side, the market will adapt, create all kinds of products and strategies to "deal" with the rates as they are and make money. The financial markets will make money, lots of it, any time official rates are out of sync with market realities, unfortunately with sometimes disastrous effect. This happened when rates were kept artificially low for to long. The markets were then shocked when rates were raised so quickly. The real question is, "Why does it seem the Fed is always lagging the markets so much, failing to see obvious signs of bubbles or crises?"
Rates were raised 17 (yes 17) consecutive times beginning June 2004. The rates had remained at 1% (fed funds rate) for the prior year and were 1.25% from November 2002.
Part of the reason the Fed had to lower rates so much in 2001 were the Fed's mistaken rate rises in 2000 of a full 1%. In only four months (Feb - May) rates were raised from 5.5% to 6.5%. The Fed then had unnecessarily choked the financial system and exaggerated the stock market bubble burst with this draconian rise. It is as if the Fed was (late to the party as usual) trying to "pop the Dotcom Bubble" right at the wrong time. The bubble was already deflating. Then, within 9 months of it's last rate increase, the Fed reversed course in dramatic fashion lowering rates a whopping 4.76% inside of 12 months so by the end of 2001 rates stood at 1.75%.
The reason the batch of rate increases in early 2000 were unnecessary was obvious at the time and is more so looking back. The Dotcom rally in the markets had begun to play itself out. Moreover, the overall economy at that time had not experienced any real underlying inflation in the consumer sector. Commodity prices were tame and Oil had bottomed out only two years earlier. There were hints of inflation in housing at the time but after the housing and real estate bust of the late 1980's which lasted well into the mid 1990's the revival in the housing and commercial real estate prices were welcome and at that time not over heated.
Note: I will paraphrase the comment about housing in 2000 by saying, there were some exceptional housing price increases around 1999-2001 fueled mostly by Dotcom employees and executives cashing out options and buying "trophy" real estate; basically real estate in resort oriented areas or "desirable" urban centers. However the overall economy did not participate in the Dotcom surge in wealth. There were some sorely needed rises in average wages and incomes, which had stagnated for some 30 years. In fact, as we can see in hindsight, the crazy options grants to executives, exploding pay and bonuses to CEO's of NON-Dotcom companies were nothing more than attempts for those guys to play the same game financially as Dotcom companies were. For boards of companies they bought in with the excuse they had to in order to "keep their CEO's from bolting to the hot Dotcom sector". Legacy industries in the US were not growing or profiting anywhere near the level of the Dotcom startups. Yes, the dramatic disparity in wages between executives and salary earners was exasperated by these phenomena. For example when you look back on deals like AOL buying Time Warner and the churning of assets in telecom and energy where executives were trying to get as much cash from these cash generating companies as possible to play the Dotcom "I want mine to" game, it is obvious the influence the Dotcom bubble had on legacy companies and the economy. Hence there was some spill over in "luxury" and "resort" real estate areas but like I said, there was no overheating of the general economy or real estate assets in general by early 2000. In fact it was obvious the Dotcom phenomena had been played out.
So the Fed drops rates in dramatic fashion throughout 2001 (not just after 9/11 as many remember, by then rates had already been slashed by 3%). The Fed obviously did not grasp the state of the markets in 2000 and was "shocked" at the dramatic drop in stocks and subsequent affect on the economy after their 2000 rate rise.
My guess looking back is had the Fed kept rates at 5.5% through 2000 we would have had a softer landing of the Dotcom bubble. Easing rates would not have had to be so dramatic in 2001. The 9/11 effect would have only had to be short lived (lowering rates and adding liquidity only in the months after the terrorist attacks). Rates should have averaged around 3.5% from late 2001 forward before being raised again beginning around mid 2003 to closer to the 5.5-6% range (nearer a historical average).
If one looks at the European lending rates this is exactly what one would find. The EU started in the fall of 1999 at 5.5% raising them only to 5.75% in late 1999 before beginning to actually LOWER them again by May 2000. Their rates reached a low point of 3% not until June 2003 before they began to raise them slowly to peak in July 2007, just before markets reached an all time high in October of the same year.
Basically, the EU Central Bank was “Right on the Money” with monetary rates from 2000 forward. So why was the US so drastic in it’s moves? Why did the US find it necessary to jack up rates in 2000? Why did the US find it necessary to drop rates to 1% so quickly through 2001? Why did the US find it necessary to keep rates so low for so long? Why is it that the entire credit crises had its roots in the US and the “financial shenanigans” undertaken by Wall Street?
What had already started happening years earlier in the US was a consolidation of the financial sector. This began in the mid 1990's and was formalized in 1999 by financial deregulation legislation. I hold the position that Washington simply bent over after the Fed had turned a blind eye to banking sector consolidation and movement into alternative areas of finance and signed off on a deregulation bill largely written by the financial industry and celebrated as a nearly ¾ century battle to undue the regulations put in place in the early 1930’s. Hedge funds, debt backed securities, off balance sheet finance (made legend by the collapse of Enron) all had gotten off the ground in style. Deregulation was all that was needed to get the wheels of pre-depression risky finance and leverage going again. Cheap money was icing on the cake.
I don't know if the Fed has an office where folks simply follow the markets day in and day out, watch for what new financing schemes have been created, keep a finger on the emergence of new money flows and "emerging" companies and markets. Is there a team of people who attend the seminars and investment strategy sessions hosted by the big money center banks and investment firms? Does the fed have a bunch of folks who watch unregulated players in unregulated markets, stay on top of their strategies, see what "products" they are trading, study the leverage they employ, find out who is lending them the capital they need for this leverage? I wonder.
Anyway, from the outside it seems the answer would be "no" because the Fed obviously was hit blind sided again by the credit bubble that emerged very rapidly from the end of 2001 to 2004 and continued as long as through the end of 2006. Either way, the Fed is making the same mistake right now as it is obvious to anyone here on the "outside" that a bubble is being created on the back of cheap money and liquidity that they are pouring into the financial system.
Right now it does not matter if unemployment rises to 10%, 12% or 14%, and sales at major companies shrink by 5-30% from 2008 because for anyone reading the daily and quarterly reports of companies that function on a national and international level in industries dominated by a hand full of players knows, these guys are still scraping out profits and decent cash flows albeit on the backs of firing as many workers as feasible and shutting down excess capacity as fast as they can. They see no reason to "invest" this money in their businesses and are dramatically scaling back growth plans to conserve even more cash. While it is obvious the economic outlook is pale, they are either 1) paying down debt 2) starting to employ it in buyouts of their nearest competitors or in other areas 3) putting it to conservative "investment" use like treasuries or 4) hedging the value of their "assets" buy "investing" in commodities. I think the smartest thing they can do is "spend" it whether it be by buying another company or buying overseas growth because there is whole other potential problem with all this cash and "debt issuance" going around, the future of the dollar.
Time and time again this theme is played out, "The dollar is going to crash". Well whether or not the dollar really looses it's international attractiveness as a "store of wealth" is not the issue. The issue is the Fed needs to stop the cheap money wheel now and begin to allow the markets to price debt. In the US the Fed IS the mortgage securities market, consumer credit market, commercial mortgage backed debt market, funder of cheap money to banks so they can play the same old "borrow cheap lend long, keep the difference and leverage as much as you can doing it" game. The rest of the money is going right into the stock market, where an interesting article in January 2009 stated, "with the credit markets frozen the only place to put money is where liquidity is king". Well stock markets and treasuries are those 2 places and both have seen booms since early 2009, all liquidity driven by cheap money and Fed buying back its debt while allowing companies recently converted into "bank holding companies" to tap markets with Fed guarantees at abnormally low rates. Basically a stew of stimulating practices that is for the time being delaying the credit write downs that are sagging the books of many financial firms and buying time for companies to refinance short term debt, raise money from the cash driven markets and otherwise pad their books with stock market increases (esp. insurance companies).
The problem with all this stimulation is it was too much and to soon. It was a very dramatic knee jerk reaction by the Treasury and Fed when all hell broke loose in late 2008. Once again the Fed was "taken off guard" by the severity of the financial melt down. It was obvious by 2006 to people like me that a house of cards was being created, a pyramid scheme not unlike the Milken days of the 1980's. I wrote a long letter to Secretary Paulson, fairly new on the job, in early 2006 warning him to stop bashing Sarbanes-Oxley and start doing his job. There was a credit bubble out there and at that time about $50 Trillion worth of “insurance” that nobody would be able to pay off if the credit market crashed. There was no way the party could continue and unlike the 1980's the introduction of credit derivatives had driven the credit markets beyond anything imaginable in the history of capital markets. Tens of trillions of dollars in "insurance" products were being sold on every type of credit imaginable combined with off balance sheet entities and leverage and vast sums of money in unregulated markets being administered and financed by regulated banking entities... I mean one had to live in a closet not to see this thing happening. Well, the fed doesn't have enough windows I guess.
Anyway, the stimulation was way out of whack. I remember the markets in late 2008. A 300-point move in the DOW sent Paulson and Bernanke to their respective podiums to announce more stimulating efforts. This was almost a daily occurrence. For a pure economic minded person such as myself, I was in total disbelief. I was loosing money left and right because any decision I made to buy or sell securities was being whip-sawed by draconian government attempts to "correct" a market that was obviously "correcting itself". Once again, the Fed was late to the party, came with huge ammunition beyond what was required and blew everything to pieces. Now we are experiencing a dramatic run right to the edge of a cliff. The stock markets are reaching elevated levels with no cause, the corporate bond market has nearly completely recovered, commodities are priced way out of context with respect to underlying demand while the fundamental consumer driven economy is not nearing a recovery. So the basic message to the Fed is, STOP STIMULATING NOW! You are causing asset bubbles that are inconsistent with underlying economic fundamentals, creating liquidity that is only chasing these assets indiscriminately, risking the future value of the US Dollar with a potential hyper inflationary scenario unrelated to classic inflation causes in the economy but related to pure debt and liquidity creation by an IRRESPONSIBLE FED.
The time is now to bring up rates .25%. NOW. This will signal to the markets that they need to start thinking about functioning without $11 Trillion in Fed guarantees. Raise again in .25% in January / February, another .25% in May / June and another .25% in September / October and a further .25% in November / December 2010. These rate increases will only bring us to 1-1.25% Fed funds rate, still extremely low. These rate rises will NOT have ANY major effect on the economy today but are absolutely essential. They will need to be combined with a removal of the Fed from the Mortgage market, the termination of the TALF program the end of the Fed Reserve buybacks scheduled this month, the adjustment of interest paid on deposits held on reserve by banks etc. The market DESPERATELY needs to begin pricing credit again the sooner we get Fed lending rates back to the 3-3.5% range the better.
I have expressed concern many times until now that the Fed extending all this credit directly and indirectly at artificially low interest rates is doing more harm than good. The longer they do this the more harm it will do to the long term credit markets and the more time it will take for the massive credit bubble (worthless assets) to "wind down". This mess cannot be "earned" out by the banks. The American taxpayer has already expressed displeasure at the Fed tacitly letting the banks rake the American Consumer's pocketbook to pay for their risky mistakes and besides, there is not enough money there to do so. The longer all of this cheap credit with Fed backing is extended while risking further declines in the dollar and further increases in non-productive asset prices, the more painful the reconciliation will be when market rates take over.
Right now, without Fed backing, I would guess mortgage rates would be in the high single digits to around 10%, credit card rates would be in the high teens to low 20's, auto loans would be in the low to mid teens, highly rated corporate debt anywhere from mid single digits to mid teens etc. If the dollar continues to fall, non-productive asset prices to rise and the economy continue it's lackluster consumer driven flat line; bigger trouble ensues.
Market realities need to be realized soon so the "market" can go about creating new ways to profit from new realities and drive our economy back towards its economic norms NOW.
It takes a while for the markets (and the economy) to react to both lower interest rates and higher interest rates. This is Econ 101 stuff. If rates are set at an abnormal level either on the high side or low side, the market will adapt, create all kinds of products and strategies to "deal" with the rates as they are and make money. The financial markets will make money, lots of it, any time official rates are out of sync with market realities, unfortunately with sometimes disastrous effect. This happened when rates were kept artificially low for to long. The markets were then shocked when rates were raised so quickly. The real question is, "Why does it seem the Fed is always lagging the markets so much, failing to see obvious signs of bubbles or crises?"
Rates were raised 17 (yes 17) consecutive times beginning June 2004. The rates had remained at 1% (fed funds rate) for the prior year and were 1.25% from November 2002.
Part of the reason the Fed had to lower rates so much in 2001 were the Fed's mistaken rate rises in 2000 of a full 1%. In only four months (Feb - May) rates were raised from 5.5% to 6.5%. The Fed then had unnecessarily choked the financial system and exaggerated the stock market bubble burst with this draconian rise. It is as if the Fed was (late to the party as usual) trying to "pop the Dotcom Bubble" right at the wrong time. The bubble was already deflating. Then, within 9 months of it's last rate increase, the Fed reversed course in dramatic fashion lowering rates a whopping 4.76% inside of 12 months so by the end of 2001 rates stood at 1.75%.
The reason the batch of rate increases in early 2000 were unnecessary was obvious at the time and is more so looking back. The Dotcom rally in the markets had begun to play itself out. Moreover, the overall economy at that time had not experienced any real underlying inflation in the consumer sector. Commodity prices were tame and Oil had bottomed out only two years earlier. There were hints of inflation in housing at the time but after the housing and real estate bust of the late 1980's which lasted well into the mid 1990's the revival in the housing and commercial real estate prices were welcome and at that time not over heated.
Note: I will paraphrase the comment about housing in 2000 by saying, there were some exceptional housing price increases around 1999-2001 fueled mostly by Dotcom employees and executives cashing out options and buying "trophy" real estate; basically real estate in resort oriented areas or "desirable" urban centers. However the overall economy did not participate in the Dotcom surge in wealth. There were some sorely needed rises in average wages and incomes, which had stagnated for some 30 years. In fact, as we can see in hindsight, the crazy options grants to executives, exploding pay and bonuses to CEO's of NON-Dotcom companies were nothing more than attempts for those guys to play the same game financially as Dotcom companies were. For boards of companies they bought in with the excuse they had to in order to "keep their CEO's from bolting to the hot Dotcom sector". Legacy industries in the US were not growing or profiting anywhere near the level of the Dotcom startups. Yes, the dramatic disparity in wages between executives and salary earners was exasperated by these phenomena. For example when you look back on deals like AOL buying Time Warner and the churning of assets in telecom and energy where executives were trying to get as much cash from these cash generating companies as possible to play the Dotcom "I want mine to" game, it is obvious the influence the Dotcom bubble had on legacy companies and the economy. Hence there was some spill over in "luxury" and "resort" real estate areas but like I said, there was no overheating of the general economy or real estate assets in general by early 2000. In fact it was obvious the Dotcom phenomena had been played out.
So the Fed drops rates in dramatic fashion throughout 2001 (not just after 9/11 as many remember, by then rates had already been slashed by 3%). The Fed obviously did not grasp the state of the markets in 2000 and was "shocked" at the dramatic drop in stocks and subsequent affect on the economy after their 2000 rate rise.
My guess looking back is had the Fed kept rates at 5.5% through 2000 we would have had a softer landing of the Dotcom bubble. Easing rates would not have had to be so dramatic in 2001. The 9/11 effect would have only had to be short lived (lowering rates and adding liquidity only in the months after the terrorist attacks). Rates should have averaged around 3.5% from late 2001 forward before being raised again beginning around mid 2003 to closer to the 5.5-6% range (nearer a historical average).
If one looks at the European lending rates this is exactly what one would find. The EU started in the fall of 1999 at 5.5% raising them only to 5.75% in late 1999 before beginning to actually LOWER them again by May 2000. Their rates reached a low point of 3% not until June 2003 before they began to raise them slowly to peak in July 2007, just before markets reached an all time high in October of the same year.
Basically, the EU Central Bank was “Right on the Money” with monetary rates from 2000 forward. So why was the US so drastic in it’s moves? Why did the US find it necessary to jack up rates in 2000? Why did the US find it necessary to drop rates to 1% so quickly through 2001? Why did the US find it necessary to keep rates so low for so long? Why is it that the entire credit crises had its roots in the US and the “financial shenanigans” undertaken by Wall Street?
What had already started happening years earlier in the US was a consolidation of the financial sector. This began in the mid 1990's and was formalized in 1999 by financial deregulation legislation. I hold the position that Washington simply bent over after the Fed had turned a blind eye to banking sector consolidation and movement into alternative areas of finance and signed off on a deregulation bill largely written by the financial industry and celebrated as a nearly ¾ century battle to undue the regulations put in place in the early 1930’s. Hedge funds, debt backed securities, off balance sheet finance (made legend by the collapse of Enron) all had gotten off the ground in style. Deregulation was all that was needed to get the wheels of pre-depression risky finance and leverage going again. Cheap money was icing on the cake.
I don't know if the Fed has an office where folks simply follow the markets day in and day out, watch for what new financing schemes have been created, keep a finger on the emergence of new money flows and "emerging" companies and markets. Is there a team of people who attend the seminars and investment strategy sessions hosted by the big money center banks and investment firms? Does the fed have a bunch of folks who watch unregulated players in unregulated markets, stay on top of their strategies, see what "products" they are trading, study the leverage they employ, find out who is lending them the capital they need for this leverage? I wonder.
Anyway, from the outside it seems the answer would be "no" because the Fed obviously was hit blind sided again by the credit bubble that emerged very rapidly from the end of 2001 to 2004 and continued as long as through the end of 2006. Either way, the Fed is making the same mistake right now as it is obvious to anyone here on the "outside" that a bubble is being created on the back of cheap money and liquidity that they are pouring into the financial system.
Right now it does not matter if unemployment rises to 10%, 12% or 14%, and sales at major companies shrink by 5-30% from 2008 because for anyone reading the daily and quarterly reports of companies that function on a national and international level in industries dominated by a hand full of players knows, these guys are still scraping out profits and decent cash flows albeit on the backs of firing as many workers as feasible and shutting down excess capacity as fast as they can. They see no reason to "invest" this money in their businesses and are dramatically scaling back growth plans to conserve even more cash. While it is obvious the economic outlook is pale, they are either 1) paying down debt 2) starting to employ it in buyouts of their nearest competitors or in other areas 3) putting it to conservative "investment" use like treasuries or 4) hedging the value of their "assets" buy "investing" in commodities. I think the smartest thing they can do is "spend" it whether it be by buying another company or buying overseas growth because there is whole other potential problem with all this cash and "debt issuance" going around, the future of the dollar.
Time and time again this theme is played out, "The dollar is going to crash". Well whether or not the dollar really looses it's international attractiveness as a "store of wealth" is not the issue. The issue is the Fed needs to stop the cheap money wheel now and begin to allow the markets to price debt. In the US the Fed IS the mortgage securities market, consumer credit market, commercial mortgage backed debt market, funder of cheap money to banks so they can play the same old "borrow cheap lend long, keep the difference and leverage as much as you can doing it" game. The rest of the money is going right into the stock market, where an interesting article in January 2009 stated, "with the credit markets frozen the only place to put money is where liquidity is king". Well stock markets and treasuries are those 2 places and both have seen booms since early 2009, all liquidity driven by cheap money and Fed buying back its debt while allowing companies recently converted into "bank holding companies" to tap markets with Fed guarantees at abnormally low rates. Basically a stew of stimulating practices that is for the time being delaying the credit write downs that are sagging the books of many financial firms and buying time for companies to refinance short term debt, raise money from the cash driven markets and otherwise pad their books with stock market increases (esp. insurance companies).
The problem with all this stimulation is it was too much and to soon. It was a very dramatic knee jerk reaction by the Treasury and Fed when all hell broke loose in late 2008. Once again the Fed was "taken off guard" by the severity of the financial melt down. It was obvious by 2006 to people like me that a house of cards was being created, a pyramid scheme not unlike the Milken days of the 1980's. I wrote a long letter to Secretary Paulson, fairly new on the job, in early 2006 warning him to stop bashing Sarbanes-Oxley and start doing his job. There was a credit bubble out there and at that time about $50 Trillion worth of “insurance” that nobody would be able to pay off if the credit market crashed. There was no way the party could continue and unlike the 1980's the introduction of credit derivatives had driven the credit markets beyond anything imaginable in the history of capital markets. Tens of trillions of dollars in "insurance" products were being sold on every type of credit imaginable combined with off balance sheet entities and leverage and vast sums of money in unregulated markets being administered and financed by regulated banking entities... I mean one had to live in a closet not to see this thing happening. Well, the fed doesn't have enough windows I guess.
Anyway, the stimulation was way out of whack. I remember the markets in late 2008. A 300-point move in the DOW sent Paulson and Bernanke to their respective podiums to announce more stimulating efforts. This was almost a daily occurrence. For a pure economic minded person such as myself, I was in total disbelief. I was loosing money left and right because any decision I made to buy or sell securities was being whip-sawed by draconian government attempts to "correct" a market that was obviously "correcting itself". Once again, the Fed was late to the party, came with huge ammunition beyond what was required and blew everything to pieces. Now we are experiencing a dramatic run right to the edge of a cliff. The stock markets are reaching elevated levels with no cause, the corporate bond market has nearly completely recovered, commodities are priced way out of context with respect to underlying demand while the fundamental consumer driven economy is not nearing a recovery. So the basic message to the Fed is, STOP STIMULATING NOW! You are causing asset bubbles that are inconsistent with underlying economic fundamentals, creating liquidity that is only chasing these assets indiscriminately, risking the future value of the US Dollar with a potential hyper inflationary scenario unrelated to classic inflation causes in the economy but related to pure debt and liquidity creation by an IRRESPONSIBLE FED.
The time is now to bring up rates .25%. NOW. This will signal to the markets that they need to start thinking about functioning without $11 Trillion in Fed guarantees. Raise again in .25% in January / February, another .25% in May / June and another .25% in September / October and a further .25% in November / December 2010. These rate increases will only bring us to 1-1.25% Fed funds rate, still extremely low. These rate rises will NOT have ANY major effect on the economy today but are absolutely essential. They will need to be combined with a removal of the Fed from the Mortgage market, the termination of the TALF program the end of the Fed Reserve buybacks scheduled this month, the adjustment of interest paid on deposits held on reserve by banks etc. The market DESPERATELY needs to begin pricing credit again the sooner we get Fed lending rates back to the 3-3.5% range the better.
I have expressed concern many times until now that the Fed extending all this credit directly and indirectly at artificially low interest rates is doing more harm than good. The longer they do this the more harm it will do to the long term credit markets and the more time it will take for the massive credit bubble (worthless assets) to "wind down". This mess cannot be "earned" out by the banks. The American taxpayer has already expressed displeasure at the Fed tacitly letting the banks rake the American Consumer's pocketbook to pay for their risky mistakes and besides, there is not enough money there to do so. The longer all of this cheap credit with Fed backing is extended while risking further declines in the dollar and further increases in non-productive asset prices, the more painful the reconciliation will be when market rates take over.
Right now, without Fed backing, I would guess mortgage rates would be in the high single digits to around 10%, credit card rates would be in the high teens to low 20's, auto loans would be in the low to mid teens, highly rated corporate debt anywhere from mid single digits to mid teens etc. If the dollar continues to fall, non-productive asset prices to rise and the economy continue it's lackluster consumer driven flat line; bigger trouble ensues.
Market realities need to be realized soon so the "market" can go about creating new ways to profit from new realities and drive our economy back towards its economic norms NOW.
Thursday, October 08, 2009
Blackrock Takes the Cake
You must know how many Washington insiders have migrated to the Blackrock "umbrella" over the years. Well today Marketwatch.com published a short story on their overwhelming influence handling the government sponsored cleanup of the financial bailouts and derivative mess created by the financial institutions "we" know own.
The story states some of the many roles Blackrock has been "hired" to take care of on behalf of the taxpayers who will be paying them and the labyrinth of conflicts that have resulted. For example the article states:
This is only part of their many roles. The bottom line is how on earth can you have a company responsible for winding down collapsed financial institutions worthless derivatives on one hand then have them valuing assets many of the derivatives were written on the other hand and not expect them to "game" these two responsibilities to maximise the profits they could potentially make by "being" both sides of the market?
Our government is run by worthless weans who are clueless and impotent. Shame. We all will pay, only this time it will truly break our economy.
The story states some of the many roles Blackrock has been "hired" to take care of on behalf of the taxpayers who will be paying them and the labyrinth of conflicts that have resulted. For example the article states:
BlackRock was hired to manage the portfolios of Bear Stearns Cos. and American International Group Inc. . BlackRock also is responsible for valuing hard-to-price assets at Fannie Mae and Freddie Mac . It manages a $46 billion fund for the New York Fed that buys assets underlying credit-default swaps written by AIG, an assignment at the behest of the New York Fed.
This is only part of their many roles. The bottom line is how on earth can you have a company responsible for winding down collapsed financial institutions worthless derivatives on one hand then have them valuing assets many of the derivatives were written on the other hand and not expect them to "game" these two responsibilities to maximise the profits they could potentially make by "being" both sides of the market?
Our government is run by worthless weans who are clueless and impotent. Shame. We all will pay, only this time it will truly break our economy.
Tuesday, October 06, 2009
Debt for Profit
I have to say, after reading about CIT and Goldman Sachs over the past few days I have had many occasions to smile. I am forever fascinated by the amount of money made on "debt" in our financial markets. I am also forever fascinated by our government's willingness to allow the credit markets to continue along their corrosive path "creating" new "products" that allow layers of profit to be made or lost all based on some underlying "debt" somewhere.
This quote from Street Insider, has me baffled.
I do not profess any clear understanding of the layers of products that allow "bets" on debt repayment, but to lend a firm $3 billion at a 2.85% interest rate with annual "interest" payments of $85 million as stated in this article on the Dow Jones News Wires ,
Wow, lending has become this profitable. Not is lending profitable, but those who buy / sell / trade the multitude of "instruments" linked to the debt have an opportunity to make a mint as well.
It seems like "debt" has become like "oil" in the sense that when a tanker of oil is loaded somewhere in the world it has already been sold forward to someone, options and futures are being traded on the oil and it may actually be "owned" ever so momentarily by many parties before actually being "delivered" to its final purchaser. In addition, there is insurance on the oil, the ship and I am sure a multitude of other products linked to the oil so that the firm moving the oil can also be "protected" in the unlikely event something goes wrong in transportation of the oil. In each of the "transactions" described above, a small "commission" or "cut" of the transaction is taken by someone for providing the "services" or "protection" or "securities" or "contracts" to buy and sell.
Now "debt" is similar. From the fees by those making the loan, processing the loan, brokering the loan etc. there are a myriad of "products" to allow the lender to "protect" themselves from default of the borrower. In fact what stops the borrower from buying protection from themselves in the form of some kind of "insurance" that pays if their business suffers financial hardships and losses ensue, thus causing them to default on the loan? The loan may be syndicated with other loans and sold as a "security", interest payments "stripped" from the loan, bets made on the likelihood of it being paid, the loan itself can be sold to another firm, the loan can be "owned" indirectly through credit protection "products" where someone may have "rights" to the loan or it's interest payments under certain circumstances.
Man, if you can think of it, it has been tried, is being tried or is in the works. This is the "financial industry" and the house of cards built on "debt". The markets for most of these derivative products are not regulated and many of the firms that create, buy and sell them are regulated which puts our entire "regulated" financial system at risk as we have seen over the past 24 months. Yet the game still goes on.
It has been said in some fashion in every religion, "one must not create an economy based on usury". We have done exactly this and are moving ever faster to a baseless debt based economy which will implode; it is a matter of time.
This quote from Street Insider, has me baffled.
According to reports from the Wall Street Journal, Goldman Sachs (NYSE: GS) is in talks to amend the terms of a $3 billion loan to struggling lender CIT Group (NYSE: CIT).The loan, extended to CIT in June 2008, calls for CIT to pay Goldman $1 billion if it were to file for bankruptcy. Goldman could reduce the total loan amount, though other scenarios likely are being considered. The loan needs to be resolved as part of CIT's move to raise funds as part of its restructuring. Goldman spokesman Michael Duvally said Goldman "is working with CIT and its creditors to enable it to continue to use the facility, which we believe gives it its most attractive cost of funding." Duvally said the potential $1 billion payment is not a windfall payment, but reflects the "present value of the spread to be earned over the life of the facility."
I do not profess any clear understanding of the layers of products that allow "bets" on debt repayment, but to lend a firm $3 billion at a 2.85% interest rate with annual "interest" payments of $85 million as stated in this article on the Dow Jones News Wires ,
The investment bank extended $3 billion in funding to CIT in June 2008, according to regulatory filings. The 20-year contract, which was put in place as the credit markets froze, calls for CIT to pay Goldman 2.85% of the maximum amount lent, which would come to about $85.5 million annually for the first 10 years of the agreement. CIT would be required to pay $1 billion if it were to file for Chapter 11 bankruptcy.then for Goldman to claim a Billion Dollar payout if the company goes bankrupt is amazing. In addition, Goldman claims to have bought "credit protection" on the original $3 billion which pays again if CIT fails, thus making the $1 billion CIT "penalty" (I would love to read this loan document to understand why CIT would have actually agreed knowing the dire straits they were in mid 2008) plus the credit protection on the original loan which may not cover the entire $3 billion but as long as it covers 70% of the original loan amount, Goldman makes a profit on the demise of CIT.
Wow, lending has become this profitable. Not is lending profitable, but those who buy / sell / trade the multitude of "instruments" linked to the debt have an opportunity to make a mint as well.
It seems like "debt" has become like "oil" in the sense that when a tanker of oil is loaded somewhere in the world it has already been sold forward to someone, options and futures are being traded on the oil and it may actually be "owned" ever so momentarily by many parties before actually being "delivered" to its final purchaser. In addition, there is insurance on the oil, the ship and I am sure a multitude of other products linked to the oil so that the firm moving the oil can also be "protected" in the unlikely event something goes wrong in transportation of the oil. In each of the "transactions" described above, a small "commission" or "cut" of the transaction is taken by someone for providing the "services" or "protection" or "securities" or "contracts" to buy and sell.
Now "debt" is similar. From the fees by those making the loan, processing the loan, brokering the loan etc. there are a myriad of "products" to allow the lender to "protect" themselves from default of the borrower. In fact what stops the borrower from buying protection from themselves in the form of some kind of "insurance" that pays if their business suffers financial hardships and losses ensue, thus causing them to default on the loan? The loan may be syndicated with other loans and sold as a "security", interest payments "stripped" from the loan, bets made on the likelihood of it being paid, the loan itself can be sold to another firm, the loan can be "owned" indirectly through credit protection "products" where someone may have "rights" to the loan or it's interest payments under certain circumstances.
Man, if you can think of it, it has been tried, is being tried or is in the works. This is the "financial industry" and the house of cards built on "debt". The markets for most of these derivative products are not regulated and many of the firms that create, buy and sell them are regulated which puts our entire "regulated" financial system at risk as we have seen over the past 24 months. Yet the game still goes on.
It has been said in some fashion in every religion, "one must not create an economy based on usury". We have done exactly this and are moving ever faster to a baseless debt based economy which will implode; it is a matter of time.
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