Tuesday, February 2, 2010

In A Nutshell

For a nutshell explanation of why things are the way they are, you might look here. Otherwise, read on for an oversimplified, but not by much, discourse on how things are and what might be done about them.
- Porcupine

When learned men begin to use their reason,
then I generally discover that they haven't got any.
G.K. Chesterton

The talking heads are useless. All they do is confuse the issues. I suppose that is what they are paid to do: to pretend there are no objective truths to be discovered. As if the problems we face are so complex they can be understood only by experts. As if there are always two sides to every issue. Well, in a sense this may be so. Unfortunately, those sides may well be one that is true and one that is false. That is common sense. Of course, what is uncommon about common sense is how rarely we see any.

When you think about it, the reason for this is obvious. Most politicians and most of the media are, in essence, employees of their corporate masters. It doesn't matter whether they are Republican or Democrat, liberal or conservative. The ultimate question is: Who is paying the bills? We all know the answer to that. See how far a little common sense can go? Let us examine the current economy in this light, shall we?

First: does Wall Street create any real wealth? No. It might sound crazy but it's true. What Wall Street creates is meaningless paper. The paper is worth whatever I can sell it to you for. Often this price is based on numbers cooked up by, you guessed it, Wall Street. It isn't real wealth, though. Real wealth is things; things have some intrinsic value. My house is real wealth. It may not be spectacular but I can live in it, regardless of what it is worth on paper.

Wall Street creates pieces of paper of dubious value and sells them. Back and forth they go, often among the same group of insiders, driving the price up. The insiders cash out while the paper is still perceived as valuable. They take that money and turn it into real wealth: land, gold, diamonds, whatever. They leave the chumps to finish the game, which was rigged from the beginning. Always.


Now, for the housing bubble and recession: Who is to blame? Wall Street, without question and almost entirely. They created the bubble, then they popped the bubble at the time of their choosing and they made billions. They still are. The whole thing is little more than a variation on the stock pools of the 1920s. Here's the common sense nutshell version of how it worked.

They decided to sell paper they called CDOs: collateralized debt obligations. These are made out to be extremely complex in the news. Individually, they are; as a class, they aren't. Essentially, they are selling the interest you pay on your mortgage as an investment. Pooling a number of mortgages into one security should, in theory, cover the risks of any one mortgage going into foreclosure. Are you with me still?

They made billions. Then they ran out of mortgages to collateralize. They needed more, fast. So they encouraged the lowered standards of subprime mortgages. Both legitimate and shady lenders were happy to oblige. There was no longer any risk for them. Wall Street bought the mortgages as quickly as they could be written, securitized them, and sold them.

To encourage the sales of these CDOs, they also sold CDSs: credit default swaps. Basically, insurance policies on the CDOs in case of loss. Common sense says these should be completely illegal. They aren't, of course, but they ought to be. Insurance is one thing, but these are similar to allowing me to take out fire insurance on your house. Not only do I have no risk of loss, I now have a clear incentive to burn it down.

Overall nutshell: Wall Street insiders made billions on the CDOs, then popped the bubble. They got bailed out on the CDOs by us, thanks to their puppets in Washington on both sides. Meanwhile, they're cashing in on the CDSs. Pretty good, huh?

See, that wasn't so complex: how Wall Street tanked the economy this time in seven paragraphs. All it takes is a little common sense. Best of all, I'm not selling a party position. Those are irrelevant. Either what I have written is true or it isn't. It is.

To me, common sense says that this is why Wall Street should be regulated and taxed far more than it is. It's relationship to society is currently parasitic. If it can't be made beneficial, at least we could try for some sort of symbiosis. Republican and Democratic positions are irrelevant. Policy needs to be based not on ideology, but truth. Now, wasn't it the truth I told ye?

Very Truly Yours,




LadyFi said...

That Chesterton quote is a classic - and all too true.

CherylK said...

Very true. Common sense is highly underrated. I enjoyed this post. And hearty Congratulations on POTW!

Ananda girl said...

Manipulations inside manipulations. Thanks for pointing this out. The doings of Wall Street often elude me. I think it has something to do with not understanding greed. My grandfather was a great believer in Wall Street and made good money. I didn't understand him much either.

The quote is going into my favorites collection.

Cricket said...

LadyFi - Chesterton is so quotable on so many subjects it's truly humbling.

CherylK - Thank you and welcome to Cricket and Porcupine.

Ananda - Welcome back! We've missed you. :-)

Your grandfather was fortunate. Obviously, it's possible for us mere mortals to make money on Wall Street or the game would have been up long ago. On the other hand, there are certain folks who are guaranteed to make out, and on an enormous scale. And there's the rub.

lime said...

it's just plain disgusting all the way around. the whole system is fed by greed from the individual who can't just have an adequate house but has to have a gigantic mcmansion, to the wall street traders bundling things and insuring stuff that isn't theirs.