1 Good Morning Monty; early today huh?

I want to make a point about the equities markets before I move into my links. I've often said that equities markets only matter to the real-world economy to the extent that they're an indicator of public mood.

I agree with that almost completely and with the intent I agree 100%. The only thing I would change is that I would replace "public" with "institutional investor".  The markets are now driven almost entirely by the fund managers at various investment houses and groups. The "public" has little to do with it any more.

2 Re How to Start an economic recovery

The data reveal that most of the consumption binge of the boom phase of this current cycle was financed directly or indirectly by debt related to rising home values.

I would certainly like to see that data because I think that consumers binging off of refinancing their homes was minuscule compared to other methods of debt.

#3: Too much debt encumbering banks;

This is reported as a hindrance to companies getting loans to expand. I would strike the entire paragraph. The major companies and small businesses are not in need of a loan. They are stockpiling cash at a prodigous rate. The real problem lies in item 4 which I would move to the top of the list. This is probably 75% of the problem with the economy today.

#4. The governmentÂ’s interference in the economy.

This section needs to be shortened and the concentration on "stimulus" reduced. The problem is government interference in the economy period. They need to get rid of all the burdensome regulations, get rid of the stupid pork barrel stimulus, get rid of high taxes and reduce government spending from currently levels to 2007 budget levels minus 20%.

What is really hurting the economy right now is uncertainty over what the government is going to do. The communist administration with nationilzation of industry, control of industry through fascist regulation, and the threat of increased taxes, all to fund payments to non-productive leaches on society and their associated apparatchiks in control of the payouts is what has business sitting on the sidelines.

ANd so-called Republicans like the ME sisters and Brown are not helping by supporting that meme.

3 I agree with that almost completely and with the intent I agree 100%. The only thing I would change is that I would replace "public" with "institutional investor".  The markets are now driven almost entirely by the fund managers at various investment houses and groups. The "public" has little to do with it any more.


Every ponzi scheme needs investors suckers.

also, good morning .

4 Private real-estate is still in a world of hurt. That's not going to change anytime soon, either.

I would add to that "in some locations".  And the problem is not just an oversupply of houses in those locations. The problem is once again, government interference in the markets.  Government interference in the markets and in the mortgage institutions CAUSED this mess, no matter what the communists and the weak kneed RINOs say.  It will not get any better until the government gets out of the markets.

The fact is, no government anywhere at any time has been able to guide and plan the markets for anything and be successful.

No matter how many times you point this out to the communists they still come back with "oh noes, we have the solution this time and it is not more cowbell".

5 Morning s☺mej☼

6 On the solid river of cash thing let us not forget that if the economy ever does turn around that solid river of cash is going to turn into double digit inflation that exceeds that of the Carter years.

7 We're not, because GDP is no longer contracting; ....

It no longer contracting if you believe this lying adm's numbers. I don't.

8 The Dow could go to 15000 tomorrow and it wouldn't improve America's finances by much.

I would disagree slightly.  Most people don't understand any of this.  What they do understand is that the Dow going up is a good thing.  That makes them feel better and thus believe that things are improving.  That can create a ripple effect throughout all aspects of the economy.

With that said, everything you say is true.

9 Hey Vic. What's going on in Orangeburg County? I agree with your gov interference argument, but would add this to it. To me, the most depressing aspect of new regs and commissions and directives is the extent to which business itself has embraced this kind of gov control as a method to help themselves and hurt perceived competitors. that's a bad sentence, but you get the idea. It is corporatism, fascism turned inside out. Both political parties survive on it. It must end.

10 Good morning,  Monty!

I see you are still unconcerned about the Chinese.  Well,  I will bow to your optimism today,  as my husband has gotten a new job,  which is a good one.

Do keep in mind,  though,  that the Chinese operate under different rules and thinking from the West.  They  will turn on a dime if it is to their advantage.  I really hope you are right.

11 Re High Frequency Trading; I couldn't get the link to work because evidently the site is overloaded. But looking up the definition of this term it looks like this is nothing more than the old manual method of traders to high turnover called "churning". The only difference is they are doing it with computers.

Of course it is not good for the investor. In fact, "churning" itself is illegal. This action only benefits the broker who gets fees for every market trade he makes. Those fees come straight out of the investors capital.

Many years ago my wife got involved with a broker like that. She and her mother went to a "lecture" over in the "city" that they had seen an add for. They both threw a few thousand dollars in the pot with this guy after he had sold them a bill of goods about "return". My wife neglected to tell me about this until the end of the year when I was sitting down to do income tax.

What I found was that this guy was buying and selling stocks in her account many times a week. He was reporting every transaction as an individual trade for income tax purposes and also charging fees for all this trades.  At the end of the year she had lost a large portion of the "investment", mainly dues to the removal of fees from the "paper profits". The thing was a scam.

Of course, as law required this guy had to give them a bunch of paperwork as part of the sign-on. Of course wifey did not read it. I did. This guy was under injunction in several States, was under investigation in several States, and was only able to stay in business by continuing to move from State to State.

I immediately told her to get hold of this guy via phone or certified letter and order all her holding liquidated and money returned and to never sign up for this kind of crap again. It took about 6 months but she finally got back "some" money, about 10% of the original investment. I wrote it off as an education.

Bottom line here is HFT looks like nothing more than renaming churning and should be just as illegal. My question is, WHERE IS THE FTC? They are supposed to be policing this shit. Oh, they are waiting for more regulation to hurt honest people while they don't enforce the current laws against the crooks.  

If this sounds like a rant that because it is. It still pisses me off.

12 Forget the Chi Coms. They're dead already but don't know it. It's the Indians to watch. They are playahs and they're ready to play.

13 #9  I agree.   The pharmaceuticals throwing in with Obama on the healthcare mess,  and the influence of GE in all aspects of energy policy are the two big examples which come to mind.

In response,  I no longer buy GE products,  and I purchase generic drugs whenever possible.   That's about all I can do.

14 It is corporatism, fascism turned inside out. Both political parties survive on it. It must end.

Its not corporatism. It IS fascism pure and simple. There hasn't been a country incorporating corporatism sine the UK in the 1800s. 

As for Orangeburg county I didn't see anything in any of the SC papers this morning. What have you seen?

15 I13- I'm at an age where I accept that I can't change this shit. We and the kids giving serious thought to Panama or Belize. Used to be those places lacked any advance medical tech and other occasionally vital services, but with real basic freedoms dissolving here in the States, many other like-minded skilled Americans are taking their shows on the road. We lived overseas for 6 years. The change in the USSA in attitudes and loss of freedom and additional regulation was astonishing. Horrifying in the acceptance I see around me.

16 Linda Ronstadt...Jerry 'Brownfly" Brown's GF.

17 Nothing. I thought you lived in Elloree.

18 Funny story about Linda Ronstadt. She was scheduled for an appearance on the Johnny Cash show back in 1970 or thereabouts. Well, come the big day, she shows up in a tiny little miniskirt...and no underwear! June Cash, who was was no stranger to the life of a road-musician, was nevertheless pretty old-school and demanded that Ms. Ronstadt put on "a pair of bloomers" or GTF out of the building. Apparently, there was no underwear to be found on short notice, so a staffer was dispatched to a local store to buy Ms. Ronstadt a pair of undies, which she was wearing (legs primly closed) while seated on a bench on stage with Johnny Cash. Maybe an apocryphal story, but I confess I freeze-framed by DVD's of the Johnny Cash show during that segment just to make sure.

19 And finally, Linda Rhonstadt, prsumably before her Jerry Brown koo-koo days started and before she put on a 1000 pounds of excess weight.

I have fond memories of her in the Silk Purse days when she would come on the Johnny Cash show or Hee Haw in those Daisey Duke shorts and do country flavored stuff.

http://tinyurl.com/2fyv6nk

Sorry best one I could find.

In those days I would gnash my teeth. When I was in the Navy and listening to her stuff via a cassette deck in my rack-locker" the Hasten Down The Wind cover was more teeth gnashing (or other).

Anyway I have all her albums from that era and quit buying some time in the 80s when she decided to go 40s. I probably should have quit long before then when she gave up the country flavor.

20 Oh, and the song Ms. Ronstadt sung with Mr. Cash? I Will Never Marry. There's a joke in there somewhere, I just know it!

21 LOL, I never heard that story about the "underwear". Now that would have been a sight on the Johnny Cash show.

22 Nothing. I thought you lived in Elloree.

OK, I misunderstood. Anyway, no I don't live anywhere near there. I live many miles North of there near the NC border.

23 The Hasten Down The Wind cover for those who are young and missed it.

http://tinyurl.com/32funqv

24 Our next resolution will call out capitalism as racist.

25

Linda Ronstadt? The Michael Mooronette? What evil lurks behind your choice in music?

I am too nauseated to remember the rest of your post.

26 Well, Morons, as much as I would like to sit around and reminisce about Linda Ronstadt when she was hawt and not a moonbat I have weeds sprouting in the yard and mowing that is needed.

That means mass quantities of beer during the mowing (1.5 acres) and porch rocker afterward until it gets too hot. 

May check in periodically. Have a good day all.

27 Good morning, morons.  Monty, your posts should come with a cyanide capsule.

28

Best Headline EVER!

"Tired Gay succumbs to Dix in 200 meters"  (yes, safe for work)

http://tinyurl.com/23eq5km 

 

29 Our next resolution will call out capitalism as racist.

Ha ha, was reading a comment posted on some fellow moron's FB page about the Steinbrenner avoiding the death tax and "social and economic justice" and giving "poor communities" "tools for employment" because "capital" is evil and getting to keep the results of your life's work is a "privilege" we can't allow....

Approximately half the teenagers in American cities can't be bothered to take advantage of the bare minimum "tool for employment": the free high school diploma. Confiscating half the Yankees' value won't change that.  Those "communities" have to change their own attitudes...and they won't as long as success is penalized so they can get more free stuff.

We're doomed.

30

Regarding the RCM article on home ownership and the need to reduce it, they make a statement that I think is misleading:  

"In fact, without the heavy load of a mortgage, property taxes and insurance, they may make into the middle class a lot faster."

Rent encompasses all of those things.  It's just that it's lumped into one sum and not divided up.  The landlord has to pay those things, and he's not going to eat the cost.  Renting is very often NOT a savings over ownership, if you compare homes of the same quality in the same neighborhood.  I'm often shocked at what people pay for rent on a 1 or 2 bed apartment - and not a great one at that.  In most cases I've encountered the payment+taxes+insurance on a dinky little house (which would be easily as large as the apartment in question) would be much cheaper than rent. 

The problem isn't home ownership - it's owning too much house.  Who here hasn't run into young couples who buy their dream house as soon as they get married, become house poor as a result, and can't afford to furnish the thing?  It was happening everywhere during the "good times."  No wonder that as soon as there's a contraction they all lose everything.  No buffer - no cushion. 

Ownership of an APPROPRIATE house is still better than renting unless you move around a lot for work or pleasure.  It produces some amount of equity in all but the worst times.  Once it's paid for, it's hard to wind up with no roof over your head.  It is a more private living arrangement than the rabbit-warrens they call apartments.  It gives people a stake in the place where they live.  A renter can pull up stakes and move at will.  Why should they lift a finger to do anything for their community?  Sure - many do - but a renter is not committed.

 

31 I'm not sure what I fear more - disfunctional algorithms or outright manipulation by humans

32

Monty,

don't you think the best way to solve this problem, since it is the same in every nation, is to get together and stick all public employees on an island in the pacific and everyone agree to pretend they never exists.

 

in one fell swoop, blamo, everyone takes a huge chunk of debt off their books

33

 I'm not sure what I fear more - disfunctional algorithms or outright manipulation by humans

It's ok. I've been double checking the algorithms with my TI-83+ from college. It all checks out.

34

@31.

 

Heather. I was so happy to read that Steinbrenner won't be subject to the tax. F*ck New York and F*ck our government.

I bet Steinbrenner is up in heaven laughing his ass off.

I love it when our government gets screwed out of money that they steal from people who've earned it.

35 don't you think the best way to solve this problem, since it is the same in every nation, is to get together and stick all public employees on an island in the pacific and everyone agree to pretend they never exists. Haw, that reminded me of the scene in Hitchhiker's Guide to the Galaxy, where it talks about the planet of Golgafrincham.

36

Monty,

I have a question.  Is it good for a nation to not have any real debt?  Doesn't China have only surpluses and yet it is potentially a boned as we are.

 

Isn't there a healthy amount of debt for a nation to have or is it best to only be a creditor nation?

Weren't we a creditor nation in the 1970s, but had massive unemployment and a stagnant economy, yet we were a debtor nation in the 1980s and it was boom times?

37 Reactionary - in a dynamic economy, mobility may become a necessity.  I am seriously considering upgrading the rural redoubt I own (outright, no mortgage - taxes are a joke) into a primary residence (needs septic upgrade, kill the critters living in the roof, etc), ditching the urban house near work (with the 17% jump in property tax this year), and renting a big condo for approx. 2/3 of my current mortgage load. 

Now if I can figure out how to write off the condo - all will be well. 

38 A renter can pull up stakes and move at will. Why should they lift a finger to do anything for their community?

Tell me how "homeowners" intentionally walking away from mortgages they can pay but don't feel like paying do anything for "the community."  Follow up with an explanation of how the federal government taxing people who were renting as an intelligent alternative to buying a house they couldn't afford, to pay for programs to "keep people in homes" they can't afford does anything to engender feelings of "community."  Certainly the smarm from homeowners about how much better and smarter they are than renters isn't doing the job.

I typed out this whole thing the other day about how "not stuck with a house you can't sell after half the town gets laid off" makes it easier for people to find new work and get on with life, instead of sitting around collecting unemployment for years and bitching about "the jobs went away", but I assume no one read it.

...and if anyone in the Syracuse area needs a metal futon, an ironing board, a TV stand, or a press board five-drawer chest, please let me know.  I'm breaking down my migrant squat and moving home.

39

Let me guess - the unnamed network also ends in NBC.

Meanwhile, this just in from Rasmussen - a new low in investor confidence as 51% of investors say their own finances are getting worse - http://tinyurl.com/RR1747

40 Admirable offering this AM.  Especially liked the "New American Dream", and the Obama backup plan,  "Knock 'em on the head and just take the merchandise".

41 Let me just Preemptively condemn the NAALCP as a bunch of racists.

42 About the CNBC article: The Democrats & MFM created the recession for their own gains. Now they realize they've fallen and can't get up.

43 Debt load - I was at another meeting in DC wherein senior policy clearly implied that the debt load would be gradually monetized and spending growth will be taken care of by new taxes, and that we should all calm down about it.  (I have to keep my mouth shut at these meetings, but as it directly effects something I have to buy in large quantities I get frick'in steamed.)

44 Heather - I know young engineers that live that way.  The own nothing that they can't carry in their cars.  The use a big laptop as a stereo, TV, gaming system, a breakdown futon thing as a bed/couch, and use file boxes on Ikea shelves as dressers. They take an apartment door off of the hinges and place it across two shorter Ikea shelves as a table - the knob comes out as a cable pass thru.   If the have to move, they can be packed and rolling in an hour.  Leaving behind a couple of Ikea shelves and few trash bags of pizza boxes.

If they had a better job offer, I could literally lose them overnight.

45

Debt Load

also coincidentally the name of Nancy Pelosi's first porn movie once she quits politics

46 Isn't there a healthy amount of debt for a nation to have or is it best to only be a creditor nation? It's not an either-or question. Credit is essential to an economy; the question is how best to use it prudently. The problem is not debt as a concept; the problem lies on how we use it. Rather than using debt as a device to improve our positions, we are squandering it short-term gains. (And this is true from the individual level all the way up to the Federal level.) Example: If you borrow money for a house or car, I consider that (reasonably) constructive debt as long as you don't over-extend yourself. You ensure a continuing short-term cashflow by not buying the good outright, but also gain the benefits of the house and car. Home and car loans are also fairly "cheap" loans. Bad debt is when you max your credit cards to take vacations or buy a big-screen HDTV home-theater system. This kind of thing brings no real gain to your life except in short-term "quality of life" kinds of ways, which are offset by the long-term harm this kind of credit imposes. Unsecured credit is a horrible debt because it is often high-rate, revolving credit: if you pay only the interest (which is really all that the monthly minimum payment covers), you'll pay forever and lay out three, four, or five times what the good would have cost if you bought with cash. "Healthy" debt changes from person to person depending on their circumstances. Person A may consider a $1000 debt to be a minor thing because he makes $100K per year and can manage such a debt easily; $1000 in debt to Person B might be disastrous if this person only makes $20K per year. It's not the amount of the debt, necessarily, but the proportion of debt to income that causes the problem. (Although even low-ratio debts over long periods of time can be a drag as well.) Credit is a tool, and like any tool it is dangerous when misused.

47

on china,

 

I am torn. Part of me hopes the chinese stay an authoritarian dictatorship because it weakens China in the long run, and a weak competitor is better than a strong one.

However, there is another part of me that thinks China would be much much weaker as a democracy for many reasons. The biggest of which is the movement towards social spending and away from military spending. We complain about our unfunded liabilities, but if china ever instituted a social safety net, it would bankrupt the country immediatly. China could never afford a social security type program. It just couldn't grow fast enough. Also left out are the social differences in China. Even though China is 94 percent ethinic Han, they aren't a unified society. There is a lot of hatred in China from region to region, city to city and person to person. This hatred and historical animus, like their debt load, is kept hidden under the surface by the Authoritarian government.

 

If that government were to disappear, I don't know if China could remain as a unified nation for very long.

 

I guess I don't think it ends well for China either way. In the long run, it will benefit as a democracy, even if it is broken up in to several separate nations, but the conversion from dictatorship to democracy will, like all major events in china, be extremely bloody.

48 Tell me how "homeowners" intentionally walking away from mortgages they can pay but don't feel like paying do anything for "the community." 

I typed out this whole thing the other day about how "not stuck with a house you can't sell after half the town gets laid off" makes it easier for people to find new work and get on with life...

Posted by: HeatherRadish at July 15, 2010 08:41 AM (M9BNu)

Homeowners walking away from properties is clearly not good.  The fault lies in having mortgages where the house itself is the only collateral.  I suspect that oversight will be rectified, if the government doesn't intervene.  Most of those home owners do have to take a bath, though.  It's not like they haven't been paying on those homes for years and years.  They still have more incentive to stay under any normal circumstance than renters.  And when renters move away in droves you still get the same blight of abandoned structures.  And while they live in a place they have little incentive to maintain it other than personal taste/dignity - rental maintenance is getting ever more costly as society degrades.   As for those sitting around on unemployment, it used to be that U.I. didn't pay near-forever like now.  We need to go back to that.  And even these days it will only last so long.

I'm not saying the government does well when it alters the market to put people in houses through extraordinary means.  Indeed, while I love my mortgage interest deduction I have to conceed that is should be reduced or eliminated. 

Your point about the convenience of mobility is well taken, but how often does a major portion of a town get laid off?  These are not normal times.  They may become the "new normal" going forward, but up until now that kind of situation was fairly exceptional - planning for it would have bordered on paranoia.  And if that is the new norm, what kind of idiot will want to own rental property?  He'll have to demand a hefty risk premium.  Costs will rise further.

49 We should all hope for a successful and democratic China. Why? Export market, baby! The Chinese love their Buicks and Apple iPods/iPhones/iPads and McDonald's hamburgers. Much of the problem I have with them is mostly their authoritarian government -- if they can cast that off and become a true democratic capitalist society, I'd be a happy man indeed. One billion new consumers with money to spend gives me a money-boner.

50 I, for one, thoroughly enjoy Monty's morning financial briefing.

51  There are entire subdivisions in California, Arizona, and Florida that are essentially ghost-towns. I'm betting that many of those houses will in the end either be sold for a song or even demolished.

I believe you could find this in all 50. In my little town (35000) I have stumbled across more then one abandoned townhome development. They have each been sitting for more than a year. Framed, roofed and windows installed, they sit rotting without siding. They will have to be demolished. Who will pay?

52 If the have to move, they can be packed and rolling in an hour.  Leaving behind a couple of Ikea shelves and few trash bags of pizza boxes.

If they had a better job offer, I could literally lose them overnight.

Posted by: Jean at July 15, 2010 08:55 AM (pEXyx)

Great.  The way things are going, this is probably the wave of the future as mass unemployment coupled with the importation of cheap labor (white collar included) goes on and on.  We're to be reduced to living as unpropertied nomadic mercenaries, devoid of any of  life's finer comforts too big to fit on the gypsy caravan.  Better to just hit the big red button and nuke the world now.

53

per drudge.

Bush releasing book before the election this year.

Thanks W, but i think you've done enough for our party and country, go back to a quiet retirement.

54 Why? Export market, baby! The Chinese love their Buicks and Apple iPods/iPhones/iPads and McDonald's hamburgers.

Posted by: Monty at July 15, 2010 09:15 AM (4Pleu)

Every one of which they will shamelessly copy as soon as they are able, to keep ours out of the market.  With the possible exception of food products like hamburgers, which apparently are to be forever filled with lead and melamine when produced there.  The Apple crap is already built there, so except for some profit by Apple that hopefully will be taxed, the average American will benefit zero by selling any quantity of them. 

The Chinese import what they can't yet make.  Once they catch up to us, or have enough American/European facilities there, their trade restrictions will increase.

55 Reactionary: The answer is to find out how to sell to a market of one billion souls, not to piss and moan about how it can't be done. Ditto India, and ditto Brazil, and ditto every other country. If we are serious about turning back into a country that makes stuff, then we need to figure out how to sell the stuff we make. The domestic market is saturated -- the only growth markets are abroad.

56

July 15 (Bloomberg) -- A record 269,962 U.S. homes were seized from delinquent owners in the second quarter as lenders set a pace to claim more than 1 million properties by the end of 2010, according to RealtyTrac Inc. 

Home seizures climbed 38 percent from a year earlier and 5 percent from the first quarter, the Irvine, California-based data company said today in a statement. More than 1.65 million properties received a foreclosure filing, including notices of default, auction and bank repossession, in the first half. That was up 8 percent from the first six months of 2009.

Recovery Summer keeps rolling along

57 Ben,  I for one will appreciate reading the book before the election,  especially if it puts paid to this "Bush lied" mantra we have been hearing for 7 years.

He would not be releasing it before the election unless a lot of people think that it would help.   Bush has always been a loyal Republican,  even when the party didn't support him.

58 32

Reactionary, part of that AFFORDABLE housing wriggle is finding it. I'm in the Southern New Hampshire/Northeastern Mass. region and you really can't find much that doesn't require a ton of work to shape up or isn't a condo/prefab house for a single person. Even if I rented an apt. it would be something retarded nearing $1000 a month which is crazy. I stopped looking about a year ago because when I sat down to figure out what I could afford living on my own I'd have no buffer if I suffered a job loss, or some sort of other sudden increase in expenses. I'm lucky enough to have landed a job out of college in 07 and been at the same place since, but even on my salary I'd be penny pinching if I had to go pretty deep on a place. So renting a room from the parents and saving the rest is where I sit. And of course, if we hit deflation/inflation well it'll be all for not anyways...

59

Ben,  I for one will appreciate reading the book before the election,  especially if it puts paid to this "Bush lied" mantra we have been hearing for 7 years.

He would not be releasing it before the election unless a lot of people think that it would help.   Bush has always been a loyal Republican,  even when the party didn't support him.

I think he is releasing it before the election, or at least his publisher, for the same reason every politician does, to sell books.

Second. Nothing Bush says or writes will ever end that matra, because the media will always be liberal and they will always be repeating that Mantra.

I don't hate Bush, but I do with given 2006-2008, the surge aside, he did a lot of damage to our party and country. He should be doing everything he can do stay out of the news.

the republican party is trying to rebuild post Bush, we don't need him becoming involved again, especially before an extremely important election.

I don't know if I would call him a loyal republican. He was his own Republican on immigration, no child left behind, TARP, and many other major issues that went against the average Republican party.  He is the reason I fear Huckabee so much, I see Huckabee as nothing more than a George Bush lite. A big spending social conservative. 

I will always be greatful to Bush for his reaction and actions following 9/11, the tax cuts, and his pride in this country, but that's about it.

He should know better than to get involved before the 2010 election.  The Dems used him as a rallying cry in 2006 and 2008.  They were even planning on running against Bush in 2010 and him putting himself out there doesn't help.

Would it kill him to release the book next summer?

60

forgot to make the comment i quoted in italics

61 Asscheeks of Saturn, you may be thinking of moi .
I live in Orangeburg county . My great uncle used to own the dime store in Eloree . Another distant relative runs the Eloree trials.
I don't get the local paper so I don't know if we've had any local big news , although deer season opens in 1 month .

62

The idea of legalizing and taxing marijuana to solve two problems at once is even funnier straight than stoned.

1. Taking crime out of it? What do you think Jose and Pedro will do then? Say "it was fun while it lasted" and open up a burrito wagon in Juarez? More likely get into competition for the remaing illegal trade, cocaine, human trafficking, thereby making the turf wars even more intense and bloodier.

2. Taxing it to help pay off debt? Really? Think tobacco. These clowns won't be able to help themselves when it comes to raising taxes because that power is even more addicting than drugs. You will soon reach the point where taxes are so high smuggling becomes profitable again and here we go again. I remember a local radio host had a guy on from Homeland Security years ago saying then they were trying to get people to stop these outrageous tax increases on tobacco because smuggling was way up, with the profits going to fund terrorist groups in the Mid East. The reason tobacco smuggling isn't at the level of drugs is that the supply is in this country. If you could raise it in Mexico or Peru like marijuana or coca you would have the same problem.

I always said the way to close the border was to spread the rumor all those illegals were coming here carrying backpacks full of untaxed tobacco. Our a$$hole governor Doyle would be the first one down there with an mp5 looking for beaners to grease.

63

Monty:

Thanks for your great financial posts.  I appreciate the information you are providing.  I find it interesting that some of the economists are making off-air admissions to John Williams that they are under orders to give falsely optimistic economic disinformation. 

Those relying on the MFM as their sole source of "news" are being lied to and will get screwed.  However, Lord Humongous's business plan requires a steady source of prey from which to obtain gasoline -- plus the AoSHQ morons and moronettes need hobos.  Of course, most of the people relying on the MFM for their sole source of  "news" are progressives and collectivists so I won't feel sorry for them when they have to walk the Wasteland.

64 I was doing okay 'til I read this comment: Posted by: Ben at July 15, 2010 08:55 AM.

Pelosi-porn? I don't mind spitting coffee through my nose, but blowing chunks at the monitor can screw up your whole day, and require many cleaning rags....

In other news: I still wanna kick Kudlow, Cramer and the whole gang of bear-market cheerleaders in the ass. Hard. These days, rises in the market don't do a whole lot for productive people, but fuel exorbitant profits for financial companies and huge-O bonuses for their executives. Skroom.

China worries me. Much of what fuels their current success was designed/developed here, and got sent to the Chicoms for cheap-labor knockoffs. Add their industrious thievery to the "free-market" policies of the greedheads in NYC and DC ("free" market: US cannot impose tariffs, restrictions, preferences for locally produced products, while other countries can be as restrictive as they wish when it comes to American goods) and we are truly boned economically.

My first computer was made in the USA. The second was made in Japan. This one came from China. What Third-World pool of cheap/slave labor will be exploited when the Chinese people decide they want real incomes and at least a few luxuries (like we used to have) and need larger salaries to pay for them?

Thanks to Osama Obama and the entrenched paper-shuffling, non-productive wealthy now in charge here, the new slave-labor pool will probably be found in Michigan. Or California. Or (insert state name here).

65 "He [Bush] would not be releasing it before the election unless a lot of people think that it would help..."

Corrected, more accurate statement: Bush would not be releasing his book right before the election unless advised that doing so would drive up the sales.

Aside from his 9/11/01 immediate response, who the hell wants to read about what Bush said/did? A monstrously mishandled war in Iraq and Afghanistan? His disastrous response to the downturn in the economy?

I blame Bush for the fact that we now have to suffer under the Osama Obama regime.

And I'd rather re-read Richard Nixon's self-aggrandizing ramblings.

66 Private real-estate is still in a world of hurt. That's not going to change anytime soon, either.

I would add to that "in some locations". 

Posted by: Vic at July 15, 2010 06:59 AM (/jbAw)

In the South Plains of West Texas, we're not one of those locations.  The local banks didn't go on the lending sprees, and loaned money responsibly.  The banks are in good shape, our housing market didn't go to the moon in the bubble years, but my house is still worth ~20% more than what I paid for it five years ago.  We're still building, and selling homes, just not at the pace of a couple of years ago.

Anecdotal evidence, but here's this:  Over the last year, I've delivered a lot of certified letters from mortgage lenders.  Every single one has been from the biggies, not local or regional banks.  The people who took advantage of the stupid loans are now in trouble that they've reset.  When I bought my house five years ago, I considered one of those.  For literally about a minute and a half.  I put 10% down, took a 15 year note, and I'm now permanently right side up.  I, and people around here, are going to wind up paying for the morons (not the good kind) who have done stupidly.  Maybe they are the smart ones after all.

67 Many of the world's financial problems are structural in nature, and are going to be very difficult to solve. ...We've built a massive engine that can only run in a high-debt environment (read: easy credit). The problem is that, human nature being what it is, overextension and overleverage are the inevitable outcomes.

Not so much.  There is one country that pretty much rode out the Great Recession and has good employment numbers and GDP growth.  It's Canada.  Canada is reducing it's corporate tax rate.  It has some old fashioned ideas that property loans require a significant down payment and decent credit. All of which contributed to over 100k real jobs grown in Canada in April.

Oh, and they're controlling their debt.

Canada points out four things that we can change next year.  End the cheap housing loans to poor people who can't pay, re-implement the Bush Tax Cuts, make banks obey the best practices as developed after the S&L bailouts two decades ago and stop banks from dealing in derivatives.

68 "I was advised off-air by the producer that they were operating under a corporate mandate to give the economic news a positive spin, irrespective of how bad it was." And now you know that watching stations like CNBC for anything more than just comedic value is hazardous to your health and wealth."

ah, monty, we've always known this...

69 If we are serious about turning back into a country that makes stuff, then we need to figure out how to sell the stuff we make. The domestic market is saturated -- the only growth markets are abroad.

Posted by: Monty at July 15, 2010 09:32 AM (4Pleu)

Exporting to countries that respect property laws (and individuals have disposable income) is do-able.  But how can a sustainable market be developed where the value added by doing the hard stuff - design and marketing - is essentially stolen and replicated for knock offs?  How many un-copyable products are there?  Even there we have an issue - in that the Chinese have recently passed a law that is making companies pull R&D out of the US and relocate it to China.  Again - government interference for the good of their own economy and future at the expense of everyone else. 

As for domestic market saturation, that is true.  Not surprising - given that our biggest "trade partner" subsidizes our purchases of his product rather handsomely.  Thus he maintains his merchantilistic (and thus parasitic) system and starves out domestic competition.  Of course, at least in old-fashioned merchantilist systems the purchasers of finished goods got along by selling the raw materials to the manufacturers.  Which we don't do.  Trade imbalance is the result, which normally would result in the deficit ridden nation having the value of its currency decline.  But it isn't allowed to decline, due to the Chinese peg, so the natural order is subverted.  

 

70 Canada points out four things that we can change next year.  End the cheap housing loans to poor people who can't pay, re-implement the Bush Tax Cuts, make banks obey the best practices as developed after the S&L bailouts two decades ago and stop banks from dealing in derivatives.

Posted by: Quilly Mammoth at July 15, 2010 10:45 AM (646mn)

I agree with these things.  But let's not forget that Canada is also the beneficiary of massive oil exports to the US, and sizeable timber exports as well.  To some extent they have a resource economy.

71 Last night ABC news said we are on track to foreclose on over a million mortgages.  I think people elected this guy cause they thought he would help out individual home owners.  Why hasn't he?

72 BTW, any morons looking for work should consider Northern Alberta; a co-worker just came back from an inspection up there -- they are begging for workers in all kinds of jobs -- not just oil services, but retail, food service, banking, etc. I don't know how hard work permits are to get, but there are jobs.

73

Jean,  thanks for the tip.  My daughter loves making snowmen in July.  Seriously, I've been long considering bailing out of the US, much as my ancestors departed from their respective homelands 100 years ago. 

What interesting migration patterns will mark the 21st century?   

74

#74: "stop banks from dealing in derivatives."

Call me an imbecile (one step down from a moron) if I'm wrong about this: but wasn't that particular problem not so much that the banks were dealing in derivatives themselves, but that they were lending vast amounts of cash to hedge funds which then did the dealing? And then when the hedge funds lost their bets the banks found out that they didn't have the assets they thought they did.

75 worst.sock.evar

76 How far up in Northern Alberta? Edmonton is nice, the wife has family there.  Canada is very tough on non-citizens working without a proper work permit.  Seems they think it puts an undue stress on their public support systems.

Racists.

77 It's Canada. Financial solutions that work for a nation of 30 million or so don't work as well for a nation with a population 10 times larger. This is the biggest argument I have with people who argue that an economic model that "works fine" in Canada or a European country of 5 million souls will scale perfectly to a nation of 350 million (and growing). Canada's market only works to the extent that it does because of its proximity (in both logistical and physical terms) to America. America cannot adapt Canada's economy because there is no one to take the role we currently play. Sometimes it sucks to be King of the Mountain.

78 Call me an imbecile (one step down from a moron) if I'm wrong about this: but wasn't that particular problem not so much that the banks were dealing in derivatives themselves, but that they were lending vast amounts of cash to hedge funds which then did the dealing? And then when the hedge funds lost their bets the banks found out that they didn't have the assets they thought they did.


Your thinking of AIG with the hedge funds. Banks were selling and buying derivatives. In fact two of the biggest dealers were Freddie and Fanny.

In 2001 Jamie Gorelick, Vice Chairman of Fannie, at the Mortgage Bankers Association (MBA) Annual Secondary Mortgage Conference in Orlando, Florida said the following:

"Our approach to our lenders is `CRA Your Way'," Gorelick said. "Fannie Mae will buy CRA loans from lenders' portfolios; we'll package them into securities; we'll purchase CRA mortgages at the point of origination; and we'll create customized CRA-targeted securities. This expanded approach has improved liquidity in the secondary market for CRA product, and has helped our lenders leverage even more CRA lending. Lenders now have the flexibility to use their own, customized loan products," Gorelick said.

And every other major lender decided to do the same thing.  Buy and sell derivatives.  Package up a roll of pennies that only have 48 pennies in it and sell it for .50 because it "will go up in value".  And so on.

The problem with selling derivatives is that it allowed banks to easily raise cash that they then handed out like an ATM that took any four didgit code as valid.

Essentially banks using derivatives, spurred by the CRA and Fannie and Freddie turned our real estate market into the biggest roulette wheel in history.  And we were all in on Black.

79 not so much that the banks were dealing in derivatives Well, derivatives certainly played a big part in the meltdown, particularly the Cedit Default Swap (CDS). In the old days you could like bonds or you could love them, but there was no way to hate them (go short) other than just not buying them. Then along comes the CDS, which essentially lets you buy insurance against bond default -- even if you don't hold the underlying bond. And because of CDO fraud (Collateralized Debt Obligations, or packaged mortgage loans) and dramatic underestimation of risk by the ratings agencies, the CDS allowed speculators to gain enormous leverage for practically no money. It almost killed the entire banking system back in 2008.

80 America cannot adapt Canada's economy because there is no one to take the role we currently play. Sometimes it sucks to be King of the Mountain.

Uhmmm...their real estate market didn't crash because they didn't turn their banking industry into a social justice mechanism and Casino.  It has zip to do with their international relations or the source of their income.

Unless you are saying that how someone budgets their money for success is dependent on where they get the income from?  Is that what you are saying, Monty?

81 A superb analysis, as usual, Monty.

82 Hey .. Great News ...
China Has Been Covertly Funding A Housing Bubble Five Times Larger Than That Of The US: 65 Million Vacant Homes Uncovered

83

Monty, your #87 is a summary of the whole problem but doesn't get into the bank / derivative nexus, which was my actual question.

Thanks, Quilly, for #86. That's more along the lines of what I wanted to know.

84 Unless you are saying that how someone budgets their money for success is dependent on where they get the income from? Is that what you are saying, Monty? Most of Canada's money is generated inside the United States. That's just a fact. Canada's actual domestically generated wealth only constitutes about 30%-40% of their GDP. America is their biggest export market, trading partner, and a major source of consumer spending. They can have the fiscal policy they have because America is what it is. Without America, Canada's financial situation would be very grim indeed.

85

how someone budgets their money for success is dependent on where they get the income from

If your business model relies upon sending shale oil down a big pipe south, it does help to know that you have buyers down south, I would assume.

86 Re: programmers themselves often cannot audit or trace problems in their code because it is "adaptive" and changes its behavior procedurally as it runs.

As a programmer, I am very interested in knowing more. Are we saying that the program itself generates code, compiles it, and runs it without testing? By adaptive, are we saying that programmers are using the dreaded untraceable IF statements? Inquiring minds want to know!

87 BTW: some of the most accurate pining of the CDS debacle on various Clintonistas has come from places like Fire Dog Lake, Mother Jones and the Village Voice.

In the mid-90's they, the Clintonistas, essentially began to change the regulations that turned financial institutions,particularly the credit-derivatives industry, back into "bucket shops". Aided and abetted by Michael Bloomberg's Market Master technology.

The players were Robert Rubin, Lawrence Summers, Junior Cuomo, Jamie Gorelick (As asst AG she changed how the Federal Government looked at and enforced anti-bucket-shop regulations).  Dodd and Frank watched their back in the Congress.

All to spur enough extra credit in the pipeline to make lending to the impoverished viable tp the banking industry.  And to make a little on the edge for themselves.

They stifled Brooksley Born of the CFTC who warned about this in the late 90's.  And then at Freddie Gorelick added gasoline to the fire with their crazed packaging of secondary market derivatives.

Of course banks were going to make bad loans if they thought there would be no blow-back...and they thought there wouldn't be.

88 Without America, Canada's financial situation would be very grim indeed.

Yes, they would have to eliminate their social programs or go into massive debt. But you are missing the point.  The EU was playing the same banking games that the US was and got burnt as well, and they are not nearly the trading partner Canada is.  Why didn't Canada's housing market collapse?  Sane banking practices.

We deliberately gamed the system to generate insane amounts of credit to foster one side's social agenda and the other sides desire to have a robust economy with no downside.  Every bubble in the last fifteen years was overcome by this tactic.   What was really happening is that an even bigger bubble was being created.

No financial stability is going to occur until the basics of sounding lending and transparent trading is returned.  It's _all_ smoke and mirrors until that happens.

89 57 There are entire subdivisions in California, Arizona, and Florida that are essentially ghost-towns. I'm betting that many of those houses will in the end either be sold for a song or even demolished. I believe you could find this in all 50. In my little town (35000) I have stumbled across more then one abandoned townhome development. They have each been sitting for more than a year. Framed, roofed and windows installed, they sit rotting without siding. They will have to be demolished. Who will pay? Posted by: kidney at July 15, 2010 09:21 AM (ENRGu) Central CT perhaps? They built a "luxury home" subdivision a short way from my house. The single-family homes are finished, some occupied. The duplexes (and these are huge houses, BTW) are unfinished, the overall lot is unfinished (big piles of dirt covered in weeds), and the sign is still out front advertising the subdivision. The tyvek is tearing away because they never finished the siding, and the underlayment is starting to rot from exposure.

90 As a programmer, I am very interested in knowing more. Are we saying that the program itself generates code, compiles it, and runs it without testing? I used to write "expert systems" (kinda like AI). "Learning" systems don't write their own code in the sense that you mean it; they operate from rulesets and bounded algorithms that change constantly as the program runs. They test boundary conditions, limits, and stressors, and then adapt the models when those limits are reached or exceeded. But this approach requires a pretty static model to work well, because these types of systems do not handle high volatility very well. They know how to adapt to small changes, not big ones. Big changes cause their rulesets to spin off into infinity more often than not. Here's an example: let's say that you program an algo to watch a certain asset-class of stocks. Your first basic rule is, "Buy when the stock goes below it's 50-day moving average; sell when it goes above it's 120-moving average" (or whatever). This is all fine; but what happens if another algo at another hedge fund has a diffferent set of rules for the same asset class (as frfequently happens)? The two algos end up driving the stock below the low-limit, and then have to start making shit up because the programmer never thought of this scenario except in the most general terms: "Sell everything if the price drops to X." But the other algo has the same rule, and all of a sudden there are lots of sellers and no buyers because all this shit happened in under a second. The algos and monitors are not really AI, that's the problem. They are actually fairly fragile (and often ludicrously badly-written) pieces of software that depend on conditions being just so to work properly.

91 #93 If your business model relies upon sending shale oil down a big pipe south, it does help to know that you have buyers down south, I would assume.

Yes, if you think that nobody else in the whole world will want to buy your oil, minerals and timber.  If you don't then your business model only fails when you run out of shit to sell.  Hence the reason that the Greens are losing battles in BC to open more mineral deposits.  The reason that the Canadian Government is letting the unions hang out to dry in Sudbury and so on.

And, Monty, the Canadian Banking Act was written in 1934 in response to all the bank collapses world wide back then.  It has only really been modified because of NAFTA. Back then the US was not the customer of Canada it became after WWII.

92 Thanks Monty, that's all good stuff. I still don't get the untraceable because adaptive phrase though. Are you saying that it fails because of an unanticipated set of variables? I have traced some bad code in my day, stuff like variables used for more than one purpose, and gotos that fired branches like buckshot. But can't a programmer just put it in debug, plug in the variables, and see what falls out? It can be a pain, but why is it untraceable?

93 Or are you saying that the rules used by the program are dynamic? But I'm assuming programs are changing the rules, yes?

94

Quilly: the problem here is logistics. BC is a Pacific territory, the only territory with all-year access to the ocean; it just has to send its lumber and minerals down all manner of shortish routes to the port of Vancouver.

Alberta (and Saskatchewan, and Manitoba) would have to cross the Rockies to get to the Pacific. Or, they get to cross a prairie which is north of North Dakota to get to the Great Lakes and then off down the Saint Lawrence.

If the USA goes Road Warrior, Alberta is quite literally left high and dry. It goes back to subsistence living, or near enough.

95

Heh, I just figured out how Detroit can reignite its economy: river piracy.

96 In the old days you could like bonds or you could love them, but there was no way to hate them (go short) other than just not buying them. Then along comes the CDS, which essentially lets you buy insurance against bond default -- even if you don't hold the underlying bond. And because of CDO fraud (Collateralized Debt Obligations, or packaged mortgage loans) and dramatic underestimation of risk by the ratings agencies, the CDS allowed speculators to gain enormous leverage for practically no money. It almost killed the entire banking system back in 2008..

Apparently you are unfamiliar with treasury bond/note/bill futures (and their corresponding option) contracts.  These have given hedgers and speculators the ability to hate bonds for decades - even if you don't hold the underlying bond.  They grant the speculator an enormous amount of leverage and are accessible for a fraction of what it takes to get into a CDS contract.  The difference is in counterparty risk.  With CDS contracts, there was no central clearing house like the CME or CBOT with margin requirements and position limits and the attending rules that have allowed these highly leveraged derivative instruments to be traded for literally centuries without endangering the global banking system.

The lesson shouldn't be that all derivatives are bad or that leverage is bad.  The lesson is that managing risk is the foundation and most important component of portfolio management.  A bank that ignores the creditworthiness of its counterparties is doomed to failure - whether they are on the other side of a mortgage loan or a CDS contract.

97 Alberta (and Saskatchewan, and Manitoba) would have to cross the Rockies to get to the Pacific. Or, they get to cross a prairie which is north of North Dakota to get to the Great Lakes and then off down the Saint Lawrence.

They already exist and they are building another in BC right now, the Northern Gateway, to Kitimat. They have pipelines for both gas and oil to the great lakes.  One major project is a new one direct to houston via the Keystone to eliminate the circuitous route it now takes to the Great Lakes that is at full capacity.

Meanwhile a new piplines (Crude) to the lakes will open this year using the existing right of way for a pipeline that will be reversed flowed to provide light hydrocarbons required for oil sand production. (diluents)

Right now Yukon, BC and Alberta are working on a  natural gas pipeline to the sea via Edmonton (because of some existing infrastructure and the new ) or the gulf coast.

98

Don't worry-Geithner assured Kudlow that pro-business policies are on their way and, by gosh, LK is predicting Dow 20,000.

99 Apparently you are unfamiliar with treasury bond/note/bill futures (and their corresponding option) contracts. Actually, I am familiar with them -- but most people aren't, and they've never been the domain of anyone but the largest institutional investors and funds. Which is why I suspect I'm talking to someone "in the industry" instead of Joe Investor. Only a markets guy would think that put/call options, futures contracts, convertibles, and covered bonds are something that everyone would know about. Most derivatives are from the devil, and add little of value to anyone except brokers and investment bankers. Futures contracts are probably a necessity, particularly for commodities traders, but the other stuff really puts me off. It's not clear to me how most of that stuff is anything other than accounting tricks to manufacture fake profits out of thin air. We hates them, my precious. Yes we does.

100 Actually, I am familiar with them -- but most people aren't, and they've never been the domain of anyone but the largest institutional investors and funds. Which is why I suspect I'm talking to someone "in the industry" instead of Joe Investor. Only a markets guy would think that put/call options, futures contracts, convertibles, and covered bonds are something that everyone would know about.

Futures & options are certainly much more accessible and better known than CDS contracts which have existed solely in the domain of institutional investors.  I was trading bond futures as a college student in the late 80's.  Besides, where did I ever say everyone would be familiar with treasury futures?  I was simply correcting your assertion that, "there was no way to hate them (go short) other than just not buying them."  But we're really talking about two different things, one is hedging/betting on a direction of interest rates and the other is insuring against the default of a specific issuer, which leads to the next point.

Most derivatives are from the devil, and add little of value to anyone except brokers and investment bankers. Futures contracts are probably a necessity, particularly for commodities traders, but the other stuff really puts me off. It's not clear to me how most of that stuff is anything other than accounting tricks to manufacture fake profits out of thin air.

Why is purchasing insurance on a bond or equity portfolio more reckless than buying homeowners or auto insurance?  Again, regarding CDS', the problem was with counterparty assurances, not the instrument.  Traded on an exchange like the CME, as many now are, the CDS is a fantastically useful tool that allows bond investors like pension funds and insurance companies to reduce the risk of their portfolios, just like a flour miller or a corn grower can reduce their risk with derivative instruments.

Spouting uninformed platitudes like "most derivatives are from the devil" is exactly how the morons in congress come up with "solutions" like the CRA and Sarbanes-Oxley.  Some examples of specific derivative instruments that are based on accounting tricks to manufacture fake profits would be enlightening.

101 Spouting uninformed platitudes like "most derivatives are from the devil" is exactly how the morons in congress come up with "solutions" like the CRA and Sarbanes-Oxley. Trust the experts, eh? Those same experts who just cost everybody trillions of dollars because they didn't know what the fuck they were doing with the fancy derivatives and algo-driven trading. Take your fucking bullshit somewhere else and sell it to someone who doesn't know better. I pray for the day when these Wharton and Stern School fucktards have to go out and get a real job.

102 And as for shitty derivatives, the CDS is a pluperfect example of something. Sure, I can buy insurance for a car -- for my car, not for your car. I can buy insurance for my house, not for your house. In other words, I'm buying insurance as a hedge against disaster, not as a speculative bet that someone's car will crash or their house will burn down. Also, when I buy insurance, it reflects the actual risk that something bad will happen: I pay more to insure a sports car than a family van, for example. CDS make money for the investment banks who sold that bullshit and no one else. It was purely and simply a way to speculate against bonds, which previous to CDS had no really inexpensive way to go short. I could rant about the ways convertibles are abused to, but I suspect you know that crap chapter and verse. Don't play coy: you know the bullshit that goes on as well as I do. Derivatives are, by and large, completely oriented to the seller, not the buyer. They almost never add value, and exist solely to generate transaction-profit for the middlemen.

103 Take your fucking bullshit somewhere else and sell it to someone who doesn't know better. Look, sorry to get heated. No offense, okay? I feel strongly about it, but that's no reason to be rude. But Jesus it bugs me when finance types go on and on about how great derivatives-trading is, in spite of their epic record of failure and lack of value to the investor (even big institutional funds). I think we're just going to have to agree to disagree on this one. I think most derivatives suck in principle, and cannot be "fixed" by regulation or adjusting of some parameters. The concept is flawed.

104 Your ignorance is exceeded only by your slavish devotion to straw man arguments.  Please point out where I said or even implied, trust the experts?  What I am saying is actually the exact opposite.  Don't trust the those, like you or our elected retards, that hold themselves out to be experts but are clearly ignorant.  The repeated spewing of populist catch phrases are dead giveaways.

And as for shitty derivatives, the CDS is a pluperfect example of something. Sure, I can buy insurance for a car -- for my car, not for your car. I can buy insurance for my house, not for your house. In other words, I'm buying insurance as a hedge against disaster, not as a speculative bet that someone's car will crash or their house will burn down.
Why would I care if you bought insurance on my house or a basket of houses in my region?  Say, that would be kind of like reinsurance wouldn't it?  Why is speculating OK for sellers of insurance, but bad for buyers?  You make speculating out to be a toxic, horrible thing without considering that speculators provide liquidity.  Although, a lack of liquidity would allow you to whine about how excess market volatility makes it impossible for a guy to earn an honest dollar, so its not all bad I guess.

Also, when I buy insurance, it reflects the actual risk that something bad will happen: I pay more to insure a sports car than a family van, for example.
Do you even know what a CDS contract is?  Of course they are priced to reflect perceived risk - what in the world are you railing about?

CDS make money for the investment banks who sold that bullshit and no one else.
So all of the institutional investors that buy them are idiots and the only smart ones are the sellers (like AIG)?  All those CDS contracts that were bought by Paulson and Goldman and Michael Burry didn't really pay off?  I have news for you, most of the time when you buy insurance, you don't want it to pay off.  I hope my liability insurance doesn't pay off, ever. 

Do yourself a favor and put a little thought into this before your next post.

105 Do yourself a favor and put a little thought into this before your next post. Yeah, you go ahead and fuck yourself too. I'm done with you. Sell your stuff to the marks who believe the horseshit you're slinging.

106 But Jesus it bugs me when finance types go on and on about how great derivatives-trading is, in spite of their epic record of failure and lack of value to the investor (even big institutional funds). I think we're just going to have to agree to disagree on this one. I think most derivatives suck in principle, and cannot be "fixed" by regulation or adjusting of some parameters. The concept is flawed.

The concept for derivative contracts that allow investors to more precisely manage risk is one of the greatest advancements in the history of finance.  Futures, options, swaps, swaptions, forward contracts, insurance, reinsurance, CDS, etc. all can and have been tremendous allies for investors, speculators and commerce.  They can be misused, just like credit can be misused, but the value of the concept and the execution is blindingly obvious.

107 Yeah, you go ahead and fuck yourself too. I'm done with you. Sell your stuff to the marks who believe the horseshit you're slinging.

Thank you for the informed discussion as to why derivatives suck and are from the devil.  You made a really strong case for your opinion and backed it up with facts and unassailable logic.  Really, great stuff.

108 I guess the disasters of the last couple of years never happened?  And were in no way caused by any new fangled financial instruments?  Yep, Paulson got rich, we got poor.

109 As I've typed several times now, it wasn't the instrument or the concept of the instrument that was the problem, it was the abdication of basic risk management.

The sellers, primarily AIG(FP) didn't think they would ever have to settle these insurance claims so they sold far beyond their ability to pay.  The buyers thought they were covered, so they held far larger underlying positions than they should have.  These CDS' were unregulated and thus placed a larger burden on the buyer to ensure the financial strength of the counterparty.  Contrast that with the exact same instruments cleared by the CME - a central clearing house that enforces position limits and has strict financial criteria to become a clearing member.  There have been no defaults on the cleared OTC swaps.

You can blame the instruments, but it's a cop-out.  The blame lies with lax risk management, which is why more responsible companies like Goldman & JP Morgan didn't take the same whipping  that Lehman and Citi took. 

Exchange traded futures contracts, with their tremendous leverage and volatility have been trading for over 300 years without bankrupting the world economy.  Market and economic booms & busts have happened regularly throughout recorded history and will continue to happen whether financial derivatives are involved or not.  They are an inevitable by-product of human nature - greed overrules fear until fear overrules greed, ad infinitum.  Dutch tulip bulbs, English canal stocks, Asian tigers, Latin American bonds, American dot coms, etc.  We don't know where the next bubble will be, but we can be fairly certain there will be an ineffective legislative overreaction to follow.

110 bickering douches ruin yet another thread