The Economic Crisis in Europe

[Cin]

Originally Posted by Kobi

I see another house of cards with a really shakey foundation. Hope whomever makes the right decisions or it will get very ugly, very quickly.

See I might be missing something here, but I think that is precisely the point. The uglier the better. Quicker not so much. No rush. The more time, the more money can be squeezed out of these crises.

Hedge funds and credit default swaps seem to be holding the world hostage.

Let's look at how this is playing out in Greece (and in time will play out everywhere.)

Hedge funds are minimally regulated and privately managed investment funds arranged so the rate of return is ridiculously high, easily far in excess of 10%. To accomplish these kinds of returns, hedge funds walk dangerously close to the edge.

So the thing is Greece can't pay off its loans. The EU and the IMF offer them a bailout package in exchange for enormous cuts in government spending and painful sacrifices by the Greek people. Hedge funds, which by the way must involve real people and real corporations, and there are about 8000 in the world, but in my research they are always referred to as simply hedge funds as though this financial terrorism is being conducted by inanimate objects, anyway, hedge funds have been buying up Greek debt. (Sound familiar? It should. Think housing debt.)

The EU wants to recall old bonds and replace them with new ones at lower interest. Now that would cost these bond holders money and they don't like to sacrifice anything, no matter how small, to help pay for the financial problems they create. So hedge funds are refusing the offer of the EU. Now you might ask why would they do that? If Greece defaults on the very bonds the hedge funds own won't that be like biting your nose to spite your face? Nope. Not at all. Actually quite the opposite. Why is that you might ask? And I hope you do.

Well, first off the financial elite that make up these hedge funds that have been buying up Greek bonds are in no hurry for the party to end and they want to get their hands on as much of the bailout money as possible, the suffering of the Greek people is as inconsequential and moving to them as the suffering of insects are to us. But, you may say, if Greece defaults won’t the holders of these bonds end up with nothing at all. Wrong again. Because, and this is the beautiful part of all this, the fact is that hedge funds have covered their bets with CREDIT DEFAULT SWAPS (these might also sound a little familiar, once again think US housing crisis then remember the derivatives involved, called weapons of mass destruction by Buffet, same game, still happening, the masters of the universe won't be happy till they destroy the world). Credit default swaps are financial insurance that would pay them the full value of the bonds (so why would they accept a deal where the bonds are discounted so Greece can afford to pay off its debt).

The problem with all this is that the entire financial system might collapse if Greece defaults. It’s like using a nuclear weapon in a way. If one bank fails to deliver it could set off a chain reaction of financial defaults around the globe.

Credit default swaps have been likened to nuclear weapons in that you can have them but you best not use them.

Before Wall Street and the financial world lost it's fucking mind, it used to be that bankers didn’t bet against their clients. If a client was successful the banker was successful. If the credit risk was bad you didn’t extend the loan or secured the loan with a lot of collateral, you didn’t give the person the loan and buy a credit default swap. This crap is ridiculous, toxic and financially destabilizing.

So what you see going on in Greece is financial blackmail by the hedge fund who holds the bonds. It’s like a game of chicken. And they get away with it because a large part of the word’s financial system has, of lately, been built with magic, voodoo, imaginary money and toxic economic practices and everyone knows it won’t take much for it all to come crashing down.

Apparently no one can stop these people.

Financial terrorism and economic weapons of mass destruction, how come we don’t declare war on them?

[Kobi]

"Financial terrorism and economic weapons of mass destruction, how come we don’t declare war on them?"



Good point. My only question is who is the "we" you are referring to?

Is the "we" our own financial institutions who stand to make a killing here, or if they make the wrong decisions, will throw the world into a depression and utter chaos?

Is the "we" the US government who is the means to an end for those mentioned above? The government who put the taxpayers on the hook for billions and trillions without requiring any accountability or punishment for those who created this mess? The government that employes the key figures in the meltdown in strategic positions and appointments?

Is the "we" the the individual taxpayer who has tasted what it is like to reap the fortunes in high risk stakes and then watched their fantasy burst as the house of cards came tumbling down? Is it the people who are struggling just to survive and who still believe there is a magical answer that will restore their fantasy life to solvency and financial growth? Is it the people who can recite the marketing they were sold but have little clue as to how this entire game is played in totality and by what rules?

Who do you expect to wage this war?

[Cin]

Originally Posted by Kobi

"Financial terrorism and economic weapons of mass destruction, how come we don’t declare war on them?"



Good point. My only question is who is the "we" you are referring to?

Is the "we" our own financial institutions who stand to make a killing here, or if they make the wrong decisions, will throw the world into a depression and utter chaos?

Is the "we" the US government who is the means to an end for those mentioned above? The government who put the taxpayers on the hook for billions and trillions without requiring any accountability or punishment for those who created this mess? The government that employes the key figures in the meltdown in strategic positions and appointments?

Is the "we" the the individual taxpayer who has tasted what it is like to reap the fortunes in high risk stakes and then watched their fantasy burst as the house of cards came tumbling down? Is it the people who are struggling just to survive and who still believe there is a magical answer that will restore their fantasy life to solvency and financial growth? Is it the people who can recite the marketing they were sold but have little clue as to how this entire game is played in totality and by what rules?

Who do you expect to wage this war?

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

Although it would be nice...

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

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

[Kobi]

Originally Posted by Miss Tick

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

Although it would be nice...

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

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

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

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

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

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

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

[Cin]

Originally Posted by Kobi

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

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

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

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

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

LOL. I wish I had an plan.

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

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

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

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

It really a strange new world.

[Ciaran]

Originally Posted by Miss Tick

LOL. I wish I had an plan.

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

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

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

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

It really a strange new world.

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

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

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

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

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

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

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

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

[Cin]

Originally Posted by Ciaran

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

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

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

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

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

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

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

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

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

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

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