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Civility is the ability to disagree with others while respecting their sincerity and decency. Civility begins with understanding. We can best understand our political differences by first understanding the moral foundations upon which political views are built. This site features research, resources, and commentary related to the pursuit of Civility through understanding.
 

 

There is a “shadow banking” system that has massively and often unknowingly leveraged client assets into possibly the largest credit bubble the world has ever seen.  Because of more favorable rules, much of the leverage has occured in the Euro, meaning a collapse of the Euro will be much more catastrophic than the public is aware.

One of the shadow banking systems favorite tools is re-hypothocation.   This means institutions can use client funds as collateral for the institutions own investments.  The institutions take $1 of client collateral and use it to purchase $1.40 to $2.00 of investments for the institution.   So for $1 of client money, the client may be trading at leverage, and the institution is trading at leverage.

A much more thorough explantion is provided by Reuters, who concludes

The volume and level of re-hypothecation suggests a frightening alternative hypothesis for the current liquidity crisis being experienced by banks and for why regulators around the world decided to step in to prop up the markets recently. To date, reports have been focused on how Eurozone default concerns were provoking fear in the markets and causing liquidity to dry up.

Most have been focused on how a Eurozone default would result in huge losses in Eurozone bonds being felt across the world’s banks. However, re-hypothecation suggests an even greater fear. Considering that re-hypothecation may have increased the financial footprint of Eurozone bonds by at least four fold then a Eurozone sovereign default could be apocalyptic.

For further reading we suggest this dire post from zerohedge.com,  who sees truly frightening possiblities

It turns out the next AIG was among us all along, only because it was hidden
deep in the bowels of the unmentionable shadow banking system, out of sight (by
definition) meant out of mind. Only it was not: and at last check there
was $15 trillion in the shadow banking system
in the US alone, where the
daisy chaining of counteparty risk meant that any liquidity risk flare up would
mean the AIG bankruptcy was not even a dress rehearsal for the grand finale.

The real threat is not the collapse of financial institutions, but the threat of governments stepping in to resuce so called “to big to fail” insitutions.   Governments don’t have the money, so they will print it up via the central banks.  This will certainly lead to inflation, and perhaps hyper-inflation.

A more hopeful opinion on the odds of hyper-inflation is provided by dailycapitalist.com

I respect many of the writers who believe that we will experience hyperinflation. A number of them are, like me, students of Austrian theory economics. I think most of them are jumping the gun. At this point none of the economic or political factors required to set off hyperinflation are present. A careful analysis of theory, fact, and history leads me to conclude that inflation/stagflation is our future. It is quite a leap of fancy to say we are certain to have hyperinflation.

 

 

CBS’s 60 Minutes documents how wrongful wealth was created in the run up to the mortgage crisis.

Mortgages are ‘originated’ between the borrower and the original lender through the services of it’s brokers.  The originating lender then may keep the loan, or may decide to resell the loan to another lender.  Originating lenders can also bundle loans into a package and then resell the package.   The originating lender makes money from the fees charged to originate the loan, and from selling the loan to others.

When reselling the loans to other lenders, the originating lender represents that the loans meet certain guidelines pertaining to the ability of the borrower to repay the loan and the value of the collateral.  High risk loans (sub prime), with less qualified buyers and less collateral, command higher fees and higher interest rates, and earned higher profits for the originating lender.  Much higher.

If the originating lenders made loans that did not meet the standards, and then knowingly resold these loans to other lenders, they would be profiting from a crime.  Managers and executives who received compensation from the resale of the misrepresented loans would be profiting from a crime.  If the originating companies stock price rises as a result of the profits from reselling these loan packages, executives made millions of dollars in stock options from a crime.   And if the whole thing fell apart, the investors who bought the loans, and the investors who bought the stock of the originating company, would lose billions of dollars from a crime.  And if the losses were so large as to endanger the financial system and cause government to bail out the failing loan originator, the tax payers would be paying for the crime.

In the two pieces below, 60 Minutes documents Countrywide and Citicorp both knowingly engaged in fraudulent loan origination.  This is the kind of wrongful wealth we can all agree should be stopped.

 

 

Not sure whether to laugh or cry over this excellent piece by Jon Stewart and The Daily Show.   The original Bloomberg article focuses on $13 billion in profit that banks accrued from $7.7 trillion in near zero rate loans from the Fed.   The US government spends $40 billion a day, to put the $13 billion in context.  The Fed claims the loans have been repaid and that they actually made money for the US government.  Well, that may be so if you choose the ignore the inflationary effect of printing up $7.7 trillion.  The money may have been “paid back”, but it’s still in the money supply.  To put that inflation of the money supply into perspective, it’s about half of our annual GDP.

The Bloomberg article also highlights the fact that decision makers in Congress were kept in the dark.  A Congress that had trouble passing a $700 billion TARP program surely would have been impacted by the news that the Fed was bailing out the banks with $7.7 TRILLION.

Enjoy…

The Daily Show With Jon Stewart Mon – Thurs 11p / 10c
America’s Next TARP Model
www.thedailyshow.com
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