This Isn’t About Institutional Failure – It’s About System Failure

And you wonder why I don’t listen to so-called "financial experts"?

The following is from an "analysis" appearing in Time magazine yesterday, Let Risk-Taking Financial Institutions Fail.;

Do not be fooled. The $700 billion (ultimately $1 trillion or more) bailout is not predominantly for mortgages and homeowners. Instead, the bailout is for mortgage-backed securities. In fact, some versions of these instruments are imaginary derivatives. These claims overlap on the same types of mortgages. Many financial institutions wrote claims over the same mortgages, and these are the majority of claims that have "gone bad."

At this point, such claims have no bearing on the mortgage or housing crisis; they have bearing only on the holders of these securities themselves. These are ridiculously risky claims with little value for society. It is as if many financial institutions sold "earthquake insurance" on the same house: when the quake hits, all these claims become close to worthless — but the claims are simply bets disconnected from reality.

The only thing "disconnected from reality" is the above.

See, here’s the problem. Money flows through the economy like water. While it sounds good to isolate parts of it from other parts, in practical application, that’s a lot more difficult than it seems. That’s precisely why we need regulation in the first place, and why regulatory bodies should be there to make sure no one is doing anything untoward with our money.

What is happening now is the direct result of eight years of
absolute benign neglect of the financial markets, on top of nearly 30
years of rampant deregulation, in which these sorts of instruments were
created, and leveraged and hedged, to the point that our system is on
the verge of collapse.

The problem at the moment isn’t individual institutions, and their
possible failure. The failure of individual banks and financial
institutions isn’t the problem. It’s the failure of the instruments
used to make this bubble, and the fact that every part of the economy
is dependent on every other part of the economy, and the fact that
there is no regulatory structure with which to reign in these idiots
and, more importantly, the securities.

The problem is the credit market. Banks rely on each other for the
money they loan to others, and right now, there is no way to know which
banks and other institutions are holding this worthless paper, so they
are reluctant to lend each other money. The ONLY way to fix this
problem is to affix a value to these securities, and then liquidate
them. But that can’t be done at the moment, because the market itself
is reluctant to assign a value for them.

The bill Congress rejected was not perfect, by any means. But given
the realities of the situation, not passing anything is not an
alternative. Of course, we can’t be sinking $700 billion into such an
enterprise, but we have to restore confidence in the markets.

Oh, yeah; another problem I’m seeing is that financial institutions
have been allowed to get too big, and less subject to oversight. By
allowing a lot of these institutions to fail, we are making banking
behemoths even bigger. By the time this is over, without a bailout, we
may be down to three huge banking companies; Bank of America, Chase and
Citigroup. And that would not be good for the country at all.   

the money. Average Joes and Janes are not the holders of the other side
of complicated, over-the-counter derivatives contracts. Rather, hedge
funds are the main holders. The bailout will involve a transfer of
wealth — from the American people to financial institutions engaging in
reckless speculation — that will be the greatest in history.

hate to break it to these people, but the above has already happened.
That’s why we’re in this trouble to begin with. They were handing out
mortgages like candy, and artificially inflating home prices, and in
the process, created the largest pool of unsecured debt in our history;
one that is largely unsustainable.

The short term bailout will allow us to get a handle on what’s out
there, and give us time to come up with a better solution to the
problem, such as assisting banks in restructuring mortgages to reflect
the actual value of the home.

But if the credit market collapses on the short term, we’ll be
looking at a financial crisis that is difficult for anyone not alive
during the Great Depression to imagine. Like it or not, but the neocons
has created an economy that is largely supported by debt. Businesses
depend on it, and so do we. If you like shortages of everything, and if
you love the idea of gas lines and $6 a gallon gas, then allow the
credit system to collapse.

And those who know me, and have read me for a while know; I’m not a
doomsayer, for the most part. But this is serious. We have to reform
our economic system into something that works. But first, we have to
bail out the old system.

It kind of makes me wonder what kinds of "experts" Time magazine is
hiring to write their columns, when I read crap like this, the last
line of their story:

Let the poorly managed, overly risk-taking financial institutions fail!
Always remember that Wall Street and the real economy are not the same

I’m not an economics expert, and I freely admit that. But you know
what? I’ve run businesses before, and I know what it entails. And when
the credit market goes bust, and when financial institutions go bust,
there is a ripple effect throughout the economy. Ask anyone who has a
fricking 401(k) whether or not Wall Street and the "real economy" are
linked. Ask the folks living in the "real economy" who have dealt with
a foreclosure whether Wall Street and the "real economy" are linked in
any way.

So, these are the guys responsible for this drivel, folks:

Ari J. Officer has completed his master of science degree in
financial mathematics at Stanford University. Lawrence H. Officer is a
professor of economics at the University of Illinois at Chicago.

One guy who can crunch numbers with the best of them, and another who wishes he was Paul Krugman. Nice.

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