The bright side of the stockmarket collapse

On Fri, 10 Oct 2008 00:31:46 -0400, "Ed Huntress"
<snip>


<snip>
Don't confuse moral outrage with the sudden realization that you have been lied to and have been had big time, although one frequently results in the other.
In many, but not all, cases the people are getting out of what they now preceive to be a rigged game, with all the cards stacked against them.
As I indicated in other posts, the foundational financial problem appears to have been the gross proliferation of megalomaniacs in charge of increasingly powerful institutions rather than any criminal cabals or plots.
However this was possible only because of the general acceptance of societies's myths and legends such as the unquestioning belief in Santa Claus, the Easter Bunny, the Tooth Fairy, the Great Pumpkin, etc. that brings toys to all the "good" little boys and girls, i.e. the reality of the existence of a cornucopia or "horn of plenty," that [only] the megalomaniacs know how to operate. A second "assumption of facts not in evidence," but widely assumed, is that the cornucopia operators will share the bounty generated.
It should be obvious that a critical reexamination/reevaluation of the basic beliefs about the way the economy/society works by a large number of citizens, possibly a majority, will be "destabilizing," to say the least.
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wrote:

It would be, if it happens. I doubt if it will happen. Again, what people care about with their investments is whether they're making money. When they aren't, everything and everyone is a potential scapegoat.
Here's what I don't get about your point, and that of Herr Greenspan. You talk about "the gross proliferation of megalomaniacs," as he talks about "greed." Well, duh, who in the hell did we think these people were, anyway? Mother Theresa?
The pirates have always been there. Wall Street draws them like flies, for obvious reasons. I know some of the minor ones. They're all self-justifying purveyors of greed.
So why turn attention to that now? Are we really surprised that when we turn over the rock, we find that all the goodies are in the hands of the greedy ones?
The issue is not that there are greedy people on Wall Street. They've always been there. The issue is that we've let them run wild. We opened the barn door and they tried to clean the place out. Hello? Are we on the same page here?
Now Alan Greenspan, and Ron Paul, and John McCain are wringing their hands about the proliferation of greed. Well, who gave them the chance? Who opened the barn door? They only have to look to themselves.
On a lighter note, I love this characterization of them by Tom Wolfe. I posted this to John Carroll a while back and he got a kick out of it. If you need some entertainment, you'll appreciate this, "The Pirate Pose. " My favorite scene in this article is about a hedge fund manager who was attending his daughter's hockey match:
"He told his daughter's coach how to play her and all her teammates and kept him abreast of his mistakes in strategy. He scolded the Port Chester coach and the players for their incessant cheating and malicious roughness. Finally a Port Chester player, a big girl, an Amazon on ice, skated to the stands, charged up the stairs on her skates, and accosted the Mouth, putting her gloved fist six inches from his face and saying, "If you don't shut the fuck up, I'm gonna come back and beat the shit outta you!" He shut up.
http://www.portfolio.com/executives/features/2007/04/16/The-Pirate-Pose?page=0
-- Ed Huntress
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F. George McDuffee wrote:

Ahem, Ed, are you reading this? HERE is MY political problem - exactly.

WoW!
Does that include voting for a fellow who tells you what he thinks you want to hear - then does the opposite when elected?
This paragraph seems to say that We, The People are to blame for believing what we hear from our candidates.

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Richard

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On Fri, 10 Oct 2008 19:24:50 -0500, cavelamb himself

Let me expand that. Not only are the decks stacked, all the cards are marked, all the dice are loaded, all the wheels rigged, and all the slots fixed, and the sheriff has a half interest in the Casino.

A backup study. http://www.sciencedaily.com/releases/2008/10/081007155100.htm Note that these people more or less self select for these positions, which then reinforce the egomania tendencies. Most likely very helpful/adaptive in hunter/geatherer tribal societies with short individual life spans, but now very maladaptive/counterproductive. This also should help explain why the application of criminal statutes will not be, and have not been, particularly effective.

To the extent that a record exists and you can see what the candidate did or did not do, and you chose to believe what they say because you like that better than what they have historically done, that is indeed the case.
There is however the case where the "paper trail" has been carefully erased and the story has been "spiked" by the media management. This is far more common than you might think in large organizations of all types.
With the expansion of the WWW/internet this is becoming more difficult. Look up the voting records to see how the gas bags voted on the repeal of Glass-Steagall and the exemption of derivative oversight. This is not a matter of opinion but of public record.

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Yeah, I'm reading it. And I'm thinking about all those people who are really in the game, with $1 million or more, who couldn't care less. They care about what's happening to their money, period. The outrage is going on mostly among those of us who don't have that much money in the first place.
-- Ed Huntress
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On Thu, 9 Oct 2008 21:26:25 -0400, "Ed Huntress"

Personally I just can't believe those inflation numbers and for years of them saying it on TV. Sure seemed be going way up to me. Bubbly sugar water at a convenient store went from 75 cents to $1.75 in no time. Beer has gone way up, cigs., building materials, cars, houses,gas, ect... Way more than 3% a year in my perspective.
Sure seemed like cars went from $18,000 to $35,000 fast. I hate to bring up houses, but I bought my first around 1993 for $45,000 and before things started downward it was appraised at $210,000. I sold it in June of this year for $135,000, still that is 3X as much in 15 years.
Maybe my math is all wrong. 3 cents on the dollar per year? I don't recall anything rising in price so slow in the last 10 years.
What really gets me is that no one will say anything about the truth like the perpetuation of lies will make everything better. Take nine eleven for example. Everyone almost wanted to believe that there was no reason what so ever for an attack on America. Or, don't worry your money is safe, and no one ever even brings up how much paperwork or lack of it and time it will take you to get it in your hands if your bank closes. Don't worry, everything is under control. Perclorate in your water supply? No problem, we raised the toxicity level so that is safe now. Have a chlorine rail car runaway through your neighborhood? No problem, we had it under control. Everything going sky high in prices? No problem, we calculate it at only less than 3%.
Am I way off here or what? I admit I don't understand that one graph, what is M-1, M-2, and M-3?

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<Sunworshipper> wrote in message wrote:
<snip>

It's a big issue -- entire college courses are devoted to inflation. Wikipedia may have a summary. Otherwise, you have to go to government sites to see how it's measured and what the numbers look like over time.
<snip>

Not in the last 10 years, because inflation is up the last few years. But the period from 1995 to 2005.

Those are the different measures of "money." Again, it's a full college course. However, there are brief definitions here:
http://en.wikipedia.org/wiki/Money_supply#United_States
Search on "M1".
I'm not suggesting you have to absorb all of that, and this is the bottom line about what I was saying: There are some really misguided ideas around about what money is and what causes inflation, but the basics were laid out over 200 years ago in Adam Smith's _The Wealth of Nations_. The wealth of a country is the output of goods and services that country produces in a unit of time -- usually a year, for purposes of discussion. The right amount of money for that country is an amount that equals the output of goods and services. This "amount" is a product, more or less, of money supply (say M2) and something called money's "velocity." Don't worry about that part. Just think, "money supply should equal output of goods and services." If the supply of money is too high (think 1978), we have inflation. If it's too low (1932) we have deflation. Inflation screws up the economy. Deflation can kill it. So in modern economies the central banks generally shoot for an ideal of 1% - 2% inflation, as a cushion to help guard against deflation. Hardly anyone hits that target for long. Money supply tends to grow a bit on its own, from "irrational exuberance," so inflation usually is a bit higher than the ideal. You want to keep it well under 4%, though, if you possibly can.
It doesn't matter if that money is backed by gold, clam shells, or Fruit Loops. Not in a modern economy with a decent monetary policy, anyway. Gold, despite what Ron Paul thinks, can cause a modern economy more problems than it solves. Gold-backed currency tends to be deflationary.
The whole thing runs on trust, not gold. If you had a gold-backed system and people lost trust in the paper money and cashed it in, all they'd wind up with is the same amount of gold. You'd still have the same amount of money. And that makes economic growth extremely difficult.
My point to George was that Ron Paul's prescriptions wouldn't, in themselves, have an influence on our current situation. Whether the currency is fiat (like ours) or gold-backed, the money supply is determined mostly by the amount of credit that banks give out -- that's fractional-reserve banking. But every country has fractional-reserve banking, and they have, for hundreds of years. Without it, an economy couldn't grow.
This is so grossly simplified that any economist would boil me in oil, but it does explain, I hope, my comment to George and my evaluation of Ron Paul's economics. As an economist, Dr. Paul is a heck of a good obstetrician.
-- Ed Huntress
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On Fri, 10 Oct 2008 12:33:51 -0400, "Ed Huntress"

I bet, I gave about 3 weeks to that course and dropped out , cause I don't think I'd ever see the forest from the trees. Interesting , but like trying to learn programming from a book.

Thanks, that looks better.

I got a good idea how the tread was going, just couldn't pass up you bringing up the inflation #, is all.
Let them think to boil ya, your just trying to explain it and I appreciate it. I've known for a while your into economics and I think it's cool that ya'll discuss it here, even though some think metalworking talk is just metalworking.
But still, you won't commit the two are way out of line? 3%, yeah right. Just took a survey and with 6 people, instantly someone showed me a can of soup with the price tag on top at $1.65 for spit peas from ahhh wallmart.
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<Sunworshipper> wrote in message
<snip>

Again, we've had much higher rates of inflation over the past three years. Maybe we don't remember very well how stable prices were through the '90s, or from '95 through '05, but those numbers hold up according to several different measures of inflation -- "basket-of-goods" measures and "cost of living (COL)" measures. I'd have to go look to see about housing; it probably isn't in the basket-of-goods measures at all, but I think it's in the COL measures.
Anyway, the numbers at least serve as a relative comparison between periods of time, and it's easy to see that we had much greater growth in the money supply than we had inflation. That agrees well with the increases in productivity rates through the same period.
I'm not trying to measure inflation here so much as to show that the idea Ron Paul is promoting, that a lack of "sound" (i.e., gold-backed) money somehow led to our present fix. That isn't where these bubbles come from. They come from an excess of credit and borrowing. You can have such an excess with gold-backed money just as well as with fiat money. It's mostly caused by things that go on in the banking industry, not the Treasury.
-- Ed Huntress
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This is correct.
And the reason for this happening, is that with the new financial structures, derivatives etc, there are many players that act like quasi-banks, borrowing money and lending it, without being subject to reserve restrictions. So during the growth years, all of that stuff ballooned, leveraged up and expanded.
Now we are seeing banks insolvent due to drops of prices of assets that they carry, due to this rapid de-leveraging. The assets of the banks are below their liabilities.
Banks being insolvent (negative equity), there is no surprise that bank lending cannot take place.
I cannot see how government can quickly put together a machine (loan officers, attorneys, computer stuff) to make business loans. I doubt that this will go very far and they should know it too.
So, then, a plan is to put forth to invest money into insolvent banks. In other words, replenish their assets by giving them money comparable to what they lost. This is not something that a private investor would normally do. In any case, a question is just how much money is needed to make the banks solvent. The amount may be very large.
If I can offer a diagnosis of what happened, I would say that for a large part this is due to reckless people managing "other people's money". So they took risks that their investors would not ordinarily take if they were informed.
These outsize risks were masqueraded by funky accounting because exotic securities that they owned never had a market with quotes. So they marked to theoretical values that they were free to assume with wide latitude. As a result, 1) they got big bonuses and 2) a lot of losses were hidden.
Growth is available money supply encouraged profligacy, public and private. So at this point we are a country with huge public debt, huge private debt, deficits, and inability to reduce both.
This is largely a result of republican philosophy to get rich quickly, and squandering public money, which I despise. I want to get rich slowly in a stable financial system.
The solution is not gold standard, but it must involve abandoning profligacy, greater regulation of lending and activities leading to creation of money, and stricter accounting standards.
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wrote:

If you look at M3 versus M2 in that graph to which I posted a link earlier in this thread, you can see it happening. It's no wonder the government no longer reports M3. It makes it look like the money supply is out of control. 'Can't have that, being monetarists and all...

Easy come, easy go. When you're leveraging 30:1 and you have that "1" hedged six ways to Sunday, who cares?

Ahhhahahmennnn...
-- Ed Huntress
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So here comes the corollary.
More entities than banks participated in lending and creation of money (such as hedge funds buying mortgages on credit using leverage, etc).
And now, besides banks per se, these entities are also suffering from losses and forced liquidations.
So, obviously, bailing out banks would not restore lending capacity of these other entities. So the money contraction cannot be prevented by bailing out banks.
Therefore, do expect an interesting ride ahead.
i
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wrote:

Right.
Well, commercial banks are suffering (probably) *because of* the losses and forced liquidations of the "shadow banks."

I suspect that money contraction, at least at the M3 level, would be impossible to stop. At the M2 level it still will be somewhat contracted. But whether it's going to have a long-term effect on M1 is questionable.
Much of M2 and M3 is really ethereal stuff, which exists mostly in the form of claims by one institution upon other institutions, much of it out of connection to the system that provides real liquidity to the real economy. Now we're going to find out if its existence has irreversible consequences to the economy that produces goods and services. Recent comments by a couple of Chicago School economists say they don't think so. The answer to that is 'way over my head, but I can imagine a scenario in which the government intervenes at a point that cuts off that ethereal money and lets it disappear, while providing liquidity and enabling the credit system that operates for the real economy to continue.
That's all an abstraction, of course.
-- Ed Huntress
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A part of it.

Keep in mind that M2 is also expanded by these "non-bank banks".
Here's a good graphic showing how this bear market compares to historical ones (Great Depression, 70s, etc).
It looks very scary.
http://www.nytimes.com/interactive/2008/10/11/business/20081011_BEAR_MARKETS.html?hp

This is a point where many bifurcations are possible, including flooding the economy with money to cause inflation and effectively erase all debts. What is not possible is to return to the pre-crisis times quickly.
I think that ultimately, we, as a whole, were misled about how wealthy we really were. Much of that wealth was self delusion and borrowing. So in the end we will wake up and realize that in fact we are collectively only 1/2 or 1/3 as wealthy.
Check out the above graphic.
It is very scary.
i

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wrote:

Sure. That's why I said "somewhat contracted."

http://www.nytimes.com/interactive/2008/10/11/business/20081011_BEAR_MARKETS.html?hp
Yeah, it does, until you think about the fact that when the stock market goes down, it always comes up. This market is so quick to move, with trades coming in so fast from every point of the globe, that it's not a surprise that it's hyper-volatile compared to previous tankings.

Iggy, a couple of years ago I was reading some background material for a trade article and I kept being hit by the fact that 40% of US corporate profit was coming from the financial sector. Then I looked at the dollar numbers in the financial sector and said to myself, "self, what the hell does all this 'money' represent? Where is it? Where did it come from"?
Self said, it seems to represent nothing but a circle of obligations; it exists on hard disks; and it fell from the sky. Of course, I look at these things from an economics point of view, with very little understanding of finance. But I think I recognize an economic circle-jerk when I see one.
I never thought we were remotely as wealthy as the numbers suggested. I still believe that Adam Smith had it right, and by no stretch of the imagination could these financial "services" be labelled honestly as things of value. They were tricks of multiplication.
So I'm not surprised. I don't claim prescience, but the whole thing has stunk, from my point of view, for at least a couple of decades. Sooner or later there would be a reckoning. When Warren Buffet said, in the mid-'90s, that he didn't understand any longer how this market was working, I knew we were in trouble.
I'm shrugging a lot these days. I have no idea where it's going, but I'm not surprised about where we are.

Yes. But it will go up again.
-- Ed Huntress
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wrote:

Couple of things wrong here George. First, the auction was totally bogus. Nothing more is indicated by the "benchmark" than the fact that nobody really wanted these things AT ALL. Losses on credit default swaps are unlikely to exceed three or four percent even in the worste case without intervention. Three very reputable auction designers have been working for the last couple of weeks to model an auction for these assets. I've seen one of them. In the end, there may never be an actual reverse auction at all. Second, none of these derivatives ever created money. Any valuation will be done the way you would value an insurance policy but in this case there aren't any reserves to back them up. Not really anyway. There isn't and probably won't be a market for these products because they simply are not tradeable securities. They aren't actually coupled directly to an asset. They are all risk and have the same value that Enron weather futures did. Third, at worste, the probable loss/liability that they represent as class is about 2.4 trillion dollars absent government intervention.
In spite of all of the running around like headless chickens claiming this is some sort of secular event, it isn't. This happened twice in the last century and while the work out took a little time and lead to consolidations of the weak and strong players, the world didn't end then and won't now.
All of this subteranian stuff need to be dragged out into the light - kicking and screaming if necessary. That sort of transparency isn't going to happen until the financial institutions involved have a credible assurance from the regulatory agencies that they won't be "Lehman'd" when they fess up. THE CURRENT ADMINISTRATION DOES NOT HAVE THE CREDIBILITY TO MAKE SUCH A REPRESENTATION. They have not, and can't, articulate a policy that is any more coherent that our ignorant boob of a President, Mr. Bush.
As a practical matter, this is a seperate issue economically. The downturn in consumer spending that is underway is the real problem. It isn't the "Spondulick economy".
It's a little odd to be faced with an election that represents a clear choice between two models but it is exactly that way. McCain/Palin is a vote for Phil Graham at Treasury and a year from now we will be looking at the DOW at 5500 with 15 percent unemployment. Graham will run around buying up toxic vapours with the expectation that saving the Spondulick economy will trickle down. Golden Shower economics, if you will and the US will go through whtat JAPAN went through for a decade or more.. The gap between rich and poor will only widen and that's the real manifestation of what's been going on. People that actually spend money have been MAKING less and less of it. They have been operating and living on borrowed money.People that DON'T spend what they earn have been making more and more. No credible economist on the planet will rell you that trickle down works today. Not one. Neither will anyone telling the truth in finance. It didn't work for Reagan, hasn't worked for Bush and sure as hell never worked for the vast majority of Americans. The results, were there ever any real doubt, are in.
Obama Biden, OTOH, is a vote for one of the sharpest groups on the planet at the financial helm and their stated goal is to put money into the pockets of the middle class- where it will be spent - at the expense of the holders of all of the shadow Spondulick owners. The entire regulatory structure of both America and the world will be torn up and rewritten to reflec current reality.BooHoo.
Their model will lead to the DOW at about 10,000 a year or so from now, nine percent unemployment trending down and the biggest public infrastructure and energy development project project ever undertaken by man. This kind of public investment is what we have forgone for DECADES and in the end I guess that's a good thing. A great deal of both public and private money will be spent but unlike the good money that has gone before and yielded NO VALUE, we will get a tremendous return on every new dollar invested.Tremendous numbers of new high paying jobs will be created in the middle class and that is the basis for a robust and stable economy. It will also have the advantage of rebuilding America's tax base. It's a self licking ice cream cone George.
The Spondulick economy will pass like a bad fever and that's sort of what it is, an infection that transfers wealth from those that create it to those that don't.
JC
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On Sun, 12 Oct 2008 05:16:05 -0700, "John R. Carroll"
<snip>

<snip> ==============Indeed, but these were the Lehman Spondulicks, i.e. Lehman Spondulick denominated bonds, or at least a significant subset of them, on which the CDSs were written, and a $USR value had to be established, as the holders of the CDSs wanted "coin of the realm" and not more Spondulicks on other institutions which *MAY* be as good as $USRs[and then again may not].
========<snip< That's because derivatives traders, using an auction Friday, set the price of Lehman's bonds at 8.625 cents on the dollar. The amount of insurance--in the form of credit default swaps--written to protect bond holders is estimated at $400 billion. Buyers of the insurance will collect the full face value of their holdings from the sellers of the insurance.
Of course that also means the banks, funds and insurance companies that sold it are out $365 billion, which is the difference between the price of Lehman's bonds as set in the auction and the remaining 91.375 cents in face value. <snip> ========for complete article click on http://www.forbes.com/business/2008/10/10/lehman-bonds-banking-biz-wall-cx_lm_1010auction.html
This establish at least a working exchange rate of about 0.0875 $USR = 1.00$USV(Lehman Spondulick) when all the BS was stripped out and the amount of Spondulicks issued is netted against the amount of $USR assets actually available to back these up.
Note that this does not include the value of the Lehman Spodulick "money of account" denominated accounts payable, unsecured loans, utility payments, deferred compensation, etc. that just vanished.
Also "missing in action" are huge amounts of negotiable securities, some denominated in Spondulicks [various issuers] and some in $USR, that were being held by Lehman as collateral. These now appear to have been used by Lehman as collateral for their obligations with other institutions. In many cases, this "collateral" is reported to have already been sold, sometimes at a steep discount, to cover the Lehman obligation. If this is indeed the case, as it appears to be, it is a serious felony called "wrongful conversion." It also indicates that the widely reported Lehman "leverage" of 30:1 was a "best case" paper number and the actual leverage was in excess of 100:1, when the total amount of "borrowed" funds is considered.
As serious as Lehman's bankruptcy is, the more critical item is how many more Lehman's are out there, and there appears to be a large number.
In addition to all the known risks there was the $USR<--->Spondulick exchange rate risk.
Don't take any Spondulicks....
Unka' George [George McDuffee] ------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?
Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).
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On Sun, 12 Oct 2008 09:52:09 -0700, "John R. Carroll"

============Actually the recent Lehman auction just determined how much the bonded Lehman debt ==>on which the CDSs were written<== [there's *LOTS* more] was worth. The Freddie/Fannie auctions which occurred this week were not as successful.
The actual payout on the Lehman CDSs can now start, which may be the "main event" if/when the counter parties can't/won't cover their bets. see http://www.nytimes.com/2008/10/11/business/11credit.html?em
A major difference between the CDS and an actual insurance policy is that to get a policy you must demonstrate an "insurable interest," otherwise the morale/moral hazards are just too great. It would make me *VERY* uneasy to know that someone could collect 100K$USR if my house just happened to burn down, or I just happened to get shot in the street. It would make me even more uneasy if I knew that hundreds or thousands of these policies had been issued.
By contrast, currently anyone can buy a CDS for most any company's debt, without any evidence of an "insurable interest," such as ownership of a bond, from a counter party that may (or may not) have the resources to pay a claim. A major reason that the bonded Lehman debt had any value at all was that to be paid by the CDS counter party, you must generally exchange the "insured" bond for the pay-out. I say generally, because there is no standard CDS contract, and the two parties can put any terms they wish in the CDS contract.
While the CDSs and other derivatives such as CDOs are a substantial part of the current financial problems, the use of Spondulick "money of account" for the "book value" of corporations whose shares are sold into the real economy for $USR remains a foundational problem. It is as if every machine shop had their own "inch" which they can expand and contract as desired (until no one will do business with them).
Unka' George [George McDuffee] ------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?
Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).
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wrote:

None of this stuff really matters. There aren't any realistic scenarios underwhich risk abatement is going to be of any value in a market where the biggest players on the block can afford to eliminate risk. The only people with an interest in longer explanations are either publishing news letters for sale or government officials with unintended conflicts of interest.
You aren't in the latter group George so I'll have to conclude it's the former. LOL
JC

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to
government
contracted.
questionable.
http://www.nytimes.com/interactive/2008/10/11/business/20081011_BEAR_MARKETS.html?hp
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Kevin Phillips. If you want to know what has been going on and why it was destined to fall apart you need to read his book. He's written a number of books and I've forgotten in which one he details the financial problems he saw coming but it was written three or four years ago. The reliance on "finance" to make our money instead of by making things is nothing but a repeat of history. Phillips explains how other countries have done the same thing and have had the same disastrous results.
George Soros was interviewed this weekend and he nailed it perfectly. Americans have been spending 6% more than they have been producing for years. We have been making up the difference on the savings of China and other countries. We consume they save. We are going to have to go back to the old fashioned ways of doing business and it's going to be painful. Dave Ramsey and Suze Ormond have been telling it like it is for years now. The country is going to have to follow their advice and live on what we make and stop using credit so much. We're going to have to start making more stuff too. Sending manufacturing away was a big mistake. Pretty much everything the republicans have advocated since Reagan was elected is going to have to be reversed because it clearly has not worked. Look where low taxes, free markets, and globalism has gotten us.
Hawke
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