Silver Lining - Ones and Zeroes

The much talked about financial problems out government faces are largely imaginary. What that means is that money created out of thin air can just as easily vanish into thin air once we come to our senses. Where once a hundred-million dollars was considered a lot of money, now we are talking in the tens of trillions, 94% of this just digits stored in computers. Only three percent of the money supply is in the form of bills and coin, and these are in the hands of the people. And it will stay there as a guard against all the gloom and doom predictions of hyperinflation and economic meltdown. As long as we have a currency that represents value, the market forces (laissez faire) that operate on Main Street will see us through. People will sell for less and work for less until they come to their senses and start turning things around. And we will. We can begin by just saying, No.

The depth of the current financial crisis involves derivative financial instruments known as Debt for Credit Swaps. These CDS's are a form of insurance taken out by investors whose holdings appear in danger of losing value. Foremost among these were holders of Collateralized Debt Obligations, another derivative instrument cooked up by Wall Street when the Mortgage Backed Securities that started the whole mess started coming apart.

Banks had been solicited for mortgages by Lehman Brothers that the Wall Street firm packaged into huge concentrations. These enormous inventories and the checks pouring in each month were to be the basis for the Mortgage Backed Securities that Lehman sold to the world's central banks, insurance and retirement funds. The banks wrote mortgages on an ever descending scale of qualification, toward the end lending money to people with no income or assets. The banks did this because they could turn around and sell these mortgages to Lehman and get paid right away. No waiting twenty or thirty years. The further rationalized that the people who bought these mortgages without assets or income could resell their houses in another year, pay of their mortgages, and walk away with a few thousand in profits, as the housing bubble had not yet burst and home prices were rising.

The Mortgage Backed Securities started coming apart, so Wall Street dreamed up the Collateralized Debt Obligation. This piece of poor judgment was an investment on an investment that offered higher interest rates on mortgage packages that involved higher risk. The sole intent here was to raise money to plug the holes in the MBS program, sort of like digging a second hole to fill the first one, then a third to fill the second, and so on. Think musical chairs. Now to the point.

The holders of the Collateralized Debt Obligations began to worry that they would lose their investments when the music stopped, thus the purchases of the Debt for Credit Swaps. It's a sensible move and the cautious investors had been paying premiums to the houses issuing these instruments, most notably AIG. The problem mushroomed to astronomical proportions because the SEC had failed to specify ownership of the securities as a condition of purchase,thus anyone could purchase a DCS whether they owned the securities or not. It's like taking out collision insurance on an automobile; if taken out by the owner then in the event of an accident in which the car is totaled, the insurance company covers the loss; if a thousand people bought the same policy the insurance company would have to pay one-thousand claims on the same car. So the tax payers of this country should not have to be stuck with the bill for this fiasco: AIG should have known better, and the SEC should have plugged the loophole that made this disaster possible. So to the question; should we bail these bums out?

Just say,No.