Inexplicable

  Really? Let me get this right. You’re going to ask the destroyers how to fix what they destroyed. This is the unfortunate state of our country’s leadership.

 http://news.yahoo.com/s/ap/20090327/ap_on_go_pr_wh/obama_economy

  I don’t get it. Common sense would tell most rational people that you don’t ask a mechanic how to fix a transmission if he was the mechanic that supposedly assembled it correctly right before it fragged itself on the highway, a hundred miles from help.

 Why would CEOs, CIOs, and CFOs all agree to new regulations that Timmy G has come up with to control the credit default swaps and derivatives market? The CDS market is a very large, if not THE reason, we are in this current financial mess. Timmy G thinks that we can expand government regulation and start managing these derivatives deals like stocks, options, and commodities. Well, the problem with that is that the big boys that got us into this mess won’t go for it.

  I was talking about something similar with the family at dinner Tuesday night. You see, credit default swaps and other exotic derivatives trades have been the bread and butter of the banking industry for almost twenty years now. Take Sonic as an example. Their products that make them the most money (the biggest margins) are the beverages. One 44oz. drink, in the cup, with the ice, costs them about 7 cents. Yes. $.07. They sell those drinks for anywhere from .99 to 1.79 depending on the sale they happen to be running at the time. That’s a huge margin by any business standards. This margin, and the resulting profits, make up for products with a smaller margin like the smaller and less expensive burgers.  

 The bigger banks (and insurance companies/hedge funds like AIG) all make their fattest margins on these exotic derivatives trades. It’s their Route 44 big drink, if you will. Credit default swaps, collateralized debt obligations, all of that buying, selling, and insuring debt produces no real tangible product. It’s all a big gambling ring. That’s basically what it all boils down to. One company is betting on either the success or failure of another to make good on their debt, with the only underlying value being the quality of their name. That’s why you have Moody’s and Standard and Poor’s. Bigger money-makers (Lehman Bros., Merrill, etc.) can call the rating companies and convince them (pay them-yes, S&P and Moody’s are paid by the very institutions they rate) to apply a certain rating to a certain debt, allowing the broker (seller of a CDS) to convince a buyer that a AAA-rated derivative is a great buy while pocketing huge money for “fees”. You can see where money could easily influence decisions on these matters. Greed eventually kills. We’re seeing it now. The market is being killed because money that we thought was there is now disappearing. Money that isn’t backed by services or tangible product will always disappear. 

  Therein lies the problem I’ve always talked about with the fiat money system. You can print all you want, but you then have to be prepared to deal with the resulting roller coaster ride of deflation and inflation. We have obviously been in a deflationary period since oil went down to $40 a barrel, but I also believe we’ll soon be the victims of inflation like nothing we’ve seen in our country's short history. With a government that is as seemingly clueless as ours, all we can do is look out for ourselves and prepare. I’m not sure how well that’s going to work out for the increasingly apathetic population that thinks they are "entitled" to everything.

CZ