Friday, October 24, 2008

Random Thoughts

I was reading about Iceland in the European papers. This country has 300,000 people and some time ago it decided to de-regulate its banking industry. Banks in Iceland started offering great interest rates to European investors who deposited huge sums of cash. Now, the banks are in trouble and many European governments fearful of investor backlash have resorted to freezing the assets of the Iceland banks in their countries and guaranteeing the deposits - in a foreign country no less! Interesting times we live in.

I have a fascination with small successful countries. Iceland was not in my radar until now but I was always a fan of Israel and its people. But Iceland is inching up my popularity index. Not because it defrauded a bunch of Europeans - I have sympathy for the people who invested - but because as I learn about this country I seem to like it more. They seem to be a tough resourceful and resilient people who cheerfully survive months of near darkness.

So I searched the web for Icelandic newspapers and came across this article. I appreciate them even more.

Another country that evokes admiration is Sweden. My fascination stems partly because many of these countries have populations that are smaller than some of the world's major megapolises. But their innate decency, concern for their people's welfare, industriousness and entrepreneurship has contributed greatly to a prosperous society in their countries.

If only many of the other countries with a wealth or resources and talent could try and replicate their models.

Stock Market

Since this is a random post, on a different topic, the stock market is not doing too well these days. So the newspapers and news sites have taken to showing the faces of traders in the floor of the stock exchange. More often than not the faces paint a picture of hyper misery, dejection worthy of the most melodramatic of Mexican soap operas.

Though I am hurting as much from the crash of the market as the next person, I can't but smile every time I see one of these images. We get it. The news is bad. Thanks for the open jawed, eyes raised toward the ticker, hand on head image to really drive home the point. I really wanted to post some of my favorite images, but did not want to run into copyright issues.
At least I have something to laugh about in the current mess.

But I am still Bullish on America!

Tuesday, October 14, 2008

Big Numbers

Anybody following the financial crisis unfolding would be shell shocked by the huge numbers being thrown around. A $100billion here or a $700billion there or maybe a couple of trillion.

The feeble mind begs to understand where the government is going to come by with this money. From what it understands, the feeble mind knows that:
There is a budget deficit
There is a trade deficit

A budget deficit means that tax revenues are not enough to fund current government spending.

A trade deficit means that imports are way more than export. While a trade deficit might result in currency valuation issues, it is inherently a private figure - that is it is comprised of the import and export totals for private company activity. It is not public money.

So with a budget deficit, spending the trillion dollars means
borrowing some more - by selling more treasuries and other bonds
printing more money eventually paying back the money through that most steady stream of government revenues – taxes.

I suppose in the scheme of things, greater minds can wrap themselves around these huge numbers and the miracle of the American economy can resurge and pay itself out of debt. One hopes that the preceding statement is true.

To a certain extent, tracing the current crisis, one gets the feeling that many people managed to dig themselves out of the tech bubble by creating a real-estate bubble. And people thought that there might be another bubble around the corner to salvage a real-estate bust. Unfortunately no build up immediately followed real-estate to take over where it left off. But given the huge amounts of liquidity being pumped in, which is not to say that there is not another bubble in the making?

As the economy gets more financial services oriented, companies will try harder to make money without really offering a tangible product. The current crisis is just a manifestation of that. What boggles the mind however is the number of people asleep at the wheel.

Companies start issuing sub-standard debt instruments.

Companies get away with giving the highest ratings to these instruments.

Companies insure this debt, but they label this insurance as credit default swaps so that they
don't fall under the insurance industries regulatory purview. Ironically some of the largest insurance companies offer these swaps.

Companies actively trade in the sub-standard debt instruments and swap without really understanding the mathematical models that define them - sort of reminds me when I started trading stocks and literally chose them on a whim (not that I am doing much better now).

To fuel this destructive model, more money is made available to mortgage brokers who happily sell mortgages to Joe Schmoe public. Joe Schmoe public conveniently ignores any nagging worries on affordability. And Joe Schmoe's mortgage gets lumped into a sub-prime Collaterized Debt Obligation which gets gets a great "AAA" rating and gets "insured" with a credit default swap and gets sold to a mutual fund. Joe Schmoe buys the mutual fund since it has a spectacular return for some inexplicable reason which he does not bother to understand or reason out. So in a way Joe Schmoe finacially cannibalizes himself.

Everybody is happy until it all breaks apart. Joe Schmoe can’t pay his mortgage. The Credit Default Swap cannot pay the “insurance” because –since it was outside insurance regulations- it did not have the capital to “insure”. Banks go psycho and stop lending. And the economy which has become dependent on financial services comes to a standstill.

And the Government HAS to step in.

And we pay "no" new taxes through our nose while the creative types devise another plan for another ponzi scheme wrapped around an algorithm.