FUNDAMENTAL TRANSFORMATION

Citizens face a financial crisis triggered by:

• Federal Agencies creating an over supply of cheap money, and

• Failure of federal Agencies to carry out their responsibility to protect citizens – and the market economy – from wild, irrational exuberance – specifically the creation of speculative “investment opportunities”

What is the proposed solution?

Create a new federal Agency and spend another $700-Billion dollars primarily to bail out those who caused the problem by making bad decisions.

This solution will not build rational scaled dwellings in functional and sustainable locations.

This solution will not create durable and sustainable infrastructure.

This solution will only put off for a short while the day when citizens must face the need for Fundamental Transformation is human settlement patterns and Fundamental Transformation in governance structure. These Transformations are necessary if civilization is to achieve a sustainable trajectory.

The current crisis has been in the making for 60 years. Nearly everyone has “benefitted” in some way from the profligate squandering of natural capital, degrading the environment, putting the balance of nature at risk and creating dysfunctional human settlement patterns.

However, just a few have really profited from what we term the orgy of Mass OverConsumption that exceeds the wildest dreams of any prior society. Now they will get bailed out while all suffer, none more than those at the bottom of the economic Ziggurat.

The core responsibility of governance is the manage society and the current management strategy is not working. There must be Fundamental Transformation.

Recently a colleague who reads our work said: “You say ‘There must be Fundamental Transformation of governance structure’ but I am not sure what you mean.” It turns out we needed just such a summary statement for a chapter in TRILO-G and so here it is:

(Sunday is a slow day on the Blog and so I am putting it all here. Jim Bacon can move it to a separate jump page if that seems like a better idea to him.)

FUNDAMENTAL TRANSFORMATION IN GOVERNANCE STRUCTURE

The key to understanding the need for Fundamental Transformation in governance structure is to recognize that:

A contemporary democracy with a market economy relies on educated citizens. A contemporary democracy cannot function long with quasi-citizens who are “Running As Hard As They Can” and are “represented” by a few who occupy positions of power in political Institutions.

These governance practitioners have worked themselves up in the political party duopoly and in practitioner elites to the point that they claim – and really believe – that they know what is best for their constituents, in spite of that citizens may believe. These governance practitioners have also perfected strategies to line their own pockets, cover their own tails / trails and – most importantly – how to blame someone from the other party if something goes wrong – which it always does.

Three key principles for the evolution of functional governance are:

The level of authority / control / action must be at the level of impact. That is true for land use and land management, and it is also for education, public health, public safety, infrastructure – including transport, communications – and everything else that Agencies do to insure the health, safety and welfare of citizens.

There must be a functional level of governance for each of the organic components of human settlement. If there are impacts of Agency actions at multiple levels – and there almost always is multi-scale impact – then there must be shared responsibility. Functional governance does not occur in a system where the “highest” – and the most remote – level of governance always controls. Currently, there is no governance structure at most of the levels – or scales – of impact with whom to share responsibility. For example, there is not yet a single New Urban Region-scale governance structure in the US of A.

The basic building block of contemporary civilization is the New Urban Region. For this reason, Regions – New Urban Regions (NUR) and Urban Support Regions (USR) – are the most important components in the evolution of functional governance structures. At the same time the evolution of the primary components of Regions – Alpha Communities – are also critical. In most cases, the existing municipalities (and counties) are not coterminous with any organic component of human settlement – especially Alpha Communities. In addition, the organic components of Alpha Communities are very important. This is true not just because of the need for functional governance at those scales of human activity. It is critical because citizens will not allow / tolerate functional Regional Agencies to evolve until they are very comfortable with the role and function of Cluster-, Neighborhood- and Village-scale governance structures.

The current system of governance was created before contemporary economic, social and physical structures were even imagined. From the perspective of human settlement pattern the most important components of the existing governance structure are the Declaration of Independence (1775), The Northwest Ordinance (1787) and the Constitution (1789). The 1775 / 1787 / 1789 structure of governance was crafted for an emerging nation-state where five percent of the population was urban and ninety-five percent of the population was agrarian. It was also a society with slaves, no women’s suffrage and the vast majority of the citizens were illiterate. Add to this the fact that the Industrial Revolution was in its infancy and the importance of trade, technology and communication taken for granted today would have been incomprehensible to citizens and their leaders in 1790.

The 1775 / 1787 / 1789 governance structure, as amended to date, is in many ways irrelevant to a society where:

• Nine-five percent of the population is urban and only five percent is agrarian
• Communication is instantaneous
• Universal education and universal suffrage are overarching goals

The federal constitution provides for protection of critical, overarching rights and responsibilities. However, the powers reserved to the states allows state governance structures to play an ever more damaging dog-in-the-manger role in governance structure.

Even though the state as a level of governance grows less relevant with each passing day, states continue to avoid the absolute necessity of Fundamental Transformation of governance structure. This is especially true for those states that straddle one or more Regional (NUR or USR) boundaries. Almost all of the ‘Lower 48″ states straddle Regional boundaries. Seven states include parts of Regions that fall in more than one nation-state.

Caught between:

• Municipal (including county) governance practitioners who believe it is in their best interest to thwart the evolution of functional governance at and below the Alpha Community scale; and

• State governance practitioners who believe it is in their best interest to thwart the evolution of functional governance at and above the Alpha Community scale – especially at the New Urban Region scale; and

• Federal governance practitioners who believe it is in their best interest to thwart the evolution of functional governance at all scales;

Citizens have no current voice or leverage to secure Fundamental Transformation of governance structure.

Inspired by the impact of two World Wars fought over resources and territory, the citizens of the EU are SLOWLY evolving a mor
e functional governance structure both “UP” from the nation-state level and “DOWN” from the nation-state level. They have a long way to go, but at least they have started.

EMR


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39 responses to “FUNDAMENTAL TRANSFORMATION”

  1. Anonymous Avatar

    interesting.

    i was just thinking today that maybe we should do away with the senate and the house of reps. and leave just the cabinet at the federal level (for things like spectrum policy and interstate highways) and just governors for the states (who come up with their own food stamps and stuff).

    well, i can see how state boundaries are less relevant now but i still like the idea of doing away with senate and the house. :p

  2. Anonymous Avatar

    Cheap Money?

  3. Anonymous Avatar

    Speculative investment opportunities? Sounds like the large quart size.

    RH

  4. Anonymous Avatar

    The core responsibility of governance is [to] manage society?

    Whew, no wonder they are failing.

    RH

  5. Anonymous Avatar

    “the citizens of the EU are SLOWLY evolving a more functional governance structure “

    So you are in favor of more taxes and less freedom, is that the example you propose?

    RH

  6. “Create a new federal Agency and spend another $700-Billion dollars primarily to bail out those who caused the problem by making bad decisions.

    This solution will not build rational scaled dwellings in functional and sustainable locations.”

    Correct.

    But the crisis was not the result of not building …rational scale dwellings yadda yadda either.

    The crisis is the result of bad lending practices for ANY kind of dwelling whether it be a condo in an Alpha-scale community in a New Urban Region or a Farmhouse in an Urban Support Region or a 4000 square foot McMansion in Sprawlopolis.

    The mandate/do-gooder goal of increasing home-ownership was INTENDED to be targeted to folks who had good credit and employment records and had an owner-occupied equity interest – not folks with bad credit who were more interested in flipping the house than living in it and who could and would walk away whenever their scam went belly up.

    Why would anyone in their right mind want to have policies that allowed people with bad credit records – essentially empowered to engage in house flipping as a way to make money?

    That’s what we did.

    I’m not sure if it had much if anything to do with settlement patterns and much, much more to do with making walk-away loans available to people who were not good credit risks to start with.

    Let’s go one step further.

    suppose the “reform” that is going to happen – ha ha ha – actually takes up back to where loans will be made only to those who are good credit risks AND requires an equity stake in the loan so it cannot be walked away from without a personal loss being incurred –

    … can EMR or others make a case for how a return to that kind of loan environment would favor “sprawl” more or less than compact development?

  7. Anonymous Avatar

    All I can tell you is that I had two good tenants: one for fourteen years and one for five years. They were renting because they couldn’t afford or couldn’t get a loan for their own house (that, plus the ones I was renting were a lot nicer than what they could buy). They are self-employed types with little in the way of verifiable income, yet they paid their rent punctually without fail.

    They are both gone now, having bought foreclosures, with little money down. Neither of them will be walking to work.

    For myself, I expect that rents will come down, and I may very well have to settle for lower quality tenants. I’m happy for my former tenants, they deserve their own place, and they will be beter off because of it.

    Granted, it is a small sample, but I’m hitting a 100% on this and I’ve heard similar stories from other landlords. This is a mess but it isn’t the end of the world, and some people will be better off as a result.

    When you are in a small boat, a sea change means you have to make some adjustments, but it doesn’t necessarily mean you are worse off.

    RH

  8. Anonymous Avatar

    “so it cannot be walked away from without a personal loss being incurred -“

    So what? I’ve got 20% equity in my home, and suddenly conditionsa re such that I can buy essentially the same house down the street for half the money.

    I can’t sell my house for the same reason the guy down the street can’t sell his, but I’m STILL better off to walk away from my house and my 20% equity, and buy back the same home for half the money.

    Although I lose my equity, the mortgage is still a no-recourse loan, and I’m out scott free – even though I can “afford” the old house, I can’t afford to pass up the deal on a new one.

    Walking away from a mortgage may have NOTHING to do with ability to pay.

    Assuming I still have a job, and that I’ll ahve time enough to recover the loss. If I’m a mortgage broker, that might be a dicey situation.

    RH

  9. E M Risse Avatar

    Larry Gross said:

    “suppose the “reform” that is going to happen – ha ha ha – actually takes up back to where loans will be made only to those who are good credit risks AND requires an equity stake in the loan so it cannot be walked away from without a personal loss being incurred -“

    Good first step.

    “… can EMR or others make a case for how a return to that kind of loan environment would favor “sprawl” more or less than compact development?”

    Yes we can.

    And we have over and over.

    Perhaps you refuse to pay attention because to do so would call into question your own location related decisions?

    Two notes:

    EMR is not sure what “compact developement” is. If you mean Balanced, functional human settlement patterns then the issue is a slam dunk. See the 10 X Rule.

    To make the case for Blance, functional settlement patterns even stronger there needs to be a fair allocation of location-variable cost that would be a key element of Fundamental Transformation.

    Those impacted by Geographic Illiteracy please abstain from commenting.

    EMR

  10. Anonymous Avatar

    I’m sure you can have a nice conversation all by yourself, then.

    But you do suggest that we follow more of the pattern of the EU, right?

    RH

  11. Anonymous Avatar

    According to the Federal Reserve, U.S. household net worth fell by $2 trillion over the last year, from $58 trillion in the second quarter of 2007 to about $56 trillion in the second quarter of 2008 (see chart above). But compared to 2002, U.S. household net worth has increased by almost $17 trillion (from $39.2 trillion to $56 trillion), or by almost 43% in the last six years.

    The sky is falling, the sky is falling.

    RH

  12. re: “walking away from a mortgage – “scott free” “

    nope.

    You do that and you better make sure you got the second loan first because once you get the “walked away” mark on your credit – you’re not getting any more loans…..

  13. re: “Perhaps you refuse to pay attention because to do so would call into question your own location related decisions”

    actually I am EMR and I’m asking you to explain specifically how the current mortgage snafu – if it is to be reformed – how it might be done to benefit more efficient settlement patterns or even the optimized ones that you call “functional” 10X rule versions.

    I’m openly doubting that mortgage policies have much to do with settlement patterns – and sorry – just because you slather out a couple thousands words claiming that it does – without providing some logic behind your very poorly supported assertions… sorry – no cigar – 10x or otherwise.
    (thats MY vocabulary dude).

    I’ve not read or heard from a single source including the smart growth and environmental communities that the current mortgage snafu is due to providing mortgages for “sprawl” or inefficient settlement patterns or sub-optimal 10X rule alpha communities….

    EMR – you are one of probably 5 people who know about your “vocabulary” enough to be able to tell the difference between a “compact development” and a “balanced, functional settlement pattern”.

    It would not hurt you to explain – (yes more than once and with patience) the DIFFERENCE in terms that the average human being can grasp.

    Yes.. we do have folks who wander through here on occasion who .. sad to say.. do not know your vocabulary..

    I know.. this probably strikes you as a shocking revelation – but trust me.. you’d do better .. saying .. things instead like ” as some of you might know…” .. that compact development … is not necessarily the same as a functional settlement pattern… because… (then you explain why).

    or.. you can stay up in your ivory tower hurling ” the sky is going to fall on you heathens” every time you get the urge.

    🙂

  14. I believe that future years will actually look back on Bush’s actions on this crisis as a high point of his administration. The “bailout” is kind of an interesting point. Who is really getting “bailed out”? AIG’s shareholders? They’ve lost 90% of their investment value in the last 12 months. The executives? Hopefully not. The Lehman Bros. NY bonus pool is a bit worrisome but I assume that will be the exception rather than the rule. The bondholders? Yes – to an extent. But the big winner is …

    The ecomomy and all of us who depend on it.

    I’ve said the same thing on many occasions on this blog – the credit markets cannot be allowed to freeze. When that happens (as it did in Japan at the start of the 1990s) – all hell breaks loose. And in a country with a pathetic savings rate which is largely financed by foreigners – it would be a crisis of unspeakable proportions. Think Russia right after the wall came down. Think bread lines like the Great Depression. That bad.

    So, what should government do? Sit by and wait for the “free market” to fix things. That will happen – after about 10 years. Or, step in and buy back the toxic investment vehicles that caused the contagion before the full melt down. That will work too – and take about 2 years.

    Is there a need for fundamental reform? You bet.

    Should regulations on financial institutions be re-instituted? You bet.

    Should the merchants of greed on Wall Street get a fiscal face slapping. You bet.

    Should the government allow the US to sink into a decade of inky black economic stagnation because of some misguided sense of purity over “free markets”? No way.

  15. I’m not so sanguine about this unfortunately.

    Look at the Stock Market today.

    The dollar is going down …which means the price of goods purchased overseas is going up – including not the least of which is oil…

    ..which means.. inflation… as higher cost fuel will mean higher priced goods and services that rely on fuel – like food.

    Kramer is advising folks to buy gold.

    I think that says it all.

  16. Anonymous Avatar

    Tax very-short-term gains — less than a three-month holding period — at 95%. That will end a lot of the speculation that is making a mess worse.

    TMT

  17. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    “it would be a crisis of unspeakable proportions”

    Guess that’s why most of the politicians are keeping their lips zipped. I believe we will all be speaking up very soon.

    As of last night the Fed is now going to accept all kinds of debt in their bailout. Credit cards, auto loans, you name it. That can only mean one thing.

    That the American citizen is fixing to take a major hit over and above what the elites are letting on.

    There is something going on here that the politicians aren’t telling us. Something forbodingly dire is coming down the road. Last night when all hell was breaking loose over these latest bailout developments, the cable news channels were showing a history of bin laden, a collector car show, the latest news of the stars, and a hannity repeat of a Palin interview. Not one was breaking in to cover this crisis. And this morning they opened with sugar coated crap about keeping your money where it’s at, while the markets were heading for another dump by the big boys.

    Some of the economic blogs I hang out on had a worldwide cast of thousands active members last night, each commenting at a rate of 20 entries per second. I’d never seen a rate like that in the three years I’ve been on those blogs. When the pros are sweating bullets, you know us average Joe’s had better start paying attention.

  18. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    From the NY Times ‘you can’t make this crap up’ section.

    More to Fear in World of Retirees

    Emerson, 65, sees herself as particularly vulnerable. Her annual income of $50,000 comes almost entirely from dividends, and she says she is worried that as her stocks decline, some of those dividends will fall, too.

    “If I were guaranteed that the dividend would remain unchanged, I could ignore that the underlying value of my stocks has eroded,” she said. “But that is not the way it works. If the value of the stocks doesn’t go up again, there are not a lot of companies that can keep on paying a 16 percent dividend.”

    Nevertheless, Ms. Emerson decided to push ahead last week with the rebuilding of her sun porch in Ventura, Calif., not wanting to endure any longer the discomfort of life in a mobile home with a leaky and rusting porch.

    “I don’t obsess about what is happening, but it is always in the back of my mind,” Ms. Emerson said, adding that she would cancel the $30,000 project if she lost faith that stocks would rebound in her lifetime.

  19. I love the Bushies saying that we must do something right now and we must have one guy in charge….

    where have we heard this before?

    reminds me of Lucy and Charley Brown and that football in Peanuts…

  20. where are the Conservative free market folks?

    I’d like to hear some views/opinions about the advisability of the current administration 700billion proposal?

    Do we have no choice but to do this or is this yet another rush to judgment?

  21. Anonymous Avatar

    You do that and you better make sure you got the second loan first

    Exactly how it is done, Or with two income families, the other party gets the loan.

    RH

  22. Darrell:

    I think you are on to something. America has overspent and/or undertaxed for too long. We are at the mercy of the countries that buy out debt. A credit / banking meltdown could (repeat:could) occasion a huge sell off of American equities and debt by both domestic and foreign institutional investors. This is the Great Depression #2 scenario.

    Why don't the politicians from both parties speak up?

    Both parties and all the leaders have been complicit in this brewing fiasco. They have bought votes with taxes that are too low for the spending levels (Republicans). They have bought votes with social programs that can't be justified by the tax base (Democrats). They have studiously ignored a very negative demographic trend (baby boomers retiring). Now, they are trying to cover up these problems by nationalizing whole industries like investment banking, mortgage packaging and business insurance. Is this the right thing to do? Yes, if:

    1. Sufficient regulations are instituted in order to prevent the next greenmail scandal, S&L meltdown, RTC, mortgage crisis, credit crisis, etc. We are averaging a financial bail out every 5 years or so and that all messed up.

    2. No political contributions from any bailed out / regulated corporation to any political candidate, party or cause.

    3. No bonuses or severance pay for any executives where the government is taking a significant equity stake in the business.

    4. All executives in all corproations where the government is taking an equity stake go to the GS and SES pay scales immediately. These executives may be paid in equity grants that vest only when the corproation in question has paid back the governemnt with interest.

    5. A personal plea by the next president to private sector economists, financiers and other critical executives to take government positions within Treasury, Fed, Senate Banking Committee, etc until the crisis is solved. The vast majority of our politicans don't know their butts from page 8 when it comes to economics. Certainly McCain and Obama know next to nothing. They need advice from people working for the government.

  23. Anonymous Avatar

    Look at the Stock Market today.

    Yep.

    If you bought AIG at $2.15 you could have sold it yesterday at $4.85.

    You gotta learn to love volatility and short term profits.

    RH

  24. Here’s Paulson at the hearing explaining “the plan”.

    ” If this works the way it should work…..” then he allows that ” this is why we need a lot of flexibility”…

    Translation:

    We don’t know WTF we are doing. We are literally flying by the seat of our pants.

    and hey.. just because we were the ones asleep at the switch to start with – that’s no reason to doubt our advise..

    just wonderful.

  25. RH:

    Remember the specifics of the AIG “bailout”. It’s actually a short term loan from the government to AIG. The theory is that AIG has sufficient “non-core” assets that it can sell to raise the funds needed to repay the loan. If they don’t repay the loan then the governemnt takes an 80% stake in AIG. So, a lot hinges on whether AIG can really sell the assets (foreign subsidiaries mainly – as I understand it). If they repay the loan then they are a private company again. Smaller, but a private company.

    I’d also say that there is a big difference between assets that have no value and assets that can’t be valued at this time. My understanding here gets a bit shaky but I’ve been told that some of AIG’s assets are more in the category of “can’t be valued” than “worthless”. For example, if you don’t have an acceptable way of calculating the return on an insurance contract then you have to consider that contract worthless UNTIL you have a basis for calculating return. Some things will remain worthless while other will have a basis for valuation and will be “written up”. At least that’s what I am hearing. So, if you think AIG can repay the loan and you think they will write up the assets that have been written off – $4.85 will seem like the bargain of the century. Of course, if they can’t repay the loan and/or the assets are truly worthless – who knows?

    Larry G –

    I think it’s unfair to take sentence fragments from testimony. Would you really rather have John Snow handling this crisis? Or maybe Greenspan? I understand he has a new book coming out on Monday. Nothing like profiting from a crisis you have created.

  26. re: unfair sentence fragments

    perhaps.. but I gotta say.. listening to Paulson and Bernanke talk about their “plans” would have been comical.. if not so serious….

    They seem to have no plan.. but instead, a concept.. and they want maximum flexibility to do their thing.

    “trust us or really bad stuff is going to happen”.

    where have we heard this before?

  27. Anonymous Avatar

    If you got in on Tuesday and out on Thursday or Monday, you already doubled your money.

    What do you care what the bailout rules are?

    I agree, there is a big difference between assets that have no value and assets that can’t be valued at this time. Valuations and ratings were a big part of the problem.

    The way you get around that is make sure there is a real market, where people can buy and sell (and get hurt) or well, as in my AIG example.

    All I care about is that someone valued it differently than I did when I bought. After that the bailout rules are their problem.

    RH

  28. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    I see Tim has a 2.9 billion dollar migrane. But it’s going to be worse than that. Crap rolls down hill and the Feds have a huge ball of it headed this way. When the state and in turn the locals find a gaping hole in their budgets from dwindling pass throughs, you can bet the citizens are going to be a bit reactive.

    RH, yep it’s fun to play trader but most people don’t have a trading account. They have 401k, IRA’s and mutual funds, which they throw money into and promptly forget about until a crisis hits. I began moving all my stock accounts over to bonds about two years ago when my international fund started acting whacky. That canary account has saved my butt at least three times in the past 20 years. I tend to be a lazy investor, leaving chunks in retirement accounts from previous jobs. They may be out of sight but not out of mind. This time it may not matter where you keep your money.

    Groveton, it would be nice if the arrangement worked out the way you say, but what you hear from the politicians is merely window dressing for the masses. We are going to end up eating exactly what the Feds want us to, with no bailout dessert for the little guy.

    After all, the ones who created the problem should pay for it, not the investors that provided the money. The citizens borrowed all that money and by god, they are going to pay it back one way or the other.

  29. Anonymous Avatar

    You can only trade with money you don’t care if you lose.

    But, after you pay your rent, clothes, food, shcool, and hobbies, if there is anything left over it has to go somewhere.

    Housing took a hit, investments are taking a hit, even your bonds may not be safe.

    Like my friend Jesus said, “What good all that money, it no go round and round?”

    So we put our money (someplace) and we want a good return for it. The bankers and other con artists obliged us, and now we are ticked off.

    Groveton’s analysis is correct. This is no longer about WHO is getting bailed out and who isn’t – we all are: everyone who depends on the economy.

    TMT – Speculation does NOT make the mess worse. Did my friend who bought AIG at $2.15 and sold at $4.85 make things worse? I asked Larry if short sellers were speculators, and sure enough, three days later the authorities are talking about cracking down on short sellers.

    So which is it? Speculators pushing the market up, or pushing it down?

    Anyone want to buy a futures contract on my hay sales? For $40 you can buy a contract on a hundred bales at $4.00 a bale, deliverable in December. In December if hay is actually $5.00 a bale, you can “take delivery”, by giving me the remaining $360. I will deliver your hay to my customer, and give you the $500. On your $40 dollars, you will have made 250%.

    I get $40 up front, and the guarantee that I’ll get $4 a bale unless the price slips below $3.60. If it goes below $4.00 a bale, well, you are out your $40 bucks.

    Of course, someone else might come along later and say, “I hear you have a contract with Ray at $4.00, I’ll give you $60 for your contract. Then, you make 50% on your money, and you don’t have to wait till December. That would make you a speculator.

    Whatever the price turns out to be, the same horse eats the hay.

    RH

  30. Definitions get tough here. I’ll use mine:

    1. Trader – gets into and out of positions with the same day. Always closes out positions by end of trading day.

    2. Speculator – hold positions longer than a day but less than a year.

    3. Investor – takes positions for a year or more.

    Our tax system already rewards investors more than traders or speculators by allowing much more favorable capital gains tax rates for investors. One policy snafu of Barak Obama is the idea that the capital gains rate should be raised. This will make investing less attractive relative to trading and speculating. That will increase volatility to some extent – which is bad at this time. Of course, he may raise the taxes on ordinary income by as much as capital gains which would hold the spread even.

    There are also different levels of risk in the various investments. For example:

    1. Buy stock – traditional long position.
    2. Buy stock on margin – leverage a long position with broker supplied debt.
    3. Buy options – take positions in stocks without ever holding the underlying stock.
    4. Sell covered options – create an option position with a corresponding position in the underlying stock.
    5. Sell uncovered options – create options positions without owning the underlying stock.




    10,215 (approx) Credit Default Swap – An agreement between counterparties whereby a fixed rate payer gives money to a floating rate payer with a corresponding agreement to pay off a loan in default.

    I have a lot less angst with short duration trading and speculation than I have with exotic derivatives used as both income generators (probably OK) and business risk insurance (not OK).

  31. Oh yeah – the approximate amounts of credit default swaps in the market:

    December, 2005 …. $13.9 trillion
    December, 2006 …. $28.9 trillion
    December, 2007 …. $62.2 trillion

    Source: Bank for International Settlements

    Of note – 62 trillion seconds of wall clock time would be 1,964,656 years. So, if you counted one dollar per second for all the dollars of credit defaul swaps in circulation at the end of 2007 it would take you just about 2 million years to count all the dollars.

    And some say the Bush Administration’s $700B bailout estimate is a staggering number. This would take a scant 21,700 years to count at one dollar per second.

  32. Anonymous Avatar

    The financial services industry grew beyond its value to the American economy. Short-term speculation adds nothing to the public interest. We need more long-term investment. If that means we don’t have liquidity for all of our investments, then so be it.

    TMT

  33. “You can only trade with money you don’t care if you lose.”

    that’s correct.

    and if the money you are using does not belong to you, it’s “borrowed” and you get to keep all the gains and the person you borrow it from gets tagged with the losses – life can be grand.

    and it’s even better if you get to use someone else money without their permission… and if things go belly-up they get caught holding the bag anyhow.

    The above explains what has happened.

    this translates into the money going “round and round” in a game of musical chairs except that the person who loses their chair is, in this case, the taxpayer – who never wanted to play musical chairs to start with – and never would have if they had a choice.

    Like Darrell, there ARE ways to protect one’s own investments …. but all of us including Darrell with still have to pay for the meltdown.

  34. Anonymous Avatar

    You can borrow the $40 it takes to buy my hay contract. If you need 20% equity then the contract only costs you $8 out of your pocket. If you win, you make 1200% instead of “only” 250%.

    Life can be grand.

    If you lose, you lose the forty you borowed, but you sstill have to pay it back, with interest, so your risk loss is greater too. Guido is likely to keep and eye on that and want more equity if things start looking bad.

    Guido wanted AIG to cough up an additon 14 billion, and he might want 250 billion, soon.

    Borrowing money works great, unless things go bad.

    Unless you can get the feds to bail you out. But if the feds “bail you out” they are really bailing out your lenders.

    Which, as Groveton points out, is all of us.

    RH

  35. Anonymous Avatar

    Short-term speculation adds nothing to the public interest.

    Not true. It adds liquidity to the markets, without which they cannot opperate. They are also a “signal” which shows how buyers rate the risk, as opposed to what the ratings agencies say. This is a case where having a dog in the fight is a good thing. Speculators do, raters,don;t.

  36. Anonymous Avatar

    Long term investments need short term profits to sustain them.

    RH

  37. Anonymous Avatar

    “…who never wanted to play musical chairs to start with – and never would have if they had a choice.”

    Really?

    Lets see, we wnt up 17 trillion, and bck down 2. We might go down another 2 before it is over. Net, up 13 trillion.

    If we had not played (and we all did, really) then maybe we went up one or four with relatively little risk.

    My tenants would still be tenants instead of owners. Under your scenario we would all be paying for the difference (9 trillion), but there would be no one to blame.

    Which would you rather pay, 4 trillion, or nine?

    The right answer might have been to make 8.5 trillion with a little risk, properly borne by the risk-takers, but that isn’t what happened.

    What we are going through isn’t the best outcome, but neither is adopting a zero risk approach. It is exaclty like saying we can never risk a lesion on a frog, no matter what it costs to prevent.

    In this case the frogs are investment banks.

    RH

  38. Anonymous Avatar

    “The government needs to directly stabilize the housing market. This is equivalent to treating the infection with antibiotics, instead of applying a cold compress for the fever. Both the fever and the infection need treating.

    The first step should be to reduce mortgage interest rates. In a normal mortgage market, rates are about 1.6 percentage points above the interest rate for 10-year Treasury notes. Recently, the difference has been closer to 2.5 percentage points.

    The government is in a great position to cut rates by about a point: Through Fannie Mae, Freddie Mac and the Federal Housing Administration, it now controls nearly 90 percent of all mortgage originations. These lower rates would apply to most home buyers who take out a loan under $729,750 for a house that they will live in.

    Along with lower rates, the government should provide temporary down-payment assistance for buyers. The government could, for example, match the amount of money that buyers use for a down payment, up to $15,000. Because the government now controls the bulk of all mortgage financing, this money could be provided directly at closing. Homeowners who refinance their current mortgages could also receive assistance, allowing them to avoid foreclosure.

    Programs like these would draw buyers into the housing market and reduce the backlog of unsold and vacant homes. Investors and speculators would be ineligible and would face the full cost of their mistakes.”

    From Urban and environmental economics.

    RH

  39. Anonymous Avatar

    “The government needs to directly stabilize the housing market. This is equivalent to treating the infection with antibiotics, instead of applying a cold compress for the fever. Both the fever and the infection need treating.

    The first step should be to reduce mortgage interest rates. In a normal mortgage market, rates are about 1.6 percentage points above the interest rate for 10-year Treasury notes. Recently, the difference has been closer to 2.5 percentage points.

    The government is in a great position to cut rates by about a point: Through Fannie Mae, Freddie Mac and the Federal Housing Administration, it now controls nearly 90 percent of all mortgage originations. These lower rates would apply to most home buyers who take out a loan under $729,750 for a house that they will live in.

    Along with lower rates, the government should provide temporary down-payment assistance for buyers. The government could, for example, match the amount of money that buyers use for a down payment, up to $15,000. Because the government now controls the bulk of all mortgage financing, this money could be provided directly at closing. Homeowners who refinance their current mortgages could also receive assistance, allowing them to avoid foreclosure.

    Programs like these would draw buyers into the housing market and reduce the backlog of unsold and vacant homes. Investors and speculators would be ineligible and would face the full cost of their mistakes.”

    From Urban and environmental economics.

    RH

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