Why the world is in this situation...
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nozzer
Posts: 22 Forumite
Some very good viewing if you can spare the time...
Bare in mind Gordan Brown is planning a £500Billion Bail Out and agrees with Bush.
1. http://www.youtube.com/watch?v=_dmPchuXIXQ&feature=related
2. http://www.youtube.com/watch?v=lBZne09Gf5A&feature=related
3. http://www.youtube.com/watch?v=SjUrib_Gh0Y&feature=related
4. http://www.youtube.com/watch?v=_BVNN1wqw3k&feature=related
5. http://www.youtube.com/watch?v=rwz85gWjFbk&feature=related
And for anyone interested in why Banks and Business are collapsing, you may want to go and get a brew and put your slippers on if you are ;0)
Around the world, banks must comply with what are known as Basel II regulations. These regulations determine how much capital a bank must maintain in reserve. The rules are based on the quality of the bank's loan book. The riskier the loans a bank owns, the more capital it must keep in reserve. Bank managers naturally seek to employ as much leverage as they can, especially when interest rates are low, to maximize profits. AIG appeared to offer banks a way to get around the Basel rules, via unregulated insurance ng:
contracts, known as credit default swaps.
Here's how it worked: Say you're a major European bank... You have a surplus of deposits, because in Europe people actually still bother to save money. You're looking for something to maximize the spread between what you must pay for deposits and what you're able to earn lending. You want it to be safe and reliable, but also pay the highest possible annual interest. You know you could buy a portfolio of high-yielding subprime mortgages. But doing so will limit the amount of leverage you can employ, which will limit returns.
So rather than rule out having any high-yielding securities in your portfolio, you simply call up the friendly AIG broker you met at a conference in London last year.
"What would it cost me to insure this subprime security?" you inquire. The broker, who is selling a five-year policy (but who will be paid a bonus annually), says, "Not too much." After all, the historical loss rates on American mortgages is close to zilch.
Using incredibly sophisticated computer models, he agrees to guarantee the subprime security you're buying against default for five years for say, 2% of face value.
Although AIG's credit default swaps were really insurance contracts, they weren't regulated. That meant AIG didn't have to put up any capital as collateral on its swaps, as long as it maintained a triple-A credit rating. There was no real capital cost to selling these swaps; there was no limit. And thanks to what's called "mark-to-market" accounting, AIG could book the profit from a five-year credit default swap as soon as the contract was sold, based on the expected default rate.
Whatever the computer said AIG was likely to make on the deal, the accountants would write down as actual profit. The broker who sold the swap would be paid a bonus at the end of the first year – long before the actual profit on the contract was made.
With this structure in place, the European bank was able to assure its regulators it was holding only triple-A credits, instead of a bunch of subprime "toxic waste." The bank could leverage itself to the full extent allowable under Basel II. AIG could book hundreds of millions in "profit" each year, without having to pony up billions in collateral.
It was a fraud. AIG never any capital to back up the insurance it sold. And the profits it booked never materialized. The default rate on mortgage securities underwritten in 2005, 2006, and 2007 turned out to be multiples higher than expected. And they continue to increase. In some cases, the securities the banks claimed were triple A have ended up being worth less than $0.15 on the dollar.
Even so, it all worked for years. Banks leveraged deposits to the hilt. Wall Street packaged and sold dumb mortgages as securities. And AIG sold credit default swaps without bothering to collateralize the risk. An enormous amount of capital was created out of thin air and tossed into global real estate markets.
On September 15, all of the major credit-rating agencies downgraded AIG – the world's largest insurance company. At issue were the soaring losses in its credit default swaps. The first big writeoff came in the fourth quarter of 2007, when AIG reported an $11 billion charge. It was able to raise capital once, to repair the damage. But the losses kept growing. The moment the downgrade came, AIG was forced to come up with tens of billions of additional collateral, immediately. This was on top of the billions it owed to its trading partners. It didn't have the money. The world's largest insurance company was bankrupt.
The dominoes fell over immediately. Lehman Brothers failed on the same day. Merrill was sold to Bank of America. The Fed stepped in and agreed to lend AIG $85 billion to facilitate an orderly sell off of its assets in exchange for essentially all the company's equity.
Most people never understood how AIG was the linchpin to the entire system. And there's one more secret yet to come out...
AIG's largest trading partner wasn't a nameless European bank. It was Goldman Sachs.
Goldman avoided the kind of huge mortgage-related writedowns that plagued all the other investment banks. And now we know: Goldman hedged its exposure via credit default swaps with AIG. Sources inside Goldman say the company's exposure to AIG exceeded $20 billion, meaning the moment AIG was downgraded, Goldman had to begin marking down the value of its assets. And the moment AIG went bankrupt, Goldman lost $20 billion. Goldman immediately sought out Warren Buffett to raise $5 billion of additional capital, which also helped it raise another $5 billion via a public offering.
The collapse of the credit default swap market also meant the investment banks – all of them – had no way to borrow money, because no one would insure their obligations.
To fund their daily operations, they've become totally reliant on the Federal Reserve, which has allowed them to formally become commercial banks. To date, banks, insurance firms, and investment banks have borrowed $348 billion from the Federal Reserve – nearly all of this lending took place following AIG's failure. Things are so bad at the investment banks, the Fed had to change the rules to allow Merrill, Morgan Stanley, and Goldman the ability to use equities as collateral for these loans, an unprecedented step.
The mainstream press hasn't reported this either: A provision in the $700 billion bailout bill permits the Fed to pay interest on the collateral it's holding, which is simply a way to funnel taxpayer dollars directly into the investment banks.
Why do you need to know all of these details? First, you must understand that without the government's actions, the collapse of AIG could have caused every major bank in the world to fail.
Second, without the credit default swap market, there's no way banks can report the true state of their assets – they'd all be in default of Basel II. That's why the government will push through a measure that requires the suspension of mark-to-market accounting. Essentially, banks will be allowed to pretend they have far higher-quality loans than they actually do. AIG can't cover for them anymore.
And third, and most importantly, without the huge fraud perpetrated by AIG, the mortgage bubble could have never grown as large as it did. Yes, other factors contributed, like the role of Fannie and Freddie in particular. But the key to enabling the huge global growth in credit during the last decade can be tied directly to AIG's sale of credit default swaps without collateral. That was the barn door. And it was left open for nearly a decade.
There's no way to replace this massive credit-building machine, which makes me very skeptical of the government's bailout plan. Quite simply, we can't replace the credit that existed in the world before September 15 because it didn't deserve to be there in the first place. While the government can, and certainly will, paper over the gaping holes left by this enormous credit collapse, it can't actually replace the trust and credit that existed... because it was a fraud.
And that leads me to believe the coming economic contraction will be longer and deeper than most people understand.
You might find this strange... but this is great news for those who understand what's going on. Knowing why the economy is shrinking and knowing it's not going to rebound quickly gives you a huge advantage over most investors, who don't understand what's happening and can't plan to take advantage of it.
How can you take advantage? First, make sure you have a substantial portion of your net worth (at least 10%) in precious metals. e.g gold bullion. The gigantic liabilities the world governments will vastly decrease the value of paper currencies. Buy bullion and keep it somewhere safe.
For those that are interested in how the English & American system works....
The Government go to the Bank of England (Federal Reserve in America, the people who print the money) and ask for £100billion in exchange for government bonds a (promise they will pay back the money borrowed)
The Government then deposit this £100billion in a subsidiary bank (the ones you and i use) this money now becomes legal tender. This money is now available for loans.
What is a Loan? A Loan is Debt. So now we know that money is debt and debt is money. All the time there is a demand for loans, there will always be debt, its what the Bank is built on. No Debt = No Bank
When the Government deposit the £100billion in the subsidiary bank, the bank is required to hold back 10% of the amount, in whats known a “Reserve” the remaining amount then becomes known as an, “Excessive Reserve”. “The amount available for new loans.” £90billion then becomes the amount available for new loans.
It would be logical to assume that this £90billion is coming out of the original £100billion This however isn’t the case. Here is what happens:
The £90billion available for new loans is created out of thin air on top of the existing £100billion making £190billion created out of nothing. This is how the supply of cash is expanded.
The book of “Money Mechanics” tells us. “Of course they (the banks), do not really pay out loans from the money they receive as deposits. If they did no additional money would be created. What they do when they make loans is to accept promissory notes (Credit Contracts) in exchange for credits to the borrowers account”
So we see that the £90billion is created out of nothing, because
1. Demand for the loan exists and
2. There is a £10billion reserve to satisfy the 10% reserve requirements. Result = New money created.
Lets now for example say that one of us visit that bank and ask for a £90billion loan. We will then take this £90billion and put it in our own bank account.
The process of the above now repeats itself. £90billion deposited in my bank. My bank as required put 10% of that amount, £9bilion into the “Reserve” and £81billion is created out of thin air as an “Excessive Reserve” amount available for new loans.
This is repeated over and over, it is what is known as “The Deposit, Money Creation, Loan Cycle!”
It is excepted that every deposit that ever occurs in the banking system. Around 9 times that amount can be created out of thin air. So for the original £100billion deposited by the government £900billion is created out of thin air!
We now understand how money is created within this system.
The next question is “What is giving the newly created money value?”
The answer is, the money that already exists. The new money steals value from the existing money supply. The total pool of money is increased irrespective of the need for goods and services.
When supply and demand find equilibrium (an equal footing), prices rise and decrease the purchasing amount of the money.
We know this better by what is known as “Inflation or the “increase in supply of money.” Although should be better described as a hidden tax! It is known as distorting the value of money by creating it out of thin air with nothing to back it up. The losers are people who save as Interest rates come down.
So how can the problem of Inflation (Supply of Money created out of thin air) be solved my more Inflation (pumping more money that doesn’t exist into the system) The answer is, It cant be!!
Lets look at Zimbabwe...The printing presses were running to breakdwown,
result = There current inflation rates (to much money chasing too few goods) stands at 231000000%. Putting the cost of a loaf of bread in the 100 of millions of zimbabwe dollars.
Sorry that was long reading, but, for some, it will be an eye opener.......?
Bare in mind Gordan Brown is planning a £500Billion Bail Out and agrees with Bush.
1. http://www.youtube.com/watch?v=_dmPchuXIXQ&feature=related
2. http://www.youtube.com/watch?v=lBZne09Gf5A&feature=related
3. http://www.youtube.com/watch?v=SjUrib_Gh0Y&feature=related
4. http://www.youtube.com/watch?v=_BVNN1wqw3k&feature=related
5. http://www.youtube.com/watch?v=rwz85gWjFbk&feature=related
And for anyone interested in why Banks and Business are collapsing, you may want to go and get a brew and put your slippers on if you are ;0)
Around the world, banks must comply with what are known as Basel II regulations. These regulations determine how much capital a bank must maintain in reserve. The rules are based on the quality of the bank's loan book. The riskier the loans a bank owns, the more capital it must keep in reserve. Bank managers naturally seek to employ as much leverage as they can, especially when interest rates are low, to maximize profits. AIG appeared to offer banks a way to get around the Basel rules, via unregulated insurance ng:
contracts, known as credit default swaps.
Here's how it worked: Say you're a major European bank... You have a surplus of deposits, because in Europe people actually still bother to save money. You're looking for something to maximize the spread between what you must pay for deposits and what you're able to earn lending. You want it to be safe and reliable, but also pay the highest possible annual interest. You know you could buy a portfolio of high-yielding subprime mortgages. But doing so will limit the amount of leverage you can employ, which will limit returns.
So rather than rule out having any high-yielding securities in your portfolio, you simply call up the friendly AIG broker you met at a conference in London last year.
"What would it cost me to insure this subprime security?" you inquire. The broker, who is selling a five-year policy (but who will be paid a bonus annually), says, "Not too much." After all, the historical loss rates on American mortgages is close to zilch.
Using incredibly sophisticated computer models, he agrees to guarantee the subprime security you're buying against default for five years for say, 2% of face value.
Although AIG's credit default swaps were really insurance contracts, they weren't regulated. That meant AIG didn't have to put up any capital as collateral on its swaps, as long as it maintained a triple-A credit rating. There was no real capital cost to selling these swaps; there was no limit. And thanks to what's called "mark-to-market" accounting, AIG could book the profit from a five-year credit default swap as soon as the contract was sold, based on the expected default rate.
Whatever the computer said AIG was likely to make on the deal, the accountants would write down as actual profit. The broker who sold the swap would be paid a bonus at the end of the first year – long before the actual profit on the contract was made.
With this structure in place, the European bank was able to assure its regulators it was holding only triple-A credits, instead of a bunch of subprime "toxic waste." The bank could leverage itself to the full extent allowable under Basel II. AIG could book hundreds of millions in "profit" each year, without having to pony up billions in collateral.
It was a fraud. AIG never any capital to back up the insurance it sold. And the profits it booked never materialized. The default rate on mortgage securities underwritten in 2005, 2006, and 2007 turned out to be multiples higher than expected. And they continue to increase. In some cases, the securities the banks claimed were triple A have ended up being worth less than $0.15 on the dollar.
Even so, it all worked for years. Banks leveraged deposits to the hilt. Wall Street packaged and sold dumb mortgages as securities. And AIG sold credit default swaps without bothering to collateralize the risk. An enormous amount of capital was created out of thin air and tossed into global real estate markets.
On September 15, all of the major credit-rating agencies downgraded AIG – the world's largest insurance company. At issue were the soaring losses in its credit default swaps. The first big writeoff came in the fourth quarter of 2007, when AIG reported an $11 billion charge. It was able to raise capital once, to repair the damage. But the losses kept growing. The moment the downgrade came, AIG was forced to come up with tens of billions of additional collateral, immediately. This was on top of the billions it owed to its trading partners. It didn't have the money. The world's largest insurance company was bankrupt.
The dominoes fell over immediately. Lehman Brothers failed on the same day. Merrill was sold to Bank of America. The Fed stepped in and agreed to lend AIG $85 billion to facilitate an orderly sell off of its assets in exchange for essentially all the company's equity.
Most people never understood how AIG was the linchpin to the entire system. And there's one more secret yet to come out...
AIG's largest trading partner wasn't a nameless European bank. It was Goldman Sachs.
Goldman avoided the kind of huge mortgage-related writedowns that plagued all the other investment banks. And now we know: Goldman hedged its exposure via credit default swaps with AIG. Sources inside Goldman say the company's exposure to AIG exceeded $20 billion, meaning the moment AIG was downgraded, Goldman had to begin marking down the value of its assets. And the moment AIG went bankrupt, Goldman lost $20 billion. Goldman immediately sought out Warren Buffett to raise $5 billion of additional capital, which also helped it raise another $5 billion via a public offering.
The collapse of the credit default swap market also meant the investment banks – all of them – had no way to borrow money, because no one would insure their obligations.
To fund their daily operations, they've become totally reliant on the Federal Reserve, which has allowed them to formally become commercial banks. To date, banks, insurance firms, and investment banks have borrowed $348 billion from the Federal Reserve – nearly all of this lending took place following AIG's failure. Things are so bad at the investment banks, the Fed had to change the rules to allow Merrill, Morgan Stanley, and Goldman the ability to use equities as collateral for these loans, an unprecedented step.
The mainstream press hasn't reported this either: A provision in the $700 billion bailout bill permits the Fed to pay interest on the collateral it's holding, which is simply a way to funnel taxpayer dollars directly into the investment banks.
Why do you need to know all of these details? First, you must understand that without the government's actions, the collapse of AIG could have caused every major bank in the world to fail.
Second, without the credit default swap market, there's no way banks can report the true state of their assets – they'd all be in default of Basel II. That's why the government will push through a measure that requires the suspension of mark-to-market accounting. Essentially, banks will be allowed to pretend they have far higher-quality loans than they actually do. AIG can't cover for them anymore.
And third, and most importantly, without the huge fraud perpetrated by AIG, the mortgage bubble could have never grown as large as it did. Yes, other factors contributed, like the role of Fannie and Freddie in particular. But the key to enabling the huge global growth in credit during the last decade can be tied directly to AIG's sale of credit default swaps without collateral. That was the barn door. And it was left open for nearly a decade.
There's no way to replace this massive credit-building machine, which makes me very skeptical of the government's bailout plan. Quite simply, we can't replace the credit that existed in the world before September 15 because it didn't deserve to be there in the first place. While the government can, and certainly will, paper over the gaping holes left by this enormous credit collapse, it can't actually replace the trust and credit that existed... because it was a fraud.
And that leads me to believe the coming economic contraction will be longer and deeper than most people understand.
You might find this strange... but this is great news for those who understand what's going on. Knowing why the economy is shrinking and knowing it's not going to rebound quickly gives you a huge advantage over most investors, who don't understand what's happening and can't plan to take advantage of it.
How can you take advantage? First, make sure you have a substantial portion of your net worth (at least 10%) in precious metals. e.g gold bullion. The gigantic liabilities the world governments will vastly decrease the value of paper currencies. Buy bullion and keep it somewhere safe.
For those that are interested in how the English & American system works....
The Government go to the Bank of England (Federal Reserve in America, the people who print the money) and ask for £100billion in exchange for government bonds a (promise they will pay back the money borrowed)
The Government then deposit this £100billion in a subsidiary bank (the ones you and i use) this money now becomes legal tender. This money is now available for loans.
What is a Loan? A Loan is Debt. So now we know that money is debt and debt is money. All the time there is a demand for loans, there will always be debt, its what the Bank is built on. No Debt = No Bank
When the Government deposit the £100billion in the subsidiary bank, the bank is required to hold back 10% of the amount, in whats known a “Reserve” the remaining amount then becomes known as an, “Excessive Reserve”. “The amount available for new loans.” £90billion then becomes the amount available for new loans.
It would be logical to assume that this £90billion is coming out of the original £100billion This however isn’t the case. Here is what happens:
The £90billion available for new loans is created out of thin air on top of the existing £100billion making £190billion created out of nothing. This is how the supply of cash is expanded.
The book of “Money Mechanics” tells us. “Of course they (the banks), do not really pay out loans from the money they receive as deposits. If they did no additional money would be created. What they do when they make loans is to accept promissory notes (Credit Contracts) in exchange for credits to the borrowers account”
So we see that the £90billion is created out of nothing, because
1. Demand for the loan exists and
2. There is a £10billion reserve to satisfy the 10% reserve requirements. Result = New money created.
Lets now for example say that one of us visit that bank and ask for a £90billion loan. We will then take this £90billion and put it in our own bank account.
The process of the above now repeats itself. £90billion deposited in my bank. My bank as required put 10% of that amount, £9bilion into the “Reserve” and £81billion is created out of thin air as an “Excessive Reserve” amount available for new loans.
This is repeated over and over, it is what is known as “The Deposit, Money Creation, Loan Cycle!”
It is excepted that every deposit that ever occurs in the banking system. Around 9 times that amount can be created out of thin air. So for the original £100billion deposited by the government £900billion is created out of thin air!
We now understand how money is created within this system.
The next question is “What is giving the newly created money value?”
The answer is, the money that already exists. The new money steals value from the existing money supply. The total pool of money is increased irrespective of the need for goods and services.
When supply and demand find equilibrium (an equal footing), prices rise and decrease the purchasing amount of the money.
We know this better by what is known as “Inflation or the “increase in supply of money.” Although should be better described as a hidden tax! It is known as distorting the value of money by creating it out of thin air with nothing to back it up. The losers are people who save as Interest rates come down.
So how can the problem of Inflation (Supply of Money created out of thin air) be solved my more Inflation (pumping more money that doesn’t exist into the system) The answer is, It cant be!!
Lets look at Zimbabwe...The printing presses were running to breakdwown,
result = There current inflation rates (to much money chasing too few goods) stands at 231000000%. Putting the cost of a loaf of bread in the 100 of millions of zimbabwe dollars.
Sorry that was long reading, but, for some, it will be an eye opener.......?
Just because I'm paranoid, doesn't mean Easyjet aren't out to get me
0
Comments
-
And in the last few minutes...
HBOS and The RBS are to be nationalised.
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3185120/Financial-crisis-HBOS-and-RBS-to-be-nationalised-in-50-billion-state-intervention.html
Can anyone see the collapse of the $$ coming?Just because I'm paranoid, doesn't mean Easyjet aren't out to get me0 -
There's no way to replace this massive credit-building machine, which makes me very skeptical of the government's bailout plan.
The satirical website - the dailymash - seems to have summarised it quite nicely.....
..."THE government is to invest £500bn of your money in British banks so they can lend it back to you with interest.
...The historic move is being hailed as a lifeline for the financial system as long as nobody asks too many questions.
...He added: "In case you hadn't already worked it out - the entire global financial system is predicated on the assumption that you're an idiot."....
http://www.thedailymash.co.uk/news/business/banks-to-lend-you-your-own-money-200810081308/0 -
Inflation as of today 5.2%Just because I'm paranoid, doesn't mean Easyjet aren't out to get me0
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