Posted originally on 2blowhards.com (comments section)
My point isInvestment banking functions on some substantial amount of trust. not the least amount of trust has to do with the fundemental faith that the market will exist tomorrow. This is irrespective of whether the participants in the market are pre apartheid south africans diamond miners or if they are Soviet communists taking bets in the capitalist system simultaneously betting on its collapse and profiting from it.
The market is a neutral player. it rewards profit and punishes losses.
The market however bets heavily on its own continuing existance. this means not only that the building on broad street will be populated by hermes ties, but also that , when people have money that earns less returns, and want to take more risk, they can use the time value of money and the volitility of returns of a cash flow, can price assets relative to one another and facilitate people buying and selling these assets.
well, the real estate market does not function like this. its values are simply that you take a buyer for whatever the market will pay. So I’d go to Atlanta and look at a property that looks like a country club suburb, with no country club, which is priced at say 350,000 and I’d come out of the gates and find a Much bigger lot with a ranch style home priced at 110,000. The funny thing is BOTH these prices are valid.
Now imagine that someone sits in Shanghai, taking an option on either property. He can be forgiven for thinking that property 2 will be as valuable as property I if only he knocked down the ranch and built a colonial on the lot. Will it?
This was the basis of the boom.
Now, when there were too many such mortgages chasing money, without such appreciation, the people holding them did the following: they looked at the zip codes and the fact that the asset existed, and simply said, “if only we wait long enough, house prices will go up.” and bought options on these mortgages., that if there was a crash in prices, they’d buy them at the historical price.
There was a crash, and they couldn’t put up the money to deliver on the contract.
Now please see that this is not corruption in the market, it is just that the Investment banking market is like a bulldog biting a rhino. even if rhino meat is comestible, the bulldog’s size and the rhino’s thick skin will ensure certain death for poor tiger, even if we admire his guts to take on a rhino in the first place.
The Bailout merely creates a pool of American liquidity that will provide buyers when people take their marbles out of the mortgage market and bet on Oil or something instead.
It gives confidence to the market that there will be buyers of the 65 trillion outstanding mortgage backed paper, (good mortgage paper) even if the chinese take their marble and go home.
so your bunch of patriots(in the house) are too stupid to see that theyre shooting their own economy in the head by talking about insurance and other such half assed ponzi schemes. (BTW insurance is like saying, when there’s a run on a bank, your solution is to give everyone ATM cards.)