Financial Weapons of Mass Destruction
Last updated:September 30, 2008
September 20, 2008
The following piece from the Economist can make one easily understand why Warren Buffett called the derivatives "financial weapons of mass destruction" when ordering the insurance arm of his Berkshire Hathaway Inc to leave this market for good a few years ago.
AIG is mostly a safe, well-run insurer. But its financial-products division, which accounted for just a fraction of its revenues, wrote enough derivatives contracts to destroy the firm and shake the world. It helps explain one of the mysteries of recent years: who was taking on the risk that banks and investors were shedding? Now we know.
September 30, 2008
The Wall Street version of an extended Chicago Hope team is urgently needed to reanimate the US economy that seems to have got such a pain shock from having the top echelon of its investment banking and other financial institutions eliminated in one go, that it went into coma or some sort of cardiac arrest. The credit system seized up and even big and well run non financial companies are only managing to get access to credit at punitive rates. With what is frequently called the blood of modern capitalist economy stuck in its veins as private institutions seem to have switched to hoarding money and refusing to release it into circulation, the situation of the super engine of the global economy will soon be worse than that of Ariel Sharon who is unconsciously celebrating god knows what birthday of his connected to life sustaining equipment in a hospital.
While for many people (like me) it may be too hard to form an informed opinion about the situation some things seem to be clear enough to be said already. The widely prevailing wisdom that the US economy fell victim to its own version of unregulated capitalism based on unrestrained greed is only partially true. What appears is that the enlightened liberals from the Democratic party have contributed more than their share to first instigate the housing bubble and later to sabotage all efforts including those by the current administration to get the situation under control.
The warning seems to have been on the wall since years ago given that some people have been that smart as to read it aloud five years ago. However, no warning on a wall, and neither the wall itself, can stop a socially conscious bleeding-heart on his mission, let alone when the mission is to allow every common dude of simple means to get his own house. The inflated on these grounds bubble was later reinforced when the wunderkinds from Wall Street, armed with those now proverbial financial weapons of mass destruction, joined the party, dragging into this shit the whole of the US and half the world. The cloud of nuclear toxicity, produced by financial nuclear explosions that went in a chain through the US and global financial systems, has polluted parts of the financial system so thoroughly that it made them virtually unusable. The currently debated bailout plan is basically meant to remove toxic waste from the system in an orderly and organized manner while performing on the way a financial equivalent of blood infusion. Of course the system itself is perfectly capable of self detoxification by its own means but this may take years.
In short, the US economy was hit from both sides just as much by the unrestrained social humanism and economic incompetence of liberals as by the unrestrained profit chasing and the same incompetence of capitalists. The main lesson everybody should draw from the current crisis is about the need to stop these pointless and leading to nowhere debates about free market vs socially oriented capitalism or capitalism with a human face. One can be socially oriented as much as he wants, but economic fundamentals remain what they are, means fundamentals. And it's impossible to practice free market as a sort of religion since in many situations it would be equivalent to banging one's head against the wall. It's about being pragmatic and practical. Just as the economy should grow for the benefit of as much of the society as possible, social orientation can be no justification for undermining the competitiveness or the macroeconomic stability of the economy as for example through subsidies to failing companies just for the sake of keeping some people employed.
The last point raises an important question about how much the US is capable of recovering from this mess. To be sure non financial sectors of the economy are as good as ever, but of course without this credit blood circulating properly inside the economic organism, other parts of the organism will start disintegrating too. In any case, the US got used over decades to deficits, living on borrowed time and enjoying prosperity lent from other nations. Listening to the two candidates one just can't fail to notice that both are a kinda struggling to come forward and say a very simple truth to their people - that this approach and this way of life are unsupportable and should stop. That getting the price of gasoline down has no priority at all and, far from this, an expanded gas tax is needed to cut the demand and allow the US to achieve its primary foreign policy objectives. That to bring that nation back on track may require time and painful sacrifices in terms of living standards and welfare.
Of course after the idiots cast their ballots, the technocrats usually come and fix things anyway, usually totally disregarding on the way promises made during election campaigns. These broken promises are a vital precondition that allows what passes these days for democracy to survive each time after holding another carnival of Santa Clauses otherwise known as elections (the Santas don't even entice the boys and girls so much with their presents as with promises to bring them better presents next time). Nevertheless, even bearing all this in mind, there is still more than enough cheap and reckless populist rhetoric going on in this bastion of free markets and social Darwinism to make one mildly concerned about its ability to soon get back on its feet.
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