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Ch. 1: Introduction: The Panic of August 
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Yes, derivitives are know, or at leat they were to seemingly pull money out of nowhere. The allusion to the lottery or casino is apt indeed.

:book:



Sat Jan 10, 2009 5:59 pm
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Thanks for the resource. I'm still not sure what those who buy these derivatives are getting, so some of this mystery remains for me. Is all this stuff a little bit immoral, or is that my puritanism speaking?

I was thinking about my last post, and one thing I'd add is that we common people are not necessarily the victims of the financial mess, the biggest part of which was caused by bad mortgage debt (right?). We might be part creators. I mean that in any situation when the final decision is ours, we can't say that some "predatory" lender was responsible. If a lender tells me I qualify on $80,000 annual income for a $300,000 house with little down, it's still my fault if I sign the contract and then can't make payments later on. I've taken on too much housing expense relative to my income, and I should know this. The gleam was in my own eyes.



Mon Jan 12, 2009 9:44 pm
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I am interested to what degree the American economic system with all its financial instruments reflects other characteristics of the "Americans" as people and as an empire - if you will excuse the blanket cultural stereotyping.

:book:



Tue Jan 13, 2009 10:31 pm
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DWill wrote:
Thanks for the resource. I'm still not sure what those who buy these derivatives are getting, so some of this mystery remains for me. Is all this stuff a little bit immoral, or is that my puritanism speaking?




As I understand it, investors do not "get" anything when they engage in the derivatives market or in the related futures market in a material sense. They enter into a contract, so they are acquiring a contractual right for a certain price. That's all they are getting, a right. The value of the right will vary over time according to changes in the market for rights of that type and so the contractual right will be bought and sold according to what the investors believe is in their best interest.



Wed Jan 14, 2009 1:44 am
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giselle wrote:
As I understand it, investors do not "get" anything when they engage in the derivatives market or in the related futures market in a material sense.


I thought real estate derivatives were like bonds and paid interest. Others were more speculative, like options.

Tom



Wed Jan 14, 2009 8:44 am
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Grim wrote:
I am interested to what degree the American economic system with all its financial instruments reflects other characteristics of the "Americans" as people and as an empire - if you will excuse the blanket cultural stereotyping.

I'm interested in that, too. Phillips does give Great Britian some "credit" for financial innovation, too, though, back in the 80s.

A guy was on public radio the other day talking about the continuities of the current crisis with other episodes of financial crashing in earlier American history (pre-Depression). Maybe there is a strong American character link in all of this.


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Wed Jan 14, 2009 10:29 am
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First off, this book seems like it was well researched, written hastily, and has an agenda.

I'm pleased with the book candidness about issues concerning the worst president ever, little georgy bush and his 'Imperial hubris'. Understatements and misstatements are the hallmarks of his administration. Mission Accomplished georgy!

Leadership can't be blamed for this is garbage. Republicans have a long history of running up debt and allowing big business supreme leniency and succor. Look at the national debt produced by Regan, Bush, and Bush. It's fact. One after another. R-e-a-d m-y l-i-p-s : THEY SUCK.

Electing any member of either party "wouldn't be prudent."

You know this man is a political writer. It shows in his work despite his confession and although I am with him 110% - it takes away from his work. Any emotional arguments or heavily opinionated views in non-fiction writing undermine the non-bias, factual, make your own assumptions style of non-fiction writing that I prefer. To read this book is to hear a man, complete with disheveled hair and clothes, beat a stack of papers while standing on a soap-box screaming we need to change or else.

Where is the calm, matter of fact style of the person who really knows what it's all about. I feel like I'm being pulled rather than led. This man is a heated outsider for sure. Well, at least he was able to pump out another book toting his particular views.... not that I don't share them - which i do very very very much.

Anyway, enough about his writing style. It is what it is.

The securitization schemes seem to be where everything went wrong. I probably have this completely wrong as I don't know anything about this.. but it seems like bad mortgages were grouped together and sold based on some value - the veracity of the value, I'm sure, was questionable.

Then, as some derivatives are based on loans - some people might have gambled that the groupings would be worth a certain amount at a future time - in essence they bet on the value of the loans or how likely people were to pay them back. The banks sold loans to people they otherwise wouldn't because they also sold the risk to the people who bought derivatives.

At least, this is what I'm getting so far. This guess is akin to Colonel Mustard did it in the library with the candle stick.

The debt that this country is accumulating without producing is a no brainer for anyone on a fixed budget. I've been thinking about this ever since we went to Iraq. I've looked at our spending - it was set to be trillions - and no one was a bit concerned.

This is the big house doling out the cash - the house that all our houses are inside of - that is racking up a huge debt. It made me extremely nervous to see our money being spent so stupidly. It was a huge transfer of wealth. To know that the oil companies were pissed and colluded to raise prices is questionable, though truly believable and justifiable.

I'd like to think we did it to ourselves. Oil is a scarce resource and there was money to be had. If the financial sector got this out of control, what was to stop them from making exorbitant sums on oil?

Also...what better way to not pay off a debt than to raise inflation? You could have a war for 1/2 what it cost if you just devalued that hell out of the currency. I'm not saying that this is what happened but why not? I wouldn't put it past little georgy.

The part of the book where it talks about pegging our currency to oil was poignant in Phillips argument that finance is what we're sure is the future of America, not manufacturing. I'm not at all convinced that finance isn't the future. Sure there was a hickup but that's nothing a little oversight can't fix.

Poor companies sell their natural resources, the next rich sell what's produced from natural resources, the next manufacture, the next high technology, and probably the last is finance. We're trying to ensure hegemony by controlling the world's money. That's not at all a bad thing.

By pegging our currency to oil we raised the value of our currency. I believe it's called the dutch disease. It was named because the dutch did something similar that destroyed its manufacturing sector. We probably did the same thing but on purpose - the disease was self inflicted.

Except, the deals coming undone because we aren't keeping the dollar strong enough. We're sliding backwards. Maybe this is what needs to happen, maybe not. I don't know.... and I'm not convinced that Phillips knows either.

"Twenty First century risk turned out to be spread and distributed in a negative rather than a positive way." Money was being created that really wasn't there. Incomes were falsely stated, loans were given out based on that information, bad loans like these were grouped together, sold, and maybe insurance was taken out on them. Risk was being spread by banks, privateers, and the insurance industry. Everyone had a piece of sh*t on their plate.

Meanwhile, houses are getting built and the economy is booming because of all this IMAGINARY money. The American dream was coming true for almost everyone. - except those duped into buying these derivatives.

The gamble was fine - the odds weren't as described... At least this is what I'm seeing.

I think the reason no one new was because of it being too late. The consequences were too severe. It would be like the Fed saying "America is broke" the day after 9/11 happened. I think the market was doomed and there was almost nothing that could be done to begin a reversal - there was only time to ride out the storm. The pessimists, COULD and probably are wrong - they're probably overstating a very minor problem - it can't be that bad. It's our economy's equivalent to global warming. The costs to change are just tooooooo high.



Wed Jan 14, 2009 7:10 pm
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"It's also 'bad' to promote an overbearing financialization of America's economy and culture, lesser versions of which in both U.S. and world history have led to extremes of income and wealth polarization, a culture of money worship, and overt philosophic embrace of speculation and wide-open markets."

Here the open market is identified for the philosophy not the precise science it is. The pseudo-scientific maxim that the markets are self-regulating natural systems, where participants engage collective intelligence to foresee downturns or poorly designed instruments motivated through self-interest and personal preservation. Depending on irrational humans to behave rationally seems to have its short comings.

http://en.wikipedia.org/wiki/Reflexivity_(social_theory)

DWill wrote:
I'm interested in that, too. Phillips does give Great Britian some "credit" for financial innovation, too, though, back in the 80s.


"The British acted first, electing in 1979 a Conservative Party government that chose free-market lioness Margaret Thatcher as prime minister. She immediately embraced a program of minimally fettered capitalism, and over more than a decade in office largely implemented it."

I feel that financial innovation will increasingly become a dirty word, essentially meaning a new way to profit that has not yet been fully understood or controlled by the regulators. The only "credit" I see Phillips giving to others comes in the form of a warning to the present day Americans about the factors and causes of fading global economic/cultural/military power dominance. Perhaps you can provide a quote or example at your own leisure, or is the quotation of "credit" meant to indicate your sarcasm?

:book:



Wed Jan 14, 2009 9:36 pm
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Yes, those are the quotation marks of sarcasm.


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Thu Jan 15, 2009 9:05 am
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Comacho"You know this man is a political writer. It shows in his work despite his confession and although I am with him 110% - it takes away from his work. Any emotional arguments or heavily opinionated views in non-fiction writing undermine the non-bias, factual, make your own assumptions style of non-fiction writing that I prefer. To read this book is to hear a man, complete with disheveled hair and clothes, beat a stack of papers while standing on a soap-box screaming we need to change or else.
My reaction is different. I didn't hear the partisan tone that you did. I still see Phillips as hard to classify politically; in this--and reputedly in his other books--he bashes liberals and conservatives both, doesn't he? Political party doesn't seem to matter to him much. Notice how he deflates the lone Democratic administration of the past 30 years as he also skewers the Republicans. Like you, I've always focused on the government's yearly deficit and total debt, but Phillips tells us that the private debt that has metastisized is the origin of our current crisis (which of course he isn't reporting on, but he must be satisfied to see his predictions borne out.) It was Clinton, according to him, who really greased the wheels of the financial industry and got into bed with these guys (yeah, where are all the women?) in a major way, he says in Chapter 2, resulting in the enormous growth of private debt. The success Clinton had in balancing the budget in his last year was largely attributable to tax revenue from all the high finance.

I'm glad Phillips has a strong point of view in the book and doesn't try to be merely a reporter. This stuff is not in itself that interesting to me and badly needs some coloring.


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Joseph Conrad, The Heart of Darkness


Thu Jan 15, 2009 9:24 am
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Partisan or not, he has an agenda - and it's a noble one!

What I've received so far:

1. Phillips seems to be in favor of the peak oil theory (a theory that's been tested and verified) and is concerned with who supplies it.

2. He's against dynastic politics.

3. He seems to be against spending in great excess of production (public/private debt).

4. He sees the Iraq war as a tragic blunder for American stability/prosperity and world peace.

5. He's concerned with the power of special interest groups, one of them being the religious right.

6. He sees the financial institution as getting too much of the GNP pie.

7. He wants us to think of the possibility of a devaluation of the dollar as it is pegged to oil.

There's more that I feel is implicit in this guy's writing.

The intro seemed to be a rant. It was a good rant. I enjoyed it a lot. I agree with this guy about most of the things he said.




:ninjafist:



Thu Jan 15, 2009 10:32 am
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Yes, while it is true that there is nothing astoundingly revelationary in Phillips writing, to this point anyway, you defiantly come away from his work much better informed than you may from many other sources. The style of this book recalls for me the writings of Bacevich in The Limits of Power - a deep respect for the macro-historical events that have led up to our present but are all too often easily dismissed or not learned.

Connections are made which seem obvious after their reading, prior to however; they were not even remotely related.

Another comment I have been making to myself is how Phillips appears to repeat himself. How many time is he going to say that certain experts (the slim/wide majority perhaps) have seen this all coming? How many times is he going to repeat that growth based on debt is an unstable way to develop an economy? I realized that all signs he brings up have pointed to several inescapable conclusions, conclusions which although not radical by any means at least deserve the concerted attention and a willingness to understand deeper exactly what causes and effects we are presently dealing with.

:book:



Thu Jan 15, 2009 7:51 pm
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And I suppose the best place to look will be the author's own thesis for his book:

"It is the thesis of this book that far-reaching economic and political events and consequences began to unfold in midsummer's melee-developments that at least in part followed the direction that many specialists had forseen - regarding U.S. housing prices, credit-bubble risk, the instability of so many financial innovations never crisis-tested, the ever-more-apparent inadequacy of global oil production, the related vulnerability of the dollar, and, behind it all, the false assurances of American 'imperial' hubris."

So many topics to choose from it is hard to imagine that anyone could not find anything to take away from this book. Of course there seem to be no stunning conclusions yet, meerly a furthered literation of the reality of risk Americans have been telling themselves and each other would eventually catch up to the pace of unconstrained development today.

"Banks, hedge funds, and lenders behaved as if home prices always rise, borrowers never miss a payment, and companies never blunder into bankrupcy."

I suppose it would be topical to point out the difference in the statement between behaving and believing. Where there is the misfortunate illusion that because things work today they can forever. An overt reliance on poorly rationalized certainty by a large enough majority, or perhaps minority, to make the disastrous causal difference.

"If markets are not always rational, the same can be said of their willingness to anticipate bad news."

:book:



Sun Jan 18, 2009 3:13 pm
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A great quick and simple explaination of derivatives from author Niall Ferguson

Quote:
Drunk on Derivatives

Do you, however, know about the second-order effects of this crisis in the markets for derivatives? Do you in fact know what a derivative is? Once excoriated by Warren Buffett as “financial weapons of mass destruction,” derivatives are what make this crisis both unique and unfathomable in its ramifications. To understand what they are, you need, literally, to go back to the future.

For a farmer planting a crop, nothing is more crucial than the future price it will fetch after it has been harvested and taken to market. A futures contract allows him to protect himself by committing a merchant to buy his crop when it comes to market at a price agreed upon when the seeds are being planted. If the market price on the day of delivery is lower than expected, the farmer is protected.

The earliest forms of protection for farmers were known as forward contracts, which were simply bilateral agreements between seller and buyer. A true futures contract, however, is a standardized instrument issued by a futures exchange and hence tradable. With the development of a standard “to arrive” futures contract, along with a set of rules to enforce settlement and, finally, an effective clearinghouse, the first true futures market was born.

Because they are derived from the value of underlying assets, all futures contracts are forms of derivatives. Closely related, though distinct from futures, are the contracts known as options. In essence, the buyer of a “call” option has the right, but not the obligation, to buy an agreed-upon quantity of a particular commodity or financial asset from the seller (“writer”) of the option at a certain time (the expiration date) for a certain price (known as the “strike price”). Clearly, the buyer of a call option expects the price of the underlying instrument to rise in the future. When the price passes the agreed-upon strike price, the option is “in the money”—and so is the smart guy who bought it. A “put” option is just the opposite: the buyer has the right but not the obligation to sell an agreed-upon quantity of something to the seller of the option at an agreed-upon price.

A third kind of derivative is the interest-rate “swap,” which is effectively a bet between two parties on the future path of interest rates. A pure interest-rate swap allows two parties already receiving interest payments literally to swap them, allowing someone receiving a variable rate of interest to exchange it for a fixed rate, in case interest rates decline. A credit-default swap (C.D.S.), meanwhile, offers protection against a company’s defaulting on its bonds.

There was a time when derivatives were standardized instruments traded on exchanges such as the Chicago Board of Trade. Now, however, the vast proportion are custom-made and sold “over the counter” (O.T.C.), often by banks, which charge attractive commissions for their services, but also by insurance companies (notably A.I.G.). According to the Bank for International Settlements, the total notional amounts outstanding of O.T.C. derivative contracts—arranged on an ad hoc basis between two parties—reached a staggering $596 trillion in December 2007, with a gross market value of just over $14.5 trillion.


:book:



Sun Jan 18, 2009 7:57 pm
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I also am not an economist, and the various financial instruments are bewildering. But the most confusing thing about the writing is the way Phillips jumps back and forth in time. He does this on a large scale, switching from 2007 to 19th-century Britain to 18th-century Holland. He also does it on a small scale, describing events in May as if they followed events in July.

Camacho called it a "rant," and I had the same impression: it's off-the-cuff, disorganized, and passionate; it's entertaining but also hard to follow in spots. I expect that future chapters will be a bit more focused, and that should help with organization.

I agree with Camacho's summary of the main points, except for a quibble on #7. My understanding is not that Phillips is concerned about the devaluation of the dollar as it is pegged to oil, rather the opposite. Phillips is concerned about the devaluation of the dollar as it comes unpegged from oil, as oil-producing nations maintain amaller reserves in U.S. currency. Or am I misreading?



Wed Jan 21, 2009 9:50 pm
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