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Ch. 1: Introduction: The Panic of August

#60: Jan. - Feb. 2009 (Non-Fiction)
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Grim

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What about the idea that acting individually in fact is what the system needs to remain operable? Its not about doomsaying its about seeing through the "hype" to the truth. This goes to the above quote in my eariler post about insiders seeing the bubble for what it was.

And no it won't last "forever," it will just seem like it's trying to. I mean the easiest way to get the "institution" upset is to suggest that there should be a radical paradigm shift to the market. There are few quicker way to be labelled a communist than to attack capitalism.

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giselle

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Perhaps individual action by small investors is a factor but only once a general trend is clear, so many of these individuals take the same or similar action, for example to invest more heavily in real estate or to disinvest. At this point, the wave of individual investment action will have a major impact.

There is a comment above about anger at the lack of warning of a breakdown in the economy and at the dangers of a highly exposed, highly leveraged economy that Phillips describes in this chapter. We may be angry about this but I don't think its not surprising. In this highly leveraged situation, where making money with someone else's money is the norm, the big risk takers have to keep things quiet and calm, they have to maintain confidence in the market and the economy generally, because loss of confidence en masse, like what has happened recently, will bring their risky investments down like a house of cards.

At this point small, individual investors get hurt as the shock wave spreads and more and more individuals react by looking for safe places for their money and Government tries to reassure everyone with $800 billion dollar stimulus programs. But the cow really is out of the barn at this point.
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Grim

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I see your point, however there is a suggestion of personal complacency when Phillips says that, "the average American, with other things to worry about, had little inkling of the financial sector's gargantuan size and clout or its resemblance to a laboratory of digital wagering. Straightforward, candid discussion was about as easy to find in popular publications as a five-leaf clover in a vacant lot full of weeds." However it is clearly said that there was strong impediment to the ability of the people to inform themselves. Had they know would they have acted to stop it? "Analogies to the late 1920s would have been too disconcerting." Would it have been possible, even if given adequate information, for the gropus of average citizens unassociated with the large profits to effect meaningful change? "Many buyers, for their part, were quite ready to be misled or to fib themselves. "Housing inflation," pundits pointed out, was also "the American national religion."

So according to Phillips, even if the news had been given it would not effect the cyberspatial dimensions of the American centered global financial system. Scary in a way, like being of a runaway train with no way to stop it your self and an engineer who won't acknowledge the problem of too little track. A simple metaphor but an applicible one non-the-less.

"A mixture of naivete and patriotism made it hard for many Americans to believe that so many foreginers would work against the United States."

This book is reading very well, Phillips has great style.

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DWill

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I just got the book, read the preface and introduction. It's pretty clear I'll need some tutorial on this stuff, since Phillips really can't write to my level without making this a "for Dummies" book. I can get by (or fake it) in religion or philosophy, but how money works is a mystery to me. You other guys with more practical experience can help me out, I hope. (Do I recall that realiz is a bookkeeper/accountant type?--great.) I thought the intro was a bit rough going because he summarizes so much data, but I hope the other chapters spread this out so I can grasp more easily.

About the question of whether the public were willing accomplices, naive dupes, or just uninterested: my indignation is that all this arcanery was ever invented and allowed to operate in the first place. You really can't expect the average person to understand what's going on with this stuff. It's like expecting us to understand details on the frontiers of science. Not understanding finance shenanigans has more consequence for us, though, I believe.

I zeroed in on the part where Phillips tells us why he calls the book Bad Money: because the abuses he tells us about were also symptoms to some degree of the failures of former world empires, and, beyond that, that it's just bad for our society--concentrates money in the "top 1 or 2 percent of the population possessing capital " (p. 21), for example.
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giselle

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I'm sure many of us will struggle with the technical aspects of finance, investments and markets as we read this book. The first chapter was an overview and I think he laid on a great deal of wide ranging ideas, information and data and I would hope that this will be more sparingly done in later chapters.

Phillips does mention "derivatives" and I did a little scouting about and found this blog. This blogger states that derivatives are not investments (ie - the transaction is not tied to a specific investment vehicle, the investor does not own anything and the investment does not produce anything) .. these investments are gambles or bets just like casino gambling or horse racing. He also has some interesting $$ figures on how big the derivatives market is. His take is that the derivatives market is a giant Monte Carlo.

http://www.survivalblog.com/derivatives.html
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Grim

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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.

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DWill

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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.
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Grim

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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.

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giselle

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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.
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Thomas Hood
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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
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