Sunday, October 5, 2008

The Changing Language of Finance - Getting Rid of Democratic Capitalism?

A funny article that has me thinking from the Financial Times
I was just thinking the same thing last week and so I laughed a little when I read Francesco Guerrera's Op-Ed here. He points out the Biblical and WeatherChannel cliche's, the one that keeps interrupting my reading these days is the word "outsized."

I've seen it referred to the massive amount of debt investment banks were carrying, but I've also seen it used recently when discussing the Presidential candidates. I don't like the word so far.

But that's neither here nor there.

Reading Guerrera's article got me thinking about something, here's the quote:

The panicky state of capital markets and investors' visceral desire to cut their losses means companies are being thrust into a crisis faster than you can say "collaterised debt obligation".

Many in the market media are saying that the reason we're going into this depression (since we've been in a tacit recession for about a year now) is because investors have been getting panicky. Note that it's not because these businesses were being poorly managed or that their wheelings and dealings were untenable globally. There is this push to shift the conversation away from the investment banks and Wall Street, discussing where these robberbarons went wrong, and instead put it squarely on the shoulders of the masses of subprime loan holders.

But here's the problem with doing so:

The people that "invested in real estate" usually through subprime lending were being encouraged to do so by the investment banks on Wall St. In fact, Wall Street could not make their money unless the masses were using the investment vehicles that the people on Wall Street had created. Think about the process a bit:

Those on top of the financial world, the power elite, make significant deregulations to how loans can be originated and to whom those loans can be sold.

The investment banks start telling those beneath them in the food chain about these great, new investment vehicles. They sweeten the sales pitch by saying, "look, it's a win-win: people who couldn't afford housing now can, and those that were just able to own one house can now own several and capitalize!"

The loan officers at banks are told to keep pumping out loans because they will not only get commissions but since these loans are being guaranteed by Really Big Names (those that pushed for the deregulation) the loans are more safe than previously we would have thought. This line of thinking was promulgated because the general message was that America, always the leader in innovation, no longer needed to focus on innovating materials, really, America can innovate financial technologies.

These technologies couldn't fail, not only because Really Big Names were insuring them, but also because entities like hedgefunds were using people's pensions to invest in these loans. So, even if these subprime loans as a class of loans went somewhat sour, no worries because the risk of this happening was minimized by both the Really Big Names insuring them but also because hedgefunds were investing in them. The whole thing had to work, you know?

So why is there this sudden anti-populist sentiment that's being leaked onto the people of the United States?

Because the elite always harbor a very real disdain for the masses. Think of There Will Be Blood and you get the drift.

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