xkcd: Money Chart
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One of the greatest charts I have ever seen. Unfortunately, we have too many enumerate people to really examine the chart but lets just look at one part – in the trillions section.
The size of the derivative market in 2009 was $439 trillion. Just credit default swaps were over $31 trillion. CDS are those wonderful financial devices used to prop up the mortgage market. They are an unregulated entity that we know is now backed by unsafe if not fraudulent mortgages.
The CDS were supposed to function as insurance for mortgage defaults. But they were so abused that they now represent HALF of the world’s GDP. Yep, if they were to get called due to mortgage collapse, it would use up half of all of the world’s output to pay them off!
No wonder most politicians who understand this look gray.
In fact, the same chart shows that the total amount of liquid assets in the world total $77 trillion. So half of everything that could be sold in the world would have to be sold to pay off these CDS if they ever came due.
The CDS designed originally to help home mortgages were gamed by greedy banks into representing half of the world’s wealth!
This is the true problem of the housing collapse. Not whether mortgages were sold to people they should not have been, not how much the government was involved.
Greedy banks came up with the idea of CDS so that they would suffer no moral hazard if a mortgage payment defaulted. Because there was no regulation, they created a huge bubble based on these CDS which now totals half of what everyone on the planet possesses.
Think of that. A totally made up financial instrument that represents no real world thing of value has been manipulated by financiers to represent half of what everyone possesses.
To unwind that mess realistically would cause all the big banks to collapse immediately. They would have to suffer huge losses since no one is simply going to transfer over half their assets to the banks. But the banks do not want to collapse – and we probably do not either – so we are seeing this slow march out of the swamp – years and years of austerity.
Instead of taking half the GDP over 1 year, they will take say 5% over 10 years. If they can keep it from fully unwinding over that time and simple remove 5% of the GDP a year, they might do it.
But just know that a major reason for all of the austerity talk is to pay back the banks who put us in this place to begin with. And it looks like they will then be able to continue their reckless ways as no regulation of these sorts of financial devices seems forthcoming.
So they will just do it again, effectively stealing our assets all over again to pay for their mistakes.
Capitalism only really works when people are put in moral hazard for their mistakes – a stock market does not work if no one loses money. There has to be risk to get a reward.
Yet these banks are not practicing Capitalism as they get rewarded no matter the risk. They win no matter what bet they make. And their CEOs get bonuses in either case.
Because they gamed the system so they could NEVER lose. That is not Capitalism. That is what – a plutocratic-kleptocracy?
