So... Let's give money to banks to create more debtFollow

AIG should never have offered the damn credit default swaps in the first place.

Of course they should have. They just shouldn't have ignored downside risk in their models, intentionally I might add, counting on government rescue of any large failure. When I say "shouldn't" of course, I mean it would be better for the country. What they did was exactly what they were encouraged to do by free market economists: Break the market and get paid.

So its unfair to give free money to citizens but it is fair to give free money to banking institutions???

No, asshole, it's not *fair*. It's *required*. Understand yet???

The other option is killing each other for food. Clear now?

Correct. In fact, the process of credit extension and debt is arguably necessary for modern economic systems to work. Without them, the world would be a much much different place, likely consisting of most of us working in the agricultural business.



Mostly correct. The process of slicing up risk assessments into investment bundles is somewhat neutral. The issue really was that a chunk of the front end of those assets were grossly overvalued (or under-risked depending on how you look at it). There is an entire string of actions that caused that to happen. Some will argue it was a lack of regulation in the lending market, others (like myself) will argue it was too much regulation, but at the end of the day, a whole class of assets ended out being worth less than the people who invested in them thought. More significantly (since that happens all the time), the risks on those assets were inaccurately assessed leading holders of the securities to over leverage them (and the lenders to extend that credit on those assets in the first place).




As Smash correctly pointed out. That's not AIG's business. It really isn't. I think this is what too many people just aren't getting. The financial businesses hit most hard by this are *not* the ones who handed out the loans in the first place. Large corporations have two broad categories of capital. Those tied up in their actual business, and those "on hand". But corporations do not just stick their on hand money in a bank vault or under a mattress, and then spend off of it as they need to for operating expenses. That would work, but would be inefficient.

What large corporations do is invest that money into the market. What they invest in is usually somewhat irrelevant. The idea is to put the assets out there as investments. Then, they borrow money on those assets and use that money to fund their day to day operations. Just as you can take out a loan that is some multiplier of the assets you put up as collateral, so can they use those initial assets to take out operating loans. They leverage those assets to some multiple and then use that to operate. And some of that can in turn be invested as well. The point is that they are earning returns on the initial assets *and* a good percentage of the leveraged assets, and as long as the total earnings is greater than the interest on the loans (which it almost always will be, usually by a significant amount), they are better off doing this than just stuffing it in a box.

You have to understand that the impact of those toxic assets could hit *any* company out there. It happened to hit large financial institutions the hardest because they are usually the ones with the largest amount of money floating around in this state. Their money is what runs their business, and they've got an awful lot of it. Most companies have the bulk of their assets tied up in the physical capital they are using to run their business (buildings, equipment, assembly lines, parts, etc). For financial institutions money *is* what they do. Thus, they are more vulnerable to a sudden large devaluation of a given asset type.


Again. I think it's incredibly important to realize that AIG wasn't involved in anyway in the mortgage lending process itself. They just invested a portion of their operating assets into them after the fact. They really are the victims of this, not the cause.

Ignoring the moral and social implications, just from a pure cold hearted financial analysis, this is a really really really stupid thing to do as is blatantly and obviously demonstrated by what is happening right now.

No, it's not. Because 99.99999999999999% of the time, the company that does this with it's operating assets will outperform the company that doesn't. So much so, that they will buy out the other guy simply because he's going to be able to use those additional monetary gains to offset his business expenses and undercut any competition who doesn't use the same financial mechanisms.


Your argument is actually backwards. From a cold hearted financial analysis this is absolutely necessary. All companies must do this to some degree if they want to compete within their given market space. It's only from an ignorant moral indignation perspective that you might think it's somehow wrong to risk money in the market which you need to pay your bills at the end of the month.


The reality is that the guys who manage this are able to do so with pretty much zero risk (most of the time) exactly because they are able to assess the risks of any given investment bundle and ensure that with a large enough number of bundles, no single economic dip or drop will affect them sufficiently to prevent them from still being able to operate (and often still with positive gain as a result). The reality is that assets do not normally plummet from some fixed value to "zero" overnight. That core problem is that a combination of actions made it possible (and some would say inevitable) that this would happen with a particular asset type that is normally incredibly stable and "safe" (property).


If you're looking for blame, do not cast it on the guys who bought up those assets, but the mechanisms which caused those assets to be over valued and under risked. That's where the true culprit lies. Because the systems used to manage and leverage assets are used pretty universally and they pretty universally work and the alternatives to using them are massively detrimental. It's not just wrong, but it's patently stupid to blame the mechanic that was used. You need to look at why those assets were assessed so horribly inaccurately.

others (like myself) will argue it was too much regulation

That would be quite the trick, considering it was a completely unregulated market. Completely. No SEC filings, no transparency, no consensus market makers, etc. It was as regulated as a craps game in an alley. That's the whole point. Unregulated markets always, always, always, always, always, always, fail.

Incentives to front end lenders to hand out as many sub-prime loans as possible isn't regulation?

Of the derivatives market? No, it isn't.


Requirements for merged financial groups to take on bundled mortgage securities isn't regulation?

I have no idea what this means. Link these requirements, please.


Laws preventing risk assessors from knowing what percentage of those mortgage bundles consisted of sub-prime loans wasn't regulation?

Cite this law that prevents quantitative analysis by somehow magically denying information to analysts, please.

I'm going to boldly go out on a limb here and assert that it's quite likely you have no fucking clue what you're posting about. Not that this would ever prevent you from parroting the same failed economic philosophy you haven't understood for the past decade, of course.

I don't think I could grow enough food in my back yard to live off of...

You just stated that buying stocks on the stock market assumes zero risk. To put the fate of your company and the economy on an unknown and unstable quantity of fake money is abjectly stupid in all cases. (Most of) The free-market system is immoral, but that's not really a debate I'd like to get into right now.



I wonder what our ancestors would think of us, unable to even imagine a reality where we grew our own food and were self-reliant.

Any small space can an abundance of good organic food, enough to feed a family for a year. You may have to build a multi-story greenhouse, but these are very cheap and easy to maintain. I am going to build a greenhouse on the side of my house to take advantage of solar heating and to make sure I can grow year-round without the weather devastating my plants.

We are one little disaster away from having major food, energy, and refugee crisis, I suggest you all prepare. I found this article an interesting read, it analyzes the effect a major solar storm would have on the infrastructure of the US.

http://www.newscientist.com/article/mg20127001.300-space-storm-alert-90-seconds-from-catastrophe.html?full=true

Mad Max wrote:

I wonder what our ancestors would think of us, unable to even imagine a reality where we grew our own food and were self-reliant.

Any small space can an abundance of good organic food, enough to feed a family for a year. You may have to build a multi-story greenhouse, but these are very cheap and easy to maintain. I am going to build a greenhouse on the side of my house to take advantage of solar heating and to make sure I can grow year-round without the weather devastating my plants.

We are one little disaster away from having major food, energy, and refugee crisis, I suggest you all prepare. I found this article an interesting read, it analyzes the effect a major solar storm would have on the infrastructure of the US.

Perhaps you didn't understand what I meant last time about an across the board decrease in standard of living, lifespan, and any really any possible benchmark for measuring the state of human existence?

If you don't have a functional capital system you can't buy the things you need to build your aforementioned mufti-story greenhouse. You really have no comprehension of the consequences of a global economic collapse.

No, they most definitely did not pursue a social agenda over an economic one. Do you understand how Corporations work?



Because the lack of regulation in the derivatives market was the issue, as Smash already discussed. The part you continuously are pointing to and crying "Omg liberal conspiracy" is in fact completely unrelated to the problem. We've been over this before, and I assume we'll be back here in 2-3 posts.

What about every profession that isn't the equivalent of scaled up hunter-gatherer? Are they not worthwhile for society to have?