3/28/2009

The need to control the beast

We have seen what had happened to the great American genies and how clever they were in bringing down the whole of America, not just the industries or the financial system. America will now be in debt for centuries to come. It is bankrupted many times over. The cause is simply too many clever people who thought they could make a lot of quick money by being too clever. They were not concern about real productivity, providing more goods and services, they were only interested in churning out numbers to represent huge paper profits in the short term, for their own vested interests, for the huge bonuses that they stood to win in the huge bets they put into the financial market. There was no responsibility, no conscience, no morals, no nothing, except how much was in it for them. And the tool that helped them to acquire their ill gotten gains at the expense of everyone, is derivatives. The first giant to fall because of gambling in derivatives is LTCM, or Long Term Capital Management, a hedge fund. Without the US govt intervention, the domino effect would have toppled many more financial institutions in 1998. That was just a warning but went unheeded. In a 2004 Bank Derivatives Report it was stated that the total values of derivatives held by US Banks was US$84.2 trillion. The bank risk exposure was US$804 billion. Today we know the answer of exposing to such high risk. The house of cards has collapsed. But be frighten, be very frighten, not because the America house of cards has collapsed. Be frighten because many are still convinced that derivatives and hedge funds are the way to go into the future. And they are pumping more money into these two beasts. How on earth would clever people be convinced to do so, when all the evidence of the disasters that can happen and already happened, be blinded to go along into the deeper and more dangerous end? They must be convinced by cleverer people that it is safe and the way to go. In relative terms, the clever people are smarter people and the clever people are just plain stupid. Way back in 2003, Warren Buffett had warned that derivatives are 'time bombs, both for the parties that deal in them and the economic system....In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that while now latent, are potentially lethal.' These words were more than prophetic. It has come to reality. At that time Buffett admitted that he could not understand how much risk the major banks were running themselves in. 'The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and govts have so far found no effective way to control, or even monitor, the risk posed by these contracts.' Do we not know the answer today? Do we still want to dabble in derivatives and allow them, and hedge funds to mess around with the financial system and market? We need independent bodies with different interests and missions to control and regulate the financial systems, the banking industry and the stock market. These institutions have their own short term interests to guard and will be blinded by them to take on higher risks than acceptable. Their exploits to grow and make more profits must be reined in by independent bodies whose interests are long term and the viability and sustainability of the system and institutions, and the foundation of a stable nation state. The financial system and the stock market must not be turned into high risk casinos. There is a need to control the beasts before they destroy everyone, every institution and the nation as a whole. The people within the industry are the most dangerous people to be tasked to regulate themselves. There is simply a conflict of interest, and self interest, short term interest will override the longer term interest and interest of other parties.

8 comments:

Anonymous said...

There is no profit without chaos and madness.

Wally Buffet Jr.

Anonymous said...

"White people with blue eyes caused global financial crisis": Brazil President

Anonymous said...

Yeah right. Now it takes a coloured American President to sort out the mess.

Wally Buffet Jr.

Anonymous said...

Maybe, just maybe, the coloured American President isn't that incidental after all........

Wally Buffet Jr.

Anonymous said...

The chaos and madness enabled me to make more than a billion us dollars.



Georgie Sorrows

redbean said...

Wow i am in the company of greatness! a big welcome to all of you, wally buffett jr, brazil president and georgie sorrows.

the whole crisis is the result of excessive greed. it creates opportunities no doubt. bit one must be well place and with the resources to take advantage of the situation.

our national fund thought we were in the right place and right time, went it and got their pockets emptied. non the wiser.

Anonymous said...

Right now AIG is still arguing that keeping those who created this mess is the right way to go, hence the payment of those bonuses.

Conflict of interest, self interest etc, I think we can tell that to the regulators until the cows come home, and nothing will change.

Lost Citizen

redbean said...

they are brilliant isn't it. when times are good they just pay themselves crazy. when times are bad, they pay themselves crazier. they reckon they will be needed more in difficult times.