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Posts Tagged ‘debt’

Christ Almighty if the Internet is such a wonderful tool of education HOW IS IT that the utter madness that is going on right now in the world of finance is allowed to continue? I have rarely felt as helpless and sick to the stomach as I do today… the facts are out there and nobody is facing up to the music and the fact that it WILL STOP again. Nothing has been fixed. NOTHING! Multiple trillion dollar compress bandages have been applied to the debt-clogged crater that once held the heart of the world economy and people are dancing around the maypole thanking the Lord for his miraculous bounty while the patient continues to hemorrhage internally. And all poor sods like me can do is tweet it and facebook it at whoever will listen like some apeshit crazy prophet of doom in neo-biblical times (because there will be another book of warning for future generations, most likely long after the Face has been ripped off this era of profligate insanity).

Rant off. Here’s what triggered it:

Why Is The US Taxpayer Subsidizing Facebook – And The Next Bubble?

Goldman Sachs … has effectively become a new form of Government Sponsored Enterprise. Goldman is not a venture capital fund or primarily an equity-financed investment fund. It is a highly leveraged bank, meaning that it borrows through the capital markets most of the money that it puts to work.

As Anat Admati (of Stanford University) and her colleagues tirelessly point out, the central vulnerability in our modern financial system is excessive reliance on borrowed money, particularly by the biggest players.

Goldman Sachs is a perfect example. Most of this firm’s operations could be funded with equity – after all, it is not in the retail deposit business. But issuing debt is attractive to shareholders because of the subsidies associated with debt funding for banks, and compelling to bank executives whose compensation is based on return on equity – as measured, this increases with leverage. If they have more debt relative to equity, that increases the potential upside for investors. It also increases the probability that the firm could fail – unless you believe, as the market does, that Goldman is too big to fail.

Social networking firms should be able to attract risk capital and compete intensely. They do not need subsidies in the form of cheaper funding (seen today as a more favorable valuation for Facebook) or in any other form.

Social networking is a bubble in the sense that email was a bubble. The technology will without doubt change forever how we communicate with each other, and this may have profound effects on the nature of our society. But investors will get carried away, valuations will become too high, and some people will lose a lot of money.

If those losses are entirely equity-financed, there may be negative effects but they will likely be small – in the revised data after the 2001 dotcom crash, there isn’t even a recession (i.e., there were not two consecutive negative quarters for GDP).

But if the losses follow the broader Goldman Sachs structure and are largely debt-financed, then the US taxpayer will have helped create another major financial crisis.

And if you think that sophisticated investors at the heart of our financial system can’t get carried away and lose money on Internet-related investments, read up on Webvan:

“During the dot-com bubble, Goldman invested about $100 million in Webvan, the online grocer that never got off the ground and eventually collapsed in bankruptcy.”

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From http://www.truthout.org

Time for a New Theory of Money

What the current banks do:

The banks are not really creating credit and advancing it to us, counting on our future productivity to pay it off, the way they once did under the deceptive but functional façade of fractional reserve lending. Instead, they are vacuuming up our money and lending it back to us at higher rates. In the shadow banking system, they are sucking up our real estate and lending it back to our pension funds and mutual funds at compound interest. The result is a mathematically impossible pyramid scheme, which is inherently prone to systemic failure.

What public banks do:

By turning banking into a public utility, profits generated by the community can be returned to the community.

The functional equivalent of a community currency system can be achieved using the national currency, by forming a publicly owned bank. By turning banking into a public utility operated for the benefit of the community, the virtues of the expandable credit system of the medieval bankers can be retained, while avoiding the parasitic exploitation to which private banking schemes are prone. Profits generated by the community can be returned to the community.

A public bank that generates credit in the national currency could be established by a community or group of any size, but as long as we have capital and reserve requirements and other stringent banking laws, a state is the most feasible option. It can easily meet those requirements without jeopardizing the solvency of its collective owners.

State-owned banks could be a way for states to bypass Wall Street, balance their budgets, and get local economies moving.

For capital, a state bank could use some of the money stashed in a variety of public funds. This money need not be spent. It can just be shifted from the Wall Street investments where it is parked now into the state’s own bank. There is precedent establishing that a state-owned bank can be both a very sound and a very lucrative investment. The Bank of North Dakota, currently the nation’s only state-owned bank, is rated AA and recently returned a 26 percent profit to the state. A decentralized movement has been growing in the United States to explore and implement this option. [For more information, see public-banking.com.]

We have emerged from the financial crisis with new clarity: Money today is simply credit. When the credit is advanced by a bank, when the bank is owned by the community, and when the profits return to the community, the result can be a functional, efficient, and sustainable system of finance.

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Reposted from Zero Hedge

Courtesy of Economic Policy Journal we now know that the majority of American states are currently insolvent, and that the US Treasury has been conducting a shadow bailout of at least 32 US states. Over 60% of Americans receiving state unemployment benefits are getting these directly from the US government, as 32 states have now borrowed $37.8 billion from Uncle Sam to fund unemployment insurance. The states in most dire condition, are, not unexpectedly, the unholy trifecta of California ($6.9 billion borrowed), Michigan ($3.9 billion), and New York ($3.2 billion). With this form of shadow bailout occurring, one can only wonder how many other shadow programs are currently in operation to fund states under the table with federal money.The full list of America’s 32 insolvent states is below, sorted in order of bankruptedness.

California $6,900
Michigan 3,900
New York 3,200
Penn. 3,000
Ohio 2,300
Illinois 2,200
N.C. 2,100
Indiana 1,700
New Jersey 1,700
Florida 1,600
Wisconsin 1,400
Texas 1,000
S.C. 886
Kentucky 795
Missouri 722
Connecticut 498
Minnesota 477
Georgia 416
Nevada 397
Mass. 387
Virginia 346
Arkansas 330
Alabama 283
Colorado 253
R.I. 225
Idaho 202
Maryland 133
Kansas 88
Vermont 33
S.D. 24
Tennessee 21
Virgin Islands 13
Delaware 1

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Time to stop drooling about iCrap and worrying about Internet business models and pick up some books on Carpentry and Sheep Farming.

At least do yourself a favour and just consider for a moment – a moment – how you would get by if you could not withdraw money for a month or so and the Internet, for all practical purposes, was down for good.

Our great grandparents would be shocked to see how incapable we are to fend for ourselves in a time of unimaginable crisis.

Note to self: Don’t forget to buy a hand wound radio!

“The US economy is unsustainable” says Roubini

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Read The Discount Rate Mismatch

This is very enlightening post by Statsguy, a frequent guest contributor to the Baseline Scenario, that explains why we are at a critical point in economic history.  The entire system is so far in debt that there is no painless way to get out of it.  What would you be willing to sacrifice so that the historic theft of wealth on Wall Street gets justly punished?  Your retirement?  Your pensions fund?  Your home?  And don’t think that Canada would be immune.  Despite having avoided the worst of the 2007 phase of the Financial Crisis, it is far from over and if the U.S. collapses in earnest, there will be nowhere to hide.  This is one of the greatest challenges humanity will face and it is intimately connected to controlling climate change and wether or not the 21st Century descends into the blood bath that was the 20th.   If we chose to continue with more or less the same system… then we will likely pay a nasty price.

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