The recession is over or is it. (Part 2)
What a response! And all on Friday and Saturday. Unexpected, to be honest. From “thanks” and “interesting” to “Who are you to write… “
OK, explaining, I am NOT an economist, I do strategic business analysis for living. No complaints so far, huh. And to some of my “very active” respondents, I decide which comments to allow or disallow or even turn them off altogether.
Now, half of the responses were about “derivatives”. And it looks like not all my readers understand important things about banks.
Banks are not simply giving credits, paying interest and safekeeping your money. This is part of banking that you as a client can see. The rest is not on the spotlight. Including Investment Banking and the derivatives market.
Again, I will oversimplify the situation but at least even my less “finically advanced” readers would understand.
Imagine that bank gives money to farmers to buy a new cow. How bank thinks, first of all cow should be somehow made very expensive (remember overinflated housing market – this is our “cow”), second cow should be somehow presented as an absolute must and essential item. Now prices go up and bank says: “This cow is now “yours”, it gives 120 litres of milk a day (complete lie, same was in real estate), so you keep 20 and give us 100 for 25 years and then even more expensive cow is yours.
The agreement is reached, then bank does a calculation 100 ltrs milk = 5 kgs butter and goes to other bank at says: “Look, we have at least 5 kgs of butter a month (complete lie, only thing they have is a cow!), we will sell it to you and you can offer it to a baker”. Second bank agrees and does the same thing with a baker:” Bla-bla-bla, 5kgs is enough for 120 cakes, you give us 100 keep 20, etc…”. Baker agrees (remember, there is no milk, no butter – just a hypothetical cow) and first derivative is created. This chain continues as third bank is approached about cakes, creating new derivative, etc., etc.
As you can see a poor cow was sold and resold under different names (milk, butter, cakes, etc.) many-many times and all banks are now happy.
Now, the initial cow gets foot and mouth disease (property market crashes) so what happens – the whole chain collapses. No milk (it wasn’t there anyway, it was just an assumption!), no butter, no cakes but… it is all been paid for from … our money.
Now, we call all this a “toxic debt” and ask the government (you!) to pay for it. Tell me, where you can see a “vital organ of the economy” that should be immediately “rescued”?
… to be continued.
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