se_ohio_young_conservative wrote:
How can panic last this long ?
Why are people freaking out when there is no reason to freak out ?
^^^^^^^^^^^^^^
Fractional Reserve banking is a pyramid scheme. Legally, the Federal Reserve can loan out $50 in paper currency on one $20 gold piece. The Fed has (had before the bailout) a 40% reserve requirement.
The bank that borrows that $50 can loan out $450, since banks have a 10% reserve requirement.
If the Fed loans the $50 to a Foreign Central Bank (foreign Federal Reserve), that Foreign Central bank can loan out $125 under their 40% reserve requirement. The foreign banks that borrow that $125, under 10% reserve requirements, can loan out $1125, all backed on one $20 gold piece.
Because of this pyramid scheme, if a single bank fails and defaults on $100, the downstream effect as the dominoes tumble is much greater than $100.
Mortgages from the housing bubble were bundled into packages, called “tranches”, by Freddie and Fannie, high risk of default, medium risk and low risk.
The banks that bought those packages also bought “insurance policies” in case they should fail. The “insurance packages” were in essence derivative investments, a piece of paper that went up in value if mortgages failed.
The company that sold the derivatives for $100 could turn around and loan out X times $100 under yet another pyramid scheme.
There are estimates out there that the derivative market pyramid scheme represents a total exposure of $500 trillion dollars. Some discount this figure since the entire world’s annual production is around $50 trillion.
Some say the derivative exposure is much greater than $500 trillion.
Nobody really knows.
In any event, nobody knows who’s holding all these shaky derivatives, so nobody wants to loan money to anybody else. Mainstream companies like Ford or Exxon or your local grain and feed company, used to being able to borrow tens of thousands up through hundreds of millions overnight, or for a week (commercial paper), now cannot.
They aren’t necessarily able to alter their normal practice fast enough to function properly while the short term credit market is frozen. They may not be able to pay back yesterday’s short term loans because they can’t borrow enough today. They may not be able to borrow enough tonight to buy enough steel to run the assembly line tomorrow. They may not be able to make payroll next payday. Regular companies, not banks.
Effect?
The entire global pyramid scheme, piled atop the Fractional reserve pyramid scheme, is tottering, wobbling, and nobody klnows when a key domino will fall, taking out many, many other dominoes with it.
Everybody wants out. Everybody is selling as fast as they can.
Two different brokers, one at Merril Lynch and one at Chase, both respected firms backed by arguably two of the strongest banks on earth, have predicted to me that the bottom of this stock sell-off lives around 8500 in the Dow Jones.
Keep in mind though, that these are bankers talking. Bankers usually won’t admit that Fractional Reserve banking is a pyramid scheme just like Amway or a chain letter, and they’re even uncomfortable describing derivatives as a pyramid scheme, even though derivatives make most bankers nervous.
Normally bankers don’t believe/won’t admit that a total meltdown is possible.
The markets will find bottom when people stop being afraid of losing loaned money, globally, whether that bottom is at 8500 or 0.
There’s plenty of reason to freak out.
I’d rather see the pyramid come down now, while I’m still young and have a little bit of say over mine and my kids’ future, instead of patching it up for another few years and an even bigger crash.
There is some concern that Paulson (or his people) will buy bad foreign paper, transferred to subsidiaries located in the US. I have been trying to understand if the US government, in any sense, “guaranteed” the bad paper. If so, Paulson will feel obligated to use taxpayers’ money to bail out investors who bought the bad paper. What “guarantee,” if any, did our government offer to these “toxic” investments?