Read a Pacific Northwest, liberal perspective on world, national, and local politics. From majestic Redmond, Washington - the Northwest Progressive Institute Official Blog.

Friday, August 10, 2007

Watching the gray men

The free market operates in a perfect, logical manner, until well, it doesn't and someone has to bail the crooks out:
"The Federal reserve is providing liquidity to facilitate the orderly functioning of financial markets," the Fed said in a statement.

It added: "The Federal reserve will provide reserves as necessary through open market operations to promote trading in the federal funds market at rates close to the Federal Open Market Committee's target rate of 5-1/4 percent." - The U.S. Federal Reserve on Friday said that it added $19 billion of temporary reserves to the banking system through 3-day repurchase agreements, compared with adding $7.5 billion through 3-day repurchase agreements last Friday.
Which is better than a complete financial meltdown anyhow. Always nice to see the free market absolutists stamping their feet for someone to help them.

It's darkly amusing to watch a financial cable station on days like today. Earlier some bobble head was talking about "locked up assets," which in plain English meant that nobody wanted to buy the cruddy securities based on mortgages containing unknown, but likely paltry, amounts of equity. Surprise! Wall Street built a house of cards, and now we all pay. Again.

Here's how Dr. Black at the Eschaton Finishing School for Economic Policy Studies put it:
Nothing wrong with putting money into the system to lower the federal funds rate, but this is bailing out investors in a certain kind of specific and troubled asset.


See, governments putting money into helping ordinary people with education and health care is SOCIALIST COMMUNISTIC-ISLAMO FASCISM. But government (or in this case the quasi-government entity known as the Federal Reserve, our version of a central bank) bailing out hedge funds is "providing liquidity."

The failure of ordinary Americans to preserve personal liquidity is moral and deserved. The failure of an entire industry to preserve liquidity is just the cost of doing business. The fact that industry historically tends to support the GOP is simply a coincidence.

As long as we're all straight on where we rank in the scheme of things. What say we don't pay our mortgages next month, and see what happens?

Yeah, I know, we'd all be out in the street faster than you can say "Where have you gone, Uncle Alan?" A Wall Street turns its lonely eyes to you...

MORE-- SF Gate has an interesting article headlined "Everything you never wanted to know about Mortgage Backed Securities." A tidbit:
For instance, to resell pools of subprime loans, investment companies separate them into distinct investment products called Collateralized Debt Obligation Tranches, which each take on different levels of risk.

The "equity" tranch takes on the highest level of risk and pays the highest interest. If any of the homes in a pool of loans is foreclosed upon, this tranch absorbs the losses first.

The "mezzanine" tranch absorbs all the losses after the equity tranch has gone under and pays a slightly lower interest rate.

Finally, the third tranch absorbs only losses from default after the equity and mezzanine tranches -- thus offering a cushion against the risk of default. This least-risky tranch pays a lower interest rate but it's designed to earn a triple-A investment grade rating from credit-rating agencies such as Standard and Poor's and Moody's, making it far easier to sell.

But even with this cushion against risk, this third tranch didn't turn out to be such a safe investment.
Good lord. I don't know if it's strictly accurate to call it a Ponzi scheme, but it sure walks like a duck.

It sounds like a fun job, making stuff up and calling it investments. Personally I've always preferred the alternate French spelling traunche. So much more class.

<< Home