10-May-11 News -- US housing, Greece crises worsen

[John]

10-May-11 News -- US housing price fall accelerates, while Greece's euro debt crisis widens


The return of toxic synthetic securities

** 10-May-11 News -- US housing price fall accelerates, while Greece's euro debt crisis widens
** http://www.generationaldynamics.com/cgi ... b#e110510b


** 10-May-11 World View -- Syria's uprising violence spreads to Damascus
** http://www.generationaldynamics.com/cgi ... 10#e110510




Contents:
"US housing price fall accelerates, while Greece's euro debt crisis widens"
"Euro crisis worsens, as S&P again cuts Greece's credit rating"
"The return of toxic synthetic securities"

### World View - Syria's uprising violence spreads to Damascus
"Syria's uprising violence spreads to Damascus"
"As Arab uprisings continue, Turkey loses credibility and Iran becomes alarmed"
"Nato charged with war crimes after letting 61 migrants die of hunger and thirst"
"Sectarian violence in Cairo worries Egypt's Supreme Council"
"Vengeful Pakistan official fails to unmask CIA station chief"

[OLD1953]

These types of risky vehicles are always available, but few use them in normal times, when they'd actually be safer. Now, when the waters are turbulent, we see people abandoning the safety of actual bonds and jumping into the higher risk synthetics because the Fed is determined to make things "right". This can't happen unless all risky vehicles are made illegal as they are issued, and that can't happen because Congress won't let it happen. So we must have a disaster that removes the desire for risk from the market, by bankrupting all the persons/funds that are willing to assume such risks.

[Higgenbotham]

I just did a google search for "cliff risk" CDO and that turned up 30 pages or about 300 hits. A search for "embedded risk" CDO turned up 41 pages or about 410 hits. Scanning those hits, it appears most of them are dated post Bear Stearns. Even so, to this day there is very little discussion and apparently no understanding of the amplification of risk inherent in derivative instruments. Back in 2007, it was more understandable as to why those of us who were discussing such things were ignored, as such had never been experienced in practice, at least as related to debt instruments. Despite one iteration, the concept still escapes people. As I listen to the recent interviews with Das and Tavakoli that I posted in the Financial Topics thread, I can sense the frustration, as it seems like they have spent years talking about things that nobody understands or will admit exist and are relegated to the esoteric or the alternative. In the interview, Das reckons that fewer than 2000 people in the world really understand how derivatives work. The current situation seems far more bizarre and far more surreal than the leadup to 2007/8.

[vincecate]

As I listen to the recent interviews with Das and Tavakoli that I posted in the Financial Topics thread, I can sense the frustration, as it seems like they have spent years talking about things that nobody understands or will admit exist and are relegated to the esoteric or the alternative. In the interview, Das reckons that fewer than 2000 people in the world really understand how derivatives work.

I think hyperinflation is like this. I think there is an amazingly small portion of the population that really understands hyperinflation. How it works, why it traps countries, etc. In a post yesterday Mish said in a coming post he will explain why hyperinflation of the US dollar is a silly theory. Mish is a very smart guy. I am looking forward to this post, maybe I am wrong, but I don't think so.

I think the problem is just that few people take it seriously so few have spent any time to understand it.

http://pair.offshore.ai/38yearcycle/#hyperinflation

[Higgenbotham]

I think hyperinflation is like this. I think there is an amazingly small portion of the population that really understands hyperinflation. How it works, why it traps countries, etc.

I think human systems eventually get built around whatever new technologies are discovered. There is a time delay of a few generations. A lot of the financial shops hired physicists to do their work. I think electronic money and derivatives have quantum characteristics that have been built into the financial system. So whereas the old financial systems emulated Newtonian mechanics with a paper system exclusively, the new financial systems add quantum characteristics with electronic money and derivatives. In order to understand potential outcomes in the new financial systems, there are many areas of expertise that need to be understood in depth. These would include history, monetary theory, physics and/or physical chemistry, complex systems, and derivatives. There may be more. I think any person who is lacking background and understanding in any one of these 5 areas cannot understand today's financial system, so of course the conclusion is that only a handful of people in the world can understand it. Also, any person who has a background in all 5 of these areas cannot understand any one of areas in depth and therefore can only understand what is going on generally, but not with a great deal of specificity.

[Higgenbotham]

A search of some of the terms used above finds a good example. Once again, Yves Smith's Naked Capitalism blog brings up appropriate information.

http://www.nakedcapitalism.com/2008/05/ ... idity.html

Here, the author says that according to history and complex systems theory (and says it early in 2008 before the big collapse) feeding excess liquidity into the financial system is not stabilizing as believed by conventional monetary theorists but is in fact destabilizing in accordance with complex systems theory.

[John]

Dear Higgie,

> A search of some of the terms used above finds a good example.
> Once again, Yves Smith's Naked Capitalism blog brings up
> appropriate information.

> http://www.nakedcapitalism.com/2008/05/ ... idity.html

> Here, the author says that according to history and complex
> systems theory (and says it early in 2008 before the big collapse)
> feeding excess liquidity into the financial system is not
> stabilizing as believed by conventional monetary theorists but is
> in fact destabilizing in accordance with complex systems
> theory.

That's a really interesting article. The thing I don't like about it,
though, is that it provides just one more excuse for banksters who
created and sold fraudulent synthetic securities to say, "Oh, it's not
my fault. It's because all that nasty liquidity in the system
destabilized it."

Also, the liquidity theory doesn't explain other bubbles --
Tulipomania, South Sea, etc.

Now that Raj Rajaratnam has been found guilty guilty guilty,
I'm hoping to see a full repeat of the Pecora Commission of
the 1930s.

John

[Higgenbotham]

That's a really interesting article. The thing I don't like about it,
though, is that it provides just one more excuse for banksters who
created and sold fraudulent synthetic securities to say, "Oh, it's not
my fault. It's because all that nasty liquidity in the system
destabilized it."

Isn't that the truth. Once all hell breaks loose, it's going to take a long time to sort out what's what and in the meantime the discourse will be really stupid and nasty.