
A fellow photoblogger - cheers, Mike - asked me yesterday: 'where
is the money gone that was in that hole [where] Billions of pounds dollars, euros being pumped into the financial world'?
I only know very few facts about the financial system. I'm reading economy news just since a few months and most things of this strange world are still completely incomprehensible to me. But the web is big and many clever people are willing to share their knowledge with us. I've found an explanation that made sense to me. So: where is all that money gone?
Only a week ago the Fed made an amount of 900 billion dollars available to the market. A lot of money, but everybody still talks about the credit crunch. That's because the banks freezed the interbanking market: they stopped lending the money among themselves, despite that's what banks are supposed to do. Obviously the money sticks with the banks. But why?
Most likely they're stashing away the money because of the preparations for the Credit Default Swaps (CDS) that are coming due this week. These CDSs are another witches' brew that is used by banks that don't want to make provisions when they are lending money. Instead they are having sort of an agreement with another bank that will act as a stand-in in case of an unexpected failure in payment. (You might call this kind of an insurance.) That second bank might do so as well and seek another bank that will pay if the debitor can't pay. And so on; thus a whole chain of obligations came up, often even more complicated contructs were built with the result that it's impossible to determine who owes whom how much money.
Yesterday the payments for Freddie Mac and Fannie Mae were payable. Both were insured equally with a sum of 500 billion dollars (nobody knows the exact amount of money because of these obscure CDS relations). Because of their nationalization the total costs could be reduced, as a great part of the money could get mutually listed (many banks are now in public property, so a great part of Fannie's and Freddie's debt could get charged against the now public banks).
The Lehman affair is much more interesting, as the loans are really lost. There is talk of 400 - 500 billion dollars debt, again nobody knows this exactly. In contrary to Freddie and Fannie, Lehman had not been rescued, so a loss of 20 - 40 % of the nominal value is to be expected. Due date is October, 21 (perhaps already next Friday).
There is a total amount of 45.000 billion dollars in the CDS market! This system never has been really stressed before (a more prominent example was the bankruptcy of the car supplier Delphi). The casus Lehman will be the first real stress test of that system, this could explain partially the market's nervousness despite all the billions being spent in the last days.
(Image: Colletia cruciata)
My (old) coffee-table book of selected postings.
More MadScientist: eclecticimaging.tumblr.com, the guy behind this blog
@akarui: Would like to have this plant for my balcony, but they're just selling monster-size shrubs. :(
@Linerberry: You're welcome. But that force of evil is way stronger than me and Mike. Enjoy the things that money can't buy!
@Tracey: Thanks, Tracey. Would like to have one too, but I only get shrubs in monster-size.
@Michael Skorulski: Cool plant, huh? It's flowering now - in contradiction to the markets...
@Laurie: AIG execs: Behaviour like this will end very soon. Watch for lanterns in your neighbourhood!
Bad companies should be allowed to fail: Two weeks ago I was thinking this too. But maybe it's too late for this, as we know have a chain reaction of collapsing markets. Without a concerted action of all great industry nations I feel gloomy about the future.
Putting control of so much of the economy in the hands of the government: I see a bitter irony in this, as this is true socialism. For overcoming a crisis (or a recession) this might work. But not if we experience a depression.
Perhaps the crunch only affects those who are already got themselves in over their heads? Depends on your job: you might have done everything correctly in your life, but if you're working in the automobile industry you might lose your job. Up to now, mostly rich people have lost a lot of money; people without a big fortune don't have much to lose. But I have no idea what will happen to people with a lot of debts, soup kitchens will become an option. Depending on the next political measurements (and I hope there will be an international exertion of force!) we'll see if it will become a recession (this will be bad) or a depression (this will be worst case).
@dogilicious: My pleasure! (Pun intended!)
@JoeB: I barely squeaked through the New Economy bust (after working in a little Internet rat-shop). This time it's coming closer - the destination is unknown.
@Ana Lúcia: Thanks very much!
@Howard F.: (With deep voice:) The worst is yet to come. Weekend will show...
@dj.tigersprout: It's not so thorny as it seems, this is no succulent plant. I'd like to have one at home, but nobody is able to give me a *small* one, only these elephant-size shrubs that are way too big for my balcony.
@Evelyne Dubos: Should be able to grow in Southern France... :-)
@Margie: Thanks, Margie! I'm always hunting for weird plants, this is one of my favourites.
@Observing: Bank executives: These guys will burn, sooner or later. I think sooner.
UK local governments: They tried to be more intelligent than the others, now they leave behind a complete mess. Who will believe these authorities any further when they tell you that there's no money left for this or that? Revolutions were made for minor reasons, what are you waiting for?
Kingdom against kingdom: I think your Prime Minister is *very* polite. Just instituting a suit against the Irish government is a generous civilizing act.
Anyway, I wish Mrs. Thatcher a clear brain and a long life. May she live long enough to convince herself on the results of her neo-liberal policy!
@MaryB: You are perfectly right.
@Twelvebit: And the miracle cure they're starting to use amounts to the confiscation of the taxpayer. Pumping billions into this sick systems just prolongs the illness. But I don't care if some scummy individuals made advantage of the turbo-capitalist system; what we're now facing is a disease of that whole system and not the results of the greed of a few. Excessive deregulation screwed things up; many benefited from this, many more suffer the consequences. This situation will end somehow, but those people who tried to avoid the mistakes will have to pay a high price. They are the last ones with some money left.
@B J in SoCal: No ideas, the middle class will pay for it, that's all.