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Where is all that money gone?

Posted by
MadScientist (Düsseldorf, Germany) on 9 October 2008 in Plant & Nature and Portfolio.

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)

akarui from Kagoshima, Japan

Beautiful macro of those strange leaves. Nice colors.

9 Oct 2008 8:32am

@akarui: Would like to have this plant for my balcony, but they're just selling monster-size shrubs. :(

Linerberry from Sumner, Christchurch, New Zealand

OK, blown away by the change in image here....what an amazing colletia and thank you for the link. You have done a great job here ms...the spikes and shadows are wicked!!! One can rely on you and Mike to put us all straight on what really goes on in the world and I'm amazed and flabbergasted by what i hear. Thank you for the info:-)

9 Oct 2008 8:36am

@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 from White Hall, United States

Wow! I have never seen a plant like that before. Great shot!

9 Oct 2008 1:06pm

@Tracey: Thanks, Tracey. Would like to have one too, but I only get shrubs in monster-size.

Michael Skorulski from Cigel, Slovakia

Yes, the banking system is a field of thorns as you photo depicts.

9 Oct 2008 1:41pm

@Michael Skorulski: Cool plant, huh? It's flowering now - in contradiction to the markets...

Laurie from New Jersey, United States

That is an amazing looking plant. Very interesting.

As far as all these bailouts and the credit crunch goes, I am very frustrated with the governments. The money is throwing good money after bad. They will probably squander and abuse it anyway. AIG here already has done so with a wasteful Spa weekend for their execs, where they wasted nearly a half million dollars and it looks like they are set to get even more money.

I think all these bailouts are a knee jerk reaction out of sheer panic as well as a way for Washington to take control of a large chunk of the free market economy. Perhaps the bad companies should be allowed to fail. I know it would be painful but I also think that while there would be pain there also would be recovery as the strong well run companies get stronger. I don't know, maybe I am too much of an optimist and naive to believe in the survival of the fittest and personal responsibility.

The other scary thing to me is putting control of so much of the economy in the hands of the government which has proved historically to be one of the most top heavy, mismanaged, and wasteful entities around. There is no lack of greed and power hunger in Washington. It's almost like handing the hen house to the foxes.

As far as the so called credit crunch goes? I have been receiving more credit card offers and equity and mortgage offers than ever before. I though that it would slow down but nope, it seems to have actually picked up. Even my unemployed 18 year old college student son continues to get credit card offers which he shouldn't be getting at all. So I haven't seen evidence of this credit crunch in this house. Perhaps the crunch only affects those who are already got themselves in over their heads?

9 Oct 2008 1:49pm

@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 from Millerstown, PA, United States

Appropriate picture for the lesson. Thanks.

9 Oct 2008 2:17pm

@dogilicious: My pleasure! (Pun intended!)

JoeB from Brampton, Canada

Its as confusing as a room full of mirrors, I've also wondered where all the money goes when these situations occur. The last one was the high tech bubble burst.

9 Oct 2008 2:42pm

@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 from Leiria, Portugal

WOW!!! Fantastic.

9 Oct 2008 3:49pm

@Ana Lúcia: Thanks very much!

Howard F. from South Pasadena, Calif., United States

Good shot for the world financial crisis. Everyone is going through thorny and painful time right now, but hope it will turn green very soon (except for Asian countries where green is bad and red it good ;)

9 Oct 2008 4:18pm

@Howard F.: (With deep voice:) The worst is yet to come. Weekend will show...

dj.tigersprout from San Bruno, CA, United States

wow - very cool -- and very thorny! wouldn't want to fall into these!! wonderfully graphic though! :)

9 Oct 2008 8:00pm

@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 from Le Mans, France

What a weird plant !! Never see that before, really incredible...

9 Oct 2008 8:01pm

@Evelyne Dubos: Should be able to grow in Southern France... :-)

Margie from Auckland, New Zealand

That's a very cool graphic shot of a very unusual plant!

9 Oct 2008 8:25pm

@Margie: Thanks, Margie! I'm always hunting for weird plants, this is one of my favourites.

Observing from West Cheshire, United Kingdom

A good choice of plant to compare to the banks.

Ok MS, so the bucks or euros have been lost in the CDS chain...? or maybe not, maybe the banking institutions want it to remain that way. So instead of solving the problem, they are ignoring it and keeping the dosh. Basically it comes down to this, [them] the bank owners, and us [debt slaves] will always remain in this configuration. Bigger banks eat little ones, money is lent, and we end up paying while the executives are laughing.... all the way to the bank.

Some more incredible news: We have just been informed that a great many UK local governments [councils] and police forces, have invested public monies in the Icelandic bank !! For ten years our local taxes have steadily increased - no money [they] say, not enough police on the streets no money [they] say, yet all this time they have been buying shares in foreign banks, is this the business of council officials to invest ? Now all those millions have been lost due to ICESAVE going bust. Our local councils now really have no money for public services..!

MARK 13:8
For nation shall rise against nation, and kingdom against kingdom: and there shall be earthquakes in divers places, and there shall be famines and troubles: these are the beginnings of sorrows.

9 Oct 2008 10:18pm

@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 from Staffordshire, United Kingdom

What a sorry state the world economy is in right now!

10 Oct 2008 1:04am

@MaryB: You are perfectly right.

Twelvebit from Victoria, United States

Looks like nature's concertina wire.

Sounds like you understand the situation pretty well to me.

Perhaps the crunch only affects those who are already got themselves in over their heads?

I know a couple, both employed, who are very careful with their money. They don't buy things on credit and own their home outright. They've done everything you're supposed to do, and in the last two weeks they've lost $150,000. The real tragedy of this criminal conspiracy is that there are millions of people just like them who did everything right will still have to pay for it.

Where did the money go? It's pretty simple. It was created out of thin air and pocketed immediately by the criminals who are hooked up financially and politically --like our Secretary of the Treasury and his cronies at Goldman Sachs. These people used it to buy property, gold, treasury bills, other financial vehicles, and live high on the ole' hog. In other words, they've either consumed the proceeds or stashed them away as safe untouchable assets.

I'd make this analogy....it's like they were issued a credit card, went out and bought whatever they wanted, and used it to acquire property they could stash away, and then when their bill came due, they passed it along to the rest of us to pay. We can pay either directly, in the form of higher taxes, or indirectly, in the form of devalued money. Either way, this is the largest swindle and criminal wealth transfer to the political class in the history of the world. If people really understood how the economic system worked, these people would have no safe sanctuary anywhere in the world.

12 Oct 2008 5:08pm

@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 from United States

Love the comments. It’s all been a game of musical chairs. We need a game plan for those of us left standing. Any ideas?

25 Oct 2009 8:35am

@B J in SoCal: No ideas, the middle class will pay for it, that's all.