Thursday, October 02, 2008

Elaine Supkis explains why Insurance can promote Recklessness amongst the Reckless

Elaine Supkis at Money Matters:

Ron Paul: Buying bad debt is the wrong solution

(CNN) -- Paul: Well, we need to do a lot, but a lot differently. We have to recognize how we got into this problem. We have too much debt. We have too much malinvestment.

Roberts: OK, OK. So we recognize all of the things that got us here. But, right now, today, what would you do, if not this bill?

Paul: You have to liquidate those mistakes. Those mistakes were made due to monetary policy. So you have to allow the market to adjust prices downward. And that's what we're not allowing to do.

If there are too many houses and the prices are too high, the sooner we get the prices down to the market level, as soon as we quit trying to encourage more housing -- this is what we're doing. They're trying to stimulate houses and keep prices high. It's exactly opposite of what we should do.

So, we should get out of the way and not buy up bad debt. There's illiquid assets, but most of those are probably worthless. They're mostly derivatives. And we're sticking those with the taxpayer. So we have to recognize that the liquidation of debt is crucial. And if we did that, we would have tough times, there's no doubt about it, for a year. But if we keep propping a system up that's not viable, we're going to have a problem for decades, just like we did in the Depression. That's what we're on the verge of doing.

[. . .]

Roberts: So what do you then think of this idea of raising the limit on [FDIC] insurance to $250,000, from its current cap of $100,000?

Paul: Well, on the short run it will calm the markets. People will feel better. I might even personally feel better for a week or two.

But I know that long term, it's the wrong thing to do. I opposed this in the early '80s when they went from 30 [thousand dollars] to 100 [thousand dollars], saying it would lead to more problems like this with malinvestment. It would cover over the mistakes. And the same thing will happen.

But if we raise it to 250 [thousand dollars], people are going to feel better, then it will keep the bubble going for a little while longer and putting more pressure on the dollar. If the dollar lasts longer, then finally the world will give up on the dollar -- and then we will have a big problem that nobody has even really begun to think about.

Roberts: A lot of people might hope that you're wrong with your projection.

Paul: I do too. I hope I'm wrong.

Roberts: You tend to be right on these things on occasion, though. Dr. Paul, it's good to talk to you. Appreciate it.

Ron is right about insurance. There are several important things to remember about insurance: too much makes for recklessness. For example, if people get unlimited insurance to build on earthquake or tsunami zones, they will cheerfully build flimsy stuff in these places. If homeowners have unlimited insurance to build in tornado or hurricane zones, they will ignore Mother Nature and pile on expensive and totally hopelessly functional buildings in these zones. It is OK to build where things can be destroyed! But to ask everyone to PAY for the mess is totally wrong in the long run. There has to be limits or everyone will be reckless and bankrupt any system doing this too much.

There has to be a price to be paid! During one housing collapse, from 1974-1980, many building owners would pile on insurance on a building and then hire arsonists to torch them. Much of NYC saw arson this time frame. All it took was passing a law concerning insuring buildings too much and it stopped. So here we are, across the planet, frightened governments are insuring more and more bank accounts...NO MATTER HOW RECKLESS THE BANKERS WERE!

Banks like Wachovia offered high returns on savings because they were being reckless with their lending. Now, people lose their accounts. The government wants to prevent the total loss of savings so they had the FDIC protect the little people of the middle class. But this is being rapidly expanded to protect the rich. This, in turn, encourages them all to be increasingly careless in search of bigger and bigger returns. Balance is lost!

[. . .]

As Cash Leaves, Money Funds Sign Up for U.S. Protection

Less than a week after the Treasury Department announced its ad hoc insurance program for money market funds, some of the nation’s largest mutual fund companies have already announced that they are signing up for coverage.

Those companies include Charles Schwab, Federated, Morgan Stanley, Putnam Investments, BlackRock and JPMorgan Chase. Several other companies said they would most likely enroll before the deadline on Wednesday.

But despite this new government safety net, investors have continued to pull cash out of money funds, especially the so-called prime funds, which have the widest latitude to provide short-term credit to banks and businesses.

According to iMoneyNet, a research firm, almost $80 billion was withdrawn from prime funds even after the new guaranty plan was announced on Sept. 19.
All told, money fund assets have shrunk by $100 billion, to $3.33 trillion, over the last three weeks, and prime funds have dwindled by more than $370 billion, to $1.6 trillion.

Damn, they are now insuring PIRATES as well as gnomes! These investment bankers created the Derivatives Beast in order to insure themselves against losses. This is the 'hedging' all the offshore hedge fund hell hound pirates were yapping about all this time. Now that it has turned on them, they are running to our government which they have been bankrupting, seeking safety.

This stinks, big time. All their loot remains offshore! They want to protect this stuff while demanding the government they defrauded spend its energy on protecting them, not us. I remember last year when the US was boasting that all world money was flowing into US based accounts. But this was a lie. The HEADQUARTERS of the pirates were in the US. But the holding points for the loot was all offshore in Queen Elizabeth's pirate coves. The entire system is based on negative wealth flows whereby wealth flows OUT of the US, not INTO the US. This is very significant.

Credit was given to the US so that DEBTS were flowing into the US, NOT WEALTH. This is very simple and to stop it, equally simple. The US navy simply has to sail to all the pirate islands and seize them and the computers there. As well as the postal boxes. Then, locks are put on everything. Then the land forces of the government can enter the towers in NYC and elsewhere and seize the rest. But this won't happen because our government is owned, lock, stock and gun barrel, by these pirates who get their own way at every turn.

This is obvious with the feeding frenzy in DC this week. Once it was decided on Monday that the ONLY way to save our economic system is to let wild overspending slosh over everything combined with making money out of thin air, the top blew on this volcano. Note that there is now NO regard whatsoever to balancing any budgets even slightly. Instead, the feeling is, 'Hey, let's go all the way! WHO CARES? We have infinite credit!'

Zurichers Say UBS `Won't Go Bankrupt' Like Swissair

(Bloomberg) -- Hartmuth Wetzel stood in front of UBS AG's headquarters in Zurich, watching a flat-panel screen through a window for signs of a rebound in the Swiss bank's shares.

``UBS won't go bankrupt,'' said the 65-year-old industry consultant, who was debating the financial crisis in a crowd of mostly middle-aged men nervous about the fate of Switzerland's largest bank. Wetzel said the stock had already fallen too much for him to sell it, and besides, he has his cash in the bank. ``That's my hope.''

Writedowns of $44 billion, the most by any European lender, helped cut 70 percent off UBS's market value from its peak last year and eroded confidence in the country's third-largest private employer, which traces its roots back more than 150 years. UBS, which says the three keys in its corporate logo signify confidence, security and discretion, this year reported the first outflows of client assets in almost eight years, driven by Swiss customers.

When the gnomes of Switzerland sold a huge amount of their gold reserves, I said, 'This is the end of Switzerland as a great banking power'. And so it goes. They wanted to prove that gold was useless. Instead, they proved themselves useless.

Latin America Economic Boom Threatened as Credit Freeze Deepens

(Bloomberg) -- Latin America's fastest economic expansion in 30 years may be coming to an end as the global credit crunch stunts investment and squeezes demand for the region's commodities.

``We're in a serious economic crisis,'' Colombian Vice President Francisco Santos said in an interview in his Bogota office. ``Financing is going to get scarcer and scarcer, and that means that investment is going to be difficult to attract.''

The region's growth in 2009 may be cut to less than 3.3 percent, from 4.6 percent this year, according to economists at Barclays Capital. The slowdown will make it harder to further reduce poverty that's fallen to its lowest levels since before the ``Lost Decade'' of the 1980s in which countries borrowed more than they could repay.

All bubbles are the same. For the last 500 years, we have a clear record as to how they develop and collapse. Yet no one learns. Even when people swear they will be sober and careful, once some great banking power decides to run riot, they all run riot. The present bubble popping started in China, not the US. China, not the US, decided to raise reserve ratios of the bankers. China, not Europe, decided it was time to push down the wild stock markets.

This has changed the flows of the planet and the frantic efforts to keep this bubble from popping is just making things worse, not better. We KNOW how this will end: all the profits of the bubble economy must be eaten by one of the divine beings who control our fates. We can't keep it. The INFRASTRUCTURE this built will remain if we don't go insane and destroy all if it, too, in massive world wars. But History gets the last laugh. Humans nearly always destroy this in massive wars when bubbles pop! We can't help ourselves. This is because we are not only a species that likes to build, we are killers who like to destroy.

Watch any child playing at building blocks or sand castles. Always, the child or its playmates end up knocking it all back down.

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