"The big banks are buying up what they call fixed income instruments (bonds and other debt backed paper) and at the same time offering CDS insurance on the same. Just like they bought and sold protection on mortgages..."This is a fairly good description of why the policies of Bush and Obama have failed to effect an economic recovery.
The policy of 'saving the banks' first and foremost, and of stuffing them with cheap money in the hopes that they will stimulate the real economy with loans, is a cruel hoax.
Cheap money is hot money and it seeks high beta returns. It does not seek investment with returns over long periods of time. And in an environment of lax regulation and little deterrence for abusive financial practices, one sets up a scenario ripe for fraud and another, more chilling, financial collapse.
And the problem is not in the US alone. Europe and the UK are following similar practices, of serving the financial elites first, and the people very little or not at all.
There will be no sustainable recovery until the banking system is reformed, and balance is restored to the economy. Growth, not austerity, is the way out of the wilderness. But that growth is only achievable if the corruption that brought down the system in the first place is corrected and the real economy restored to some sort of natural order and sensible priority.
The hot money seeks out speculative returns, and when it cannot find them, it creates them. And that is the well spring of fraud, and of many of the corrosive economic problems facing our world today.
The problem is complicated because most of the western political leaders are complicit, by action or acquiescence, in the financial corruption that holds their nations by the throat, and allows the very few to prosper enormously at the expense of the people in general. The leadership is caught in a credibility trap. They are unable and unwilling to reform the system, and promote a renewal and change might bring them down with it as well as the corruption that feeds them with money and power.
"...The problem (one of them at least) is that while our leaders are banking on growth to save us, the banks are not. They are banking instead, on fear. Our leaders keep thinking if they ‘save’ the banks then the banks will help save us by investing in growth. They fail to understand that ‘invest’ is really not something high up on the global bank’s ‘to do’ list. I spoke at length recently to bankers in The City who deal in investing in raising money for Small and Medium businesses. They were unequivocal – it is getting harder not easier to raise money for such investment. The big banks and big funds are looking for short term speculative returns not slow investment returns.
When you have large and growing losses from bad debts you cannot and will not recoup and recover on the basis of wise but slow investment returns. The worse your previous debt mountain is, the greater the pressure to pursue exactly the sort of high-risk speculation that got you in trouble in the first place. If it is a choice between investing in Spanish factories or buying Spanish debt or selling CDS on that debt, the ‘smart’ bonus seeking money goes for the latter every time.
The brokerage Carmel whose study I have quoted is a good example. On page 9 of their study they say,
We began buying Spain CDS in Q4 2011…[with a coupon of] 3.5% of notional per annum –effectively an option premium on the default of Spain.300%! Investing in small and medium businesses or a potential 300% speculating on Spanish default. You choose.
Should the Spanish crisis flare up in 2012 as we expect, we can generate a 300% return on the annual premium.
Banks are banking on fear and the volatility fear causes. They are not banking on or helping to support growth. They will do the politically necessary minimum and no more. The big banks are buying up what they call fixed income instruments (bonds and other debt backed paper) and at the same time offering CDS insurance on the same. Just like they bought and sold protection on mortgages..."
Read the rest of this blog from 'Golem XIV' in the UK here.
Also see his essay "We Are All In This Together."
This may also be a good time to read or re-read this essay of mine, Currency Wars: The Anglo-American Century. What is happening in the western world is no accident, anymore that the rise of tyrants and the destruction of freedom are accidental.