@GamTrak 185636 wrote:
I always figured that the banks would just keep the money (like they did) and not use it to ‘stimulate’ the economy. We got scammed on that deal! :flush:
In a nutshell ..
The derivatives market is a financial tool. It was used traditionally as insurance items, against physical goods, future prices etc, but used by industry that actually used, consumed or needed the real item. Oil, wheat, gold, dollar prices, pork bellies .. you know the sort of thing.
The derivatives market got so big, hundreds and thousands of time the size of the actual REAL market. This was due to speculation by investment funds, hedge funds, private equity, all the captains of industry.
While prices went up – all was good (like the stock market). Everyone makes money buying, selling, buying again. A financial roundabout where values are inflated – and monies are loaned using the potential value of the underlying asset as collateral.
But eventually, someone decided it was an unsustainable bubble.
Selling occured, and then more selling, and more selling. It became apparent that the reason why the derivatives market was so big was that some companies had sold contracts that was in excess of their ability to ever repay or redeem … if the prices suddenly crashed.
Bascially the big firms had acted as insurers for these commodities, but they’d sold so many contracts that they couldn’t possibly pay a fraction of them if they all came due … and with the drop in oil, wheat, gold, the dollar … they were all coming due.
As redemptions of contracts slowed, and then were frozen it became apparent that these companies wouldn’t pay, couldn’t pay, and the underlying value of the asset was never really as high as speculators had driven it.
The value of the assets were slashed. Balance sheets were altered. And that meant that companies that had loaned money on margins for this speculative buying were in trouble.
The “banks” needed much of the bailout monies to pay the increased cost of lending because their loan ratios and newly stated balance sheets pushed them into different risk categories once junk bond were no longer categorised as assets at 100% of their paper value.
It wasn’t to buy stuff, it wasn’t to stimulate the economy, it was to pay margin calls on the loans of over-leveraged businesses. There was little choice. Pay the margin call or the loan is defaulted and the bank goes into receivership.
The hard call would have been to let the institutions fail. That is technically what a pure capitalist system would have done – but the medicine was considered too tough – as the size and scale of the banking failures would have brought down tens of thousands of businesses across the US as well.
The US (and therefore the world business envirnoment) was starring right in the face of a major downturn of economic system that would surely have started the GREATEST depression.
It may still come to pass, as much of the junk bonds are still in the system, and eventually major financial organisations are going to have to admit how much of these “assets” they’re writing off.
So where has he money gone?
The crazy money spent BEFORE the bailout on acquisitions of other companies who were also doing the same thing was money poorly spent, was the source of much wealth destruction. (pay $1 billion for a debt ridden company is simplywasting $1 billion).
THe US spending more on imports than it exports each and every day is also pmping money offshore – and destroying the wealth of domestic taxpayers.
The bailout was dumb … but I think that not doing it would have been even dumber … and it still may not save the global economy … in the next 12-18 months we will see.