# It's Not Sub-Prime's Fault



## wayneL (19 December 2007)

Right through out the forumosphere I keep seeing people blame American sub-prime lending for the world economy's woes.

It's not sub-prime's fault at all, it is merely the first symptom of the cause.

No, the cause is the ludicrous loosening of credit originating from the US Federal Reserve, & subsequently the other CB's, starting in 2001. If CB's had never taken that action, sub prime (and the CDO nonsense) would never have become an issue. Loose credit ==>> boom ==>> malinvestment ==>> bust.

On my blog there are a series of video lectures on economics which explains the whole shebang (which I've posted before). 

*It's Greenspan's fault*... and now he's trawling the world shifting the blame onto whoever else he can, to ensure his place in history is not sullied.

Uncle Ben has picked up the baton now too.

Bastards!

Discuss?


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## Kauri (19 December 2007)

It will never catch on...


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## numbercruncher (19 December 2007)

Yes good subject ....


It cracks me up no ends just how many people are cursing and blaming the American mortgage holders that are defaulting aka " the little Guys, the scape goats, the fall guys , the victims "

General rule of thumb, follow the money trail folks, he who benefits most was probably to blame 

And true to form, looks like they will bail out the guilty under the guise of saving the innocent.


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## IFocus (19 December 2007)

Hi Wayne

I thought the expansion in derivatives used in financial markets has predominately been in the last 3 to 4 years, sub prime just being the tip of the very large ice block.

Also I thought the current crisis is due to the fact no one knows whose holding the bag but everyone knows some one is and they are going under if put in the position of having to realize the assets from paper to cash. It won’t make any difference even if the paper is OK no one wants to buy.

A question that baffles me some what is if there was no FED then are you suggesting that it all should be left to free markets?

Focus


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## numbercruncher (19 December 2007)

Im for free markets, and a shake up of the fractional reserve banking system and a return to currencys backed by precious metals instead of backed by a "she'll be right mate" 

Might even happen if the USD imploded 


Was speaking to my ma the other day, back in 1970 my Pa was apparently paid $20.00 a week, or enough for about half an ounce of Gold, the $20.00 bill he earnt then is still just a $20.00 bill if he kept it, but if paid in Gold it kept virtually all its purchasing power .....


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## wayneL (19 December 2007)

IFocus said:


> A question that baffles me some what is if there was no FED then are you suggesting that it all should be left to free markets?
> 
> Focus




Yes & No, I think we need CBs in the current monetary system (Though a privately owned one like the Fed is not Kosher in my view).

I'm suggesting a completely different course of action. In Austrian theory, recessions are a natural and necessary part of the economic cycle. They clean out malinvestent and a host of other ills, when necessary. However when CBs start pulling levers to avoid recessions, malinvestment continues and exponentially increases as we've seen lately, and attempts are made to prop them up are absolutely toxic.

In two words "MORAL HAZARD".

Those clowns who have taken the most innappropriate risks are now the ones being protected/rewarded by CBs, while the prudent instos/individuals get shafted. 

The big problem is that malinvestment has now become so widespread, so indulged in by the masses, that people cannot see it for what it is  (e.g. property investors calling for a new Dickensian age of a two tier society {the rotten self centered *****})  People believe that ALL risk should be rewarded, therefore no risk.

In conclusion, CBs should facilitate the free market and stick to there public remit of controlling inflation, but not intervene in the cycle as they are now (Gu'mints do a good enough job of screwing that up all by themselves).


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## billhill (19 December 2007)

wayneL said:
			
		

> No, the cause is the ludicrous loosening of credit originating from the US Federal Reserve, & subsequently the other CB's, starting in 2001. If CB's had never taken that action, sub prime (and the CDO nonsense) would never have become an issue. Loose credit ==>> boom ==>> malinvestment ==>> bust.




Wasn't the loosening of credit done to stimulate the economy so as prevent or reduce the sererity of a recession. I'm no pro on the Federal Reserve but assume it basically performs the same functions as our reserve bank. Or is the Fed more undisiplined when it comes to lowering interest rates. I see how loose credit leads to whats occuring now but how then do you prevent recession.


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## wayneL (19 December 2007)

billhill said:


> Wasn't the loosening of credit done to stimulate the economy so as prevent or reduce the sererity of a recession. I'm no pro on the Federal Reserve but assume it basically performs the same functions as our reserve bank. Or is the Fed more undisiplined when it comes to lowering interest rates. I see how loose credit leads to whats occuring now but how then do you prevent recession.



Recession is normal/natural as per my previous post. Let mild recessions happen when they should. They are necessary in the capitalist system.


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## Knobby22 (19 December 2007)

I completely agree.
Loose credit combined with severe asset inflation willlead to high inflation which will lead to high interest rates which will lead to the bust. Greenspan has caused an enormous bubble.

Sub Prime though was also about selling unwitting investors duds so the banks don't lose. Also a symptom of short term horizons of CEOs. The US has lost trust with world investors and how are they going to get it back??


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## dhukka (19 December 2007)

wayneL said:


> Right through out the forumosphere I keep seeing people blame American sub-prime lending for the world economy's woes.
> 
> It's not sub-prime's fault at all, it is merely the first symptom of the cause.
> 
> ...




Subprime has definitely taken on the role of whipping boy for the financial woes that we now inhabit. However I think blaming it all on the Fed and easy Al lets others off the hook that deserve at least a little bit of the blame. 

For example the ratings agency cartel that by virtue of the way they conduct business are in an unavoidably compromised position where they get paid by the companies whose securities they rate. Calling sh*t sugar doesn't make it taste any sweeter but that is essentially what the ratings agencies have been doing. 

Wall Street couldn't sell their toxic waste fast enough which incentivised mortgage brokers to engage in predatory lending practices. I don't have much sympathy for people who signed up for mortgages they couldn't afford or couldn't be bothered to read the fine print however the mortgage brokers are hardly innocent.


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## wayneL (19 December 2007)

dhukka said:


> Subprime has definitely taken on the role of whipping boy for the financial woes that we now inhabit. However I think blaming it all on the Fed and easy Al lets others off the hook that deserve at least a little bit of the blame.
> 
> For example the ratings agency cartel that by virtue of the way they conduct business are in an unavoidably compromised position where they get paid by the companies whose securities they rate. Calling sh*t sugar doesn't make it taste any sweeter but that is essentially what the ratings agencies have been doing.
> 
> Wall Street couldn't sell their toxic waste fast enough which incentivised mortgage brokers to engage in predatory lending practices. I don't have much sympathy for people who signed up for mortgages they couldn't afford or couldn't be bothered to read the fine print however the mortgage brokers are hardly innocent.



Yep, great points dhukka.

The thing that I'm sorta trying to get at is that without The Fed loosening so much, the ratings agencies etc would never called sh*t sugar, because there would have been the unavoidable smell. As is was, it was disguised my mountains of cash. Massive turnover of cash can hide stuff.

So instead of facilitating free enterprise, they were facilitating avarice and outright greed.

That's my chicken and egg view anyway.


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## Smurf1976 (19 December 2007)

It's no different to any problem from cancer to a machine needing maintenance to the world economy.

If you delay facing the consequences of the situation, which is exactly what the Fed etc has done, then you generally end up turning a small fixable problem into a massive unfixable one.

Eg car needs an oil change. You do nothing. Now you've got a blown engine. And you still need new oil.

Eg a mild recession is due. It is delayed. Then we end up with a truly massive bust that transforms a generation versus a recession that few would remember for long.

Same with practically anything. Small problems faced today versus massive problems tomorrow. I'd much rather the former than the latter.


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## dhukka (19 December 2007)

wayneL said:


> Yep, great points dhukka.
> 
> The thing that I'm sorta trying to get at is that without The Fed loosening so much, the ratings agencies etc would never called sh*t sugar, because there would have been the unavoidable smell. As is was, it was disguised my mountains of cash. Massive turnover of cash can hide stuff.
> 
> ...




Yep I think the Fed lowering rates too low and keeping them there for too long came first and exacerbated the effect of lax regulation of the financial industry, the flawed business models of ratings agencies and encouraged greed on Wall Street and in the mortgage broking industry.

Looking at the Fed more specifically I think part of it has to do with what Nouriel Roubini calls an asymmetric approach to monetary policy rather than a symmetric approach:



> Those of us who believe that central banks should have a symmetric approach to asset bubbles (see my paper on monetary policy and asset bubbles) – i.e. try to prick/contain them when they are on the way up so as to be able to ease policy and minimize the real collateral damage if/when they burst – rather than the Greenspan/Kohn/Bernanke doctrine of asymmetric response – *do nothing on the way up when the bubble is growing while aggressively ease when the bubble burst* – do also agree that monetary policy that tries to control asset bubbles on the way up is not necessarily and only based on the use of interest rate policy: poor regulation and supervision of the S&Ls caused that real estate bubble and banking crisis.


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## numbercruncher (19 December 2007)

Its gos even further than people intentionally calling sewer water beer, absolute armies of so called experts genuinely beleived that this train was unstoppable, that capatalism had entered a new golden age of easy untold wealth, gawd only 1 or 2 months ago these experts were saying S&P 500 profits would go up 12 percent to 15 percent this quarter, now realty has showed her ugly head they are saying 1.5 (still optimistic imho) - a 1000pc difference.


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## Judd (19 December 2007)

"Wall Street couldn't sell their toxic waste fast enough which incentivised mortgage brokers to engage in predatory lending practices. I don't have much sympathy for people who signed up for mortgages they couldn't afford or couldn't be bothered to read the fine print however the mortgage brokers are hardly innocent."

I think care should be taken about pointing fingers of blame at certain groups.  My Aunt who lives in (get this!) Eureka, California, sent me a clipping from the San Francisco Chronicle and their reporters discovered that in one very expensive area called the Bay, investors (using that term in a loose fashion) accounted for 20% of mortgage foreclosures with some owning multiple properties. One fella had 11 (all on lo-doc) and all gone down the gurgle.

Now you can take this one small sample and extrapolate that to the rest of the USA and say that a few investors with multiple properties who used lo-doc loans are responsible for the defaults and therefore the crisis.  Depends on how you want to skew the stats.

It is possible that greed, stupidity and possibly fraud at all levels got in the way of rational thought (although the thoughts during that time were probably viewed as rational)

And now the good men at the CB's are trying to close the stable door after the Equine flu infected horse has well and truly bolted.  Usual 20/20 vision afforded by hindsight.


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## wayneL (20 December 2007)

Judd said:


> It is possible that greed, stupidity and possibly fraud at all levels got in the way of rational thought (*although the thoughts during that time were probably viewed as rational*)




There were voices of reason at the time, Peter Schiff, Stephen  Roach et al (and dare I say a few of us bears here on ASF), but only to be mocked by the laughing, sneering, pea brained Perma-Bulls on BubbleVision.

How satisfying to see those turkeys pwned. :batman:


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## tronic72 (20 December 2007)

wayneL said:


> Right through out the forumosphere I keep seeing people blame American sub-prime lending for the world economy's woes.
> 
> It's not sub-prime's fault at all, it is merely the first symptom of the cause.
> 
> ...




I tend to agree. Personally, I think money just got to cheap. For a long time many counties economies propped themselves up buy dropping interest rates to record lows while business and personal debt continues to sky-rocket. This obviously couldn't continue. 

I'm sure I'll get stonned for saying this but there are times when the world needs the likes of Margaret Thatcher (and example) to do the things that everyone knows NEED to be done but won't do. The last rate change in the US is a good example of the FED trying to be too nice but simply postponing the inevitable.

As someone who was a fan of the Howard Costello combo I'm beginning to have a lesser view of their management and can only hope that Rudd is the "economic conservative" he claims to be, because after the last election it seems that even Howard & Costello weren't.


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## KIWIKARLOS (20 December 2007)

I dont believe it was just loose lending standards and low rates that caused this. The big problem also seems to be that many banks and investment firms have been sidestepping their responcibility to hold reserves by taking their investments off their balance sheet. Thereby creating the net effect of reducing the % reserves to investment way way below the 8% (or there about) required level. in a normal case you wouldn't expect bad investments to be above 8% of total investment but now that the firms have say equivalent of 10+% of bad investments and 2% reserve. 

Basically I think many will find that they are insolvent.

If they still did dodgy lending but kept it all on their books the extent of the problem would be fully known and i would suggest that while still taking a big hit these firms would still be viable.

Therefore i blame the off balance sheet investments that undermine the whole financial system basic rules. Criminal if you ask me


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## theasxgorilla (20 December 2007)

wayneL said:


> Those clowns who have taken the most innappropriate risks are now the ones being protected/rewarded by CBs, while the prudent instos/individuals get shafted.




Then the way I see it you've got two options...if you can't beat 'em join them, or start a revolution.

I see that its unjust, but up to this moment have favoured the former approach as the latter option is still a long, long way from being a viable path of least resistance.  Notwithstanding those who were the last to climb aboard the asset inflation Ponzi scheme and actually might have been affected with negative equity just now...too many other people have benefited and continue to benefit from what has happened.  

I don't see any biting of the hand that feeds, yet.  If anything I see the middle class blaming the poor (sub-prime, thats what it is after all) for borrowing what they can't afford to repay.  As already pointed out, the upper middle and upper classes are getting away with their antics.


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## disarray (20 December 2007)

most importantly is what checks and balances will come out of this fiasco? the market is one continuous history of greedy people pushing the system until it collapses, and a new, more regulated system evolving from the ashes. i look at the market today compared to 1929 and thank christ for things like ASIC when i've got the fruits of labour tied up in something other than hunks of physical gold.

will government keep a tighter reign on banks and lending practices or are the multinationals now a law unto themselves and can only be taught a lesson by screwing up through their own excesses? i fear this is the case.

and make no mistake, this whole situation is bankers losing the plot for the $$$ signs in their eyes and taking everyone else down with them (including my bloody resource stocks)


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## profithunter (20 December 2007)

Debt is a disease no matter how big or small it is...The US is in serious debt and the CB's have no cure for it.  I see the U.S dimishing as an economic superpower with the focus shifting moreso to Asia, Europe and the middle east.  Debt (Financial leprosy) will eat away at the U.S economy over the coming years until it falls to its knees.  We may see one last big bull run possibly turning into a bubble before the bull stops charging and runs out puff, slowing sinking to the ground and falling asleep.  Just my 2 cents


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## Flying Fish (20 December 2007)

profithunter said:


> Debt is a disease no matter how big or small it is...The US is in serious debt and the CB's have no cure for it.  I see the U.S dimishing as an economic superpower with the focus shifting moreso to Asia, Europe and the middle east.  Debt (Financial leprosy) will eat away at the U.S economy over the coming years until it falls to its knees.  We may see one last big bull run possibly turning into a bubble before the bull stops charging and runs out puff, slowing sinking to the ground and falling asleep.  Just my 2 cents




so what is the best language to speak?


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## KIWIKARLOS (21 December 2007)

I dont think that will be the case the reason the US is the worlds superpower is because it consumes 25% of its oil production and was the worlds largest oil producer for 100 years untill the middle of last century. They have the biggest established and diversified economy on the face of the planet

They will continue been the worlds superpower because they have control of the largest and cheapest oil reserves in the world ! it cost about $1 to get a barrel of oil from the ground in Iraq. We have hit peak oil no matter what way you look at it reserves are declining and if you dont have cheap abundant energy you aren't going to be a superepower.

But every says that russia and china still have plenty of energy reserves but the problem is their whole economy is based on exporting fossil fuels. America is addicted to oil but Saudi's Russia etc are addicted on selling it to generate income. These exporting nations have nothing other than fossil fuel exports to drive their economy so when the fuel runs out or demand deminishes due to cost they will be screwed. Their economies are basically empty shell with very little actual production power or financial investment power. China makes it living from exporting cheap dodgy consumables that really aren't a nesseciaty when it comes down to it. 

My opinion is the US has a well established military industrial machine with control of a huge amount of cheap oil they wont loose their superpower status if anything they will become more powerful.


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## Aussiejeff (21 December 2007)

KIWIKARLOS said:


> ...But every says that russia and china still have plenty of energy reserves but the problem is their whole economy is based on exporting fossil fuels. America is addicted to oil but Saudi's Russia etc are addicted on selling it to generate income. *These exporting nations have nothing other than fossil fuel exports to drive their economy so when the fuel runs out or demand deminishes due to cost they will be screwed. Their economies are basically empty shell with very little actual production power or financial investment power.* China makes it living from exporting cheap dodgy consumables that really aren't a nesseciaty when it comes down to it....




Gee, sounds a bit like OUR economy based on DIG or PERISH eh? 


Cheers,

AJ


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## BradK (21 December 2007)

What an interesting thread! 

For those of us who want to understand, you can't go past the conclusion that there are alot of elected and non-elected crooks out there who will, unfortunately, never be brought to account for their actions. 

More talk about the foundations of our system is very much welcome. LakeMac had a similar thread somewhere here. 

Brad


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## prawn_86 (21 December 2007)

KIWIKARLOS said:


> I dont think that will be the case the reason the US is the worlds superpower is because it consumes 25% of its oil production and was the worlds largest oil producer for 100 years untill the middle of last century. They have the biggest established and diversified economy on the face of the planet
> 
> My opinion is the US has a well established military industrial machine with control of a huge amount of cheap oil they wont loose their superpower status if anything they will become more powerful.




While i am bullish short term, when i look long term macro the inner bear in me comes out. 

Like others have said, the problem America has is the huge amount of debt it is in. Im not sure of the current figures, but a couple years ago they were going $50mill into debt _per hour_. 

Also look at the foreign investment in America. The Saudis have something like $7 trillion invested, and who knows how much the Chinese have slowly been buying up? Imagine if these countries unwound all that, their economy would come crashing down, and all the military power would not be able to save them. They would not be able to produce anything as no one would sell them anything etc etc.

point is, IMO, their military cannot 'blast' them out of the debt they are in.


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## theasxgorilla (21 December 2007)

Aussiejeff said:


> Gee, sounds a bit like OUR economy based on DIG or PERISH eh?




It's as good of a reason as any try and acquire dual citizenship IMO.  There is bound to be a 'bubble' being blown up somewhere, at any given time


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## prawn_86 (21 December 2007)

theasxgorilla said:


> It's as good of a reason as any try and acquire dual citizenship IMO.  There is bound to be a 'bubble' being blown up somewhere, at any given time




Yeh i love the fact that im a dual citizen. Once i finish my degree's im outta here 

I'll be over in Europe for a few lagers ASX.G


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## wayneL (21 December 2007)

prawn_86 said:


> Yeh i love the fact that im a dual citizen. Once i finish my degree's im outta here
> 
> I'll be over in Europe for a few lagers ASX.G




Holy crap! Just about the entire mod team will be outside OZ!


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## BradK (21 December 2007)

wayneL said:


> Holy crap! Just about the entire mod team will be outside OZ!




Wayne, 

Are you guys outside of Australia for lifestyle reasons, or because trading conditions are much more favourable in other countries? 

I am off to the UK on boxing day with wife and two year old. 

Brad


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## prawn_86 (21 December 2007)

BradK said:


> Wayne,
> 
> Are you guys outside of Australia for lifestyle reasons, or because trading conditions are much more favourable in other countries?
> 
> ...




So we dont derail this thread i started a new one for you Brad 

https://www.aussiestockforums.com/forums/showthread.php?p=237341


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## rub92me (21 December 2007)

I agree that feeding the monster with easy credit was an irresponsible thing to do. I see the monster as the extraordinary leverage that has been created, hidden by derivatives that are so complex that they have become impossible to value. The fed didn't create the monsters though: financial institutions (and their clever accountants) did. So maybe we should blame the accountants as the bad guys? :


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## numbercruncher (21 December 2007)

rub92me said:


> I agree that feeding the monster with easy credit was an irresponsible thing to do. I see the monster as the extraordinary leverage that has been created, hidden by derivatives that are so complex that they have become impossible to value. The fed didn't create the monsters though: financial institutions (and their clever accountants) did. So maybe we should blame the accountants as the bad guys? :





I think they are eventually going to have to dedicate an army of Lawyers and have devoted Court Houses to weave through this debacle over the next decade


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## KIWIKARLOS (21 December 2007)

No country will abandon the US or force it to collapse that would do just as much damage to their economies. Chinas largest trading partner is the US closely followed by EU. Same with japan. Saudis sell most of their oil to the US. Theres are so many countries who's economic fates rest with the US that they will definitly bail them out or inject cash as needed. We have already seen it happening Saudis andd China pumping in dollars, i doubt they are doing it based on it been a good investment if the economy is as screwed as we all know.

I would also argue that the military can and is playing a massive role in securing their economy. Most of the money spent in Iraq simply flows back to the US through dodgy contractors and mercinaries who dont actuall build anything they just write the invoices.


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## chops_a_must (23 January 2008)

wayneL said:


> Yes & No, I think we need CBs in the current monetary system (Though a privately owned one like the Fed is not Kosher in my view).
> 
> *I'm suggesting a completely different course of action. In Austrian theory, recessions are a natural and necessary part of the economic cycle. They clean out malinvestent and a host of other ills, when necessary. However when CBs start pulling levers to avoid recessions, malinvestment continues and exponentially increases as we've seen lately, and attempts are made to prop them up are absolutely toxic.
> 
> ...




Thought I would bring this up again as it seems appropriate.

It appears as if the US authorities will do anything to bail out markets, and wrong side participants at any cost.

But how can this work? How on Earth is this going to go on? How can you have any faith in trades, both ways, when interference is rife? 

How can you even have a market when you know you will be bailed out on the long side no matter what? And how can you have any confidence in the buy side when you don't know if there is any actual intrinsic value in what you are dealing with? Especially if there is someone behind you forcing a market.

So what is the state of play? Bonds aren't secure. No-one knows what, if any real value is in certain markets. But worthlessness is continuing to be forced on people who did not want, don't want and avoided from having in the first place.

Where to from here?

/rant.


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## Temjin (23 January 2008)

chops_a_must said:


> Where to from here?
> 
> /rant.




Here is what I would do.

1.) Be greedy and become rich by doing things deliberately to "take wealth" away from the poor and get bailed out by the government when things go sour. Accumulate lots of wealth and ignore the poors.

2.) Protect yourself by accumulating hard assets including precious metals and wait till the storm is over.

3.) Live in a fairy tale and believe in justice and that the world is fair and you wouldn't be "punished" from the greedy capitalists (i.e. No. 1) just because you live as a normal, working middle class. 

Yep, it all comes down to a moral issue again. The last option is definitely not for me. I wouldn't let the government or the "manipulators" to take my wealth away just to make them richer during this crisis.

I am definitely considering path 1 because I believe the world is a corrupted place and without wealth and power, there is nothing you can do to help others or even protect yourself or your loved one. Of course, that is something I cannot achieve in time to be of any significances.

So I would protect myself with whatever means I have and don't trust the government.  

ahhh, such deep talks here.


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## Mofra (23 January 2008)

KIWIKARLOS said:


> I would also argue that the military can and is playing a massive role in securing their economy. Most of the money spent in Iraq simply flows back to the US through dodgy contractors and mercinaries who dont actuall build anything they just write the invoices.




Have you read "Confessions of an Economic Hitman" by John Perkins? He makes exactly that point, and details his personal involvement in it.

I'm not sure ease of credit is the sole reason we are in this mess. If easy credit is applied to productive areas of the economy, it encourages innovation & an entrepreneurial spirit. The problem as I see it is the easy credit has been applied almost entirely to unproductive areas of the economy - larger housing & large scale speculation. In these instances, the extra credit has been pointless as a stimulus for real economic growth, and as such the dollar vs productivity ratios have gone out the window.


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## wayneL (23 January 2008)

chops_a_must said:


> Thought I would bring this up again as it seems appropriate.
> 
> It appears as if the US authorities will do anything to bail out markets, and wrong side participants at any cost.
> 
> ...




It's part of the reason I went to commodities, to sidestep those factors.

Commodities aren't immune of course, as some markets are interconnected, and through index futures I'm still, _ipso facto_, totally involved with that nonsense, but less of a factor overall.

But it is hard not to have a sense of outrage at it all, if one tries to be a moral human being. 

I try to get a bit zen about it all; detachment blah blah. It works... sometimes.


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