Friday, December 2, 2011

Gerry Eckhoff: The Haves and the Have Yachts

Governments all over world are trying to deal with their financial debt problems but appear not to acknowledge the cause - as they battle to control the effects. Massive Government, national and international bank debt is the problem so why is the answer - according to the very people that got us into this mess – even more debt. Banks should be allow to fail but in doing so will bring down governments with them.

Lord Acton, Lord Chief Justice of England 1875 said…. “The issue which has swept down the centuries and which will have to be fought sooner or later is - the people vs the banks”. Is the movement “Occupy Wall St” the start of Lord Acton’s prophecy?

Our current financial debacle started when the US Federal Reserve allowed the US dollar to be freed from the gold standard and engage the ‘Fiat system.’ This system was invented and discarded by the Romans but was reinvented in 1971 by the USA.

To partially explain the impact of such a move we only have to go back just  a few years - to 2007 when a new phrase entered the lexicon – the “have yachts”.  The world has always had the “haves” - the “haves nots,” but thanks to the financial world of derivatives, margin trading and currency speculation; a new grouping called the “have yachts” emerged and with them, a new dimension in largess. Such people were to become fluent in the unrestrained manipulation of the financial system. It has become clear that it was these financial coteries dalliance with credit and not capitalism (or even socialism) that has caused the inevitable economic meltdown of recent times.

It was and still is the failure of the unregulated derivative market that is responsible for the creation of the unheard of wealth by the traders of “financial instruments”. This is where a buyer and seller exchange certain benefits of one parties financial instrument for those of another party’s financial instrument and is called a “swap”. Got that?  In essence it is the swapping of information and benefits between parties and each relies on the other party to perform, which on a rising market they usually did. It is this unreal world of the have yachts that caused famed investor Warren Buffet to describe derivatives as – “financial weapons of mass destruction” as derivatives distort the real underlying value of an actual asset. (See Fannie May and Freddie Mac)

The have yachts and their bankers / shareholders wealth should have collapsed due to their exposure to “assets” that didn’t actually exist or were valueless, as, with the derivative market, you own absolutely nothing. In February 2009 the total world derivative market expanded to upwards of $1000 trillion so it’s not difficult to see how an apparent trifling commission percentage resulted in an early and comfortable retirement for the traders.  The have yachts have somehow managed to shower the blame on the ordinary investor for involving themselves in something few people understood but were coerced into with the promise of a good return; so in the eyes of the have yachts it is the investors fault for believing them and the governments fault for not effectively regulating them.

The have yachts secured their personal wealth during the time of wine and roses by way of commissions for the traders and share options, and multi million dollar salaries their executives offered themselves and never refused. They believed they fully deserved their money as they were the really really clever people who knew how the investment world worked. Essentially, the have yachts knew everything goes up in value and will never fall. The system of capitalism did provide for checks and balances within the world of high finance but sadly those appointed as commercial watchdogs were happy to remain on the chain and merely sniffed the air for the smell of corrupt and illegal practice. The NZ QC Anthony Molloy in his book “Thirty Pieces of Silver” asked a vast array of as yet unanswered questions of NZs financial and commercial sector in 1998. Why after such a period of time are his challenges apparently ignored? Our political masters still appear to be asleep at the wheel.

Commerce and securities commissions all over the western world were required to exercise their given authority over the have yachts which we now know did not occur. Banks such Lehman Bros and companies such as Enron exemplified the worst excesses of the have yachts but were by no means alone as they ignored the risk factor and bought and sold “securities” all over the world that often had little basis in actual value and even less security. All the while - the financial system wallows in the seemingly bottomless trough of excess.

President Barak Obama held out hope to the masses that the have yachts would have their sails removed or at least trimmed. Even today, it seems like business as usual in that sector despite the clamour from their victims to control those who set out to debauch the financial system. Hence the global - “Occupy Wall St” movement.

The mess started out with politicians. The current rulers now lack the courage to restrain the rampant manipulation of the financial system by those who have established themselves as the have yachts.

We should all pause to “thank” one President Richard Nixon who in 1971 moved the $US away from the gold standard and so unleashed the financial world which has enabled them to exploit untold personal benefits from the creation of unrestrained and destructive credit.


Anonymous said...

I do not like to disagree with Gerry. But consider: if the great mass of public investors thought that natural disasters had become suspended by some miracle, insurance underwriting would suffer exactly the same mania that derivatives around mortgage-backed securities did. Then when the next big disaster DID happen, there would be "systemic risk" of exactly the same kind.
Why blame the "traders" in the instruments? As David P. Goldman said in "Asia Times", "...what went wrong was the childish imaginings of the American public".
It is incredible that even after 2007, the public in Ireland, NZ, and Australia seem to think "house prices can never fall". We have banks, RE Agents, media pundits, and young people's own PARENTS urging them to "get on the property ladder". The popular narrative means that we can blame financial system traders for mass public stupidity - and this is especially unhelpful to getting any truth and reason applied to our own circumstances present and future. I hope our current Commission of Inquiry into Housing Affordability gets it right. Urban land is being racketeered, with the enviro religionists acting as the Baptists, and the property speculators acting as the Bootleggers. Randal O'Toole of CATO is one of the few to hit the nail on the head, entitling a paper "How Urban Planners Caused the Housing Bubble".
- PhilBest

Anonymous said...

Furthermore, if you read "The Big Short" by Michael Lewis, you will find that the only people with any brains, KNEW that the bubble was restricted to a few markets (the ones with urban growth restraints) and hence they concentrated their short selling (via derivatives) on mortgage backed securities specifically relating to those markets.
The smartest ones of the lot proceeded after the crash, to scoop up mortgage backed securities that related to completely safe, unaffected housing markets, which securities were now UNDERPRICED due to the same mass STUPIDITY.
Even TODAY, it is rare to find comment that goes beyond analysis of "The American Housing Market" and "The American Housing Bubble" and "The American Housing Crash". This is like referring to the Irish Housing Crash as "The European Housing Crash". In a way, it was, because of all the interlinked financial relationships; but it is especially unhelpful to make it look as though Germany or Texas had a house price bubble, when they DIDN'T - and we should be discussing WHY, when they had the same monetary and financial system as nations and States that DID. If investors "due diligence" is so pathetic as to miss such obvious distinctions, they deserve nil sympathy.
The financial system "traders" are merely another layer of rent-seekers on top of all the other layers that relate to regulatory distortions in urban land markets. The whole problem actually STARTS with the rural sector rent seekers whose land gets included in a still-restrictive urban plan - leading to capital gains of literally hundreds of percent. Even the financial system traders don't strike it as rich as these people. The next layer of gainers, are the owners of existing property, which derives its price from the options at the fringe. These people represent a large constituency against reform.
The "suckers" who are at the bottom of the Ponzi, are the first home buyers, whose income for their entire lifetime is being "gouged". The term "fiscal child abuse" certainly deserves to be applied to this whole racket.
- PhilBest

Anonymous said...

Stick to farming Gerry.

R Cressy said...

The problem is not lack of regulation just lack of a free market. The moment these bankers realised they had lost their bet they ran to the taxpayer for welfare.

the system only works when people who fail lose.

Anonymous said...

True, Cressy.
As I was saying about rent seeking and regulations on urban growth; where there were no urban growth regulations (i.e. in most US cities) there was minimal rent seeking IN FRINGE DEVELOPMENT, AND minimal rent seeking in derivatives relating to mortgages in those markets. This whole saga is CLASSIC "unintended consequences", ESPECIALLY seeing that the urban growth restraints have "unintended consequences" for urban form itself, that are the OPPOSITE of what the "planners" intended. That is, FEWER people can afford to live in "efficient" locations, in spite of the fact that the regulations that forced the prices up were intended to "encourage" people to live at more efficient locations......!
- PhilBest

Anonymous said...

The final proof of what total fwits we have in gummint was the guarantee given on bad investments and the too big to fail bail-out. Forgive them, Lord, for they know not what they do. But do NOT forgive us for electing them - we deserve every failure as punishment for our gullibility.

Anonymous said...

The 'Have Yachts' are the true bludgers and all those who exist in their 'entourage'. They have their hands out waiting for the earner to fill them. These are the parasites that leech the economy and the people on the dole get the blame. The world would be a better place without this sort of self serving personality. I feel a cull of the super wealthy of our society, who are a cancer, would save the economy. Bring in the guillotine, I will operate it personally.