Blagnet.net

Blagnet.net’s link of the day

Despite the fact that I hardly have time to read and write as much as I want about political economy and philosophy, I am trying to make an effort to frequent my less-frequented blags, find new blags worth frequenting, and read about something other than economics (in both web pages and books). Well, at the risk of disappointing our visitors who are tired of seeing posts about economics, money/banking, the current recession, the Obama regime’s worsening of it, etc., this post is also about our global economic meltdown.

Via nostate.com, I came across Strange Blue Planet, an occasionally updated blag of which I like what I’ve seen. In fact, I enjoyed his recent post Recession Demystified so much that it’s my link of the day. It provided me with yet another detailed layman’s explanation of the irresponsibility and ignorance in the State–banking complex that caused our financial crisis and deepening recession. I recommend the entire thing, but this was my favorite part, from the end of the post (the hypothetical entities Linda and PUKEBONDS will make a lot more sense if you read the whole post):

But we are not done yet. As we saw, Linda’s shady bonds were being packaged and sold, and again leveraged, repackaged and resold, in an ever rising pyramid, till the total money involved probably touched trillions of dollars! Since most of these transactions were being done on borrowed money, this would surely have created a great demand for money. We know from Econ 101, higher demand leads to higher prices. In case of loans, higher demand for money would lead to higher interest rates. Till a point would be reached where the interest rates would be so high that buying PUKEBONDs on loan would make the risk not worth the returns from the bonds. Surely this should have put the scam to an end before it reached trillion dollar figures?

Well, no actually. Thanks to the Central banks of the world, the total amount of credit available in the market is in theory unlimited. When demand for credit increases, Central banks just print some more money and lend it out. The self-regulating system of demand and supply fails in case of money, because central banks have the Govt given authority to counterfeit money and lend it out at any arbitrarily low rate they think fit.

So finally we have our answer: The two factors we discussed above [bond-rating monopolies, centrally controlled money supply], both creations of Govts, led investors to have an incorrect perception of risk involved in PUKEBONDs. They also allowed the Ponzi scheme to run as long as it did. The market did not self-correct in time, because Govt intervention did not allow it to self-correct. It’s not unsupervised free-market, but Govt supervision that’s a mortal danger to the stability of global finance.

Final thoughts: Markets are self-regulating, even when they are not free. Always. There are no exceptions. What we are seeing today is a much delayed, but vicious self-correction of the market. The more delayed a correction is the more vicious it gets, and the more people are hurt. It’s best for Govt to leave markets alone, not try to supervise it, or make it better. It only interferes with the self-regulating mechanisms of markets and delays the self-correction. “Stimulus”, “bailouts”, and other shenanigans of Govts worldwide is a last ditch attempt to postpone the self-correction to another day. It’s better for Linda to lose her bar today, than for the whole world to lose their shirts tomorrow. [emphasis added]

Posted in Economics