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Apple breath




Yet another century

Those of my readers who actually pay attention to the URL of the page they are looking at will have notice that it is http://richardhartersworld.com/cri_c/editorials/edit100.html. So what, you say?

Well, it is an aniversary of sorts, and a tribute to my foresight. Back when I started this website, I started writing editorials. Being a simple minded computer geek type, I numbered the pages. The first editorial was edit001.html, the second, edit002.html, and so forth. Why those extra zeroes, you ask? The answer is simple enough - when I list them on my computer they will come out in order. That's the way we computer types are - we like our software stuff to be neat and orderly. (As Our Lady with the Large Black Dog will testify, that's about the only place.)

But why the three digits, the 001 in the first editorial URL? That's where the foresight comes in. Back in 1996 I foresaw that I would keep this website going, that I would keep writing editorials, and that the day would come when I would write my 100'th editorial. So I was prepared. That's my story and I'm sticking to it.

Any way, this is an anniversary of sorts. I look forward to writing another 100 editorials.

An apple a day

There is an old saying that an apple a day keeps the doctor away. People never say why an apple a day keeps the doctor away. However recent research has revealed the reason; 97% of doctors are allergic to people with apple breath.

Reinventing the financial panic

As of this writing the US is in the midst of a financial panic. Back in the century before last they used to have major financial panics every so often. The whole financial system would go into major convulsions and banks would fail every so often. Why did they happen, how do they fix it, and what happened to the fix? The answers are all in the Economics 101 textbooks.

The key is that banks can create money. The way they do it is very simple. Suppose that I want to borrow some money - one million dollars will do nicely, thank you. I go to the bank, and, being a persuasive chap, persuade them to loan me my million dollars. I sign an IOU that the bank stashes in its vault. They give me a credit balance that I can go out and spend. Presto, there is now one million dollars more in circulation.

There is a catch of course. The bank has to pony up cash if someone wants the money they have on the books. If the bank doesn't have enough reserves on hand they can go broke if too many people want their money right now.

The elements of a financial panic are simple. In good times the banks lend out a lot of money. The money supply expands; it becomes large compared to the underlying assets. Comes a hickup in the economy. People try to convert credit balances into real cash. This makes the ratio of credit balances to assets even worse. Then there ensues a game of financial musical chairs in which some people get their money back and the rest get screwed. The bank goes belly up. The panic spreads and the entire money supply contracts.

How did they fix it? The answer is simple enough, though the devil is the details. That's what the Federal Reserve is about, that and FDIC. The essence is that banks have to keep adequate reserves and are subject to inspection to make sure that they are financially sound. In turn the Fed covers their ass. That way there are limits on the extent to which banks can increase the money supply. Deposit insurance means that bank runs don't happen because people don't have to worry about getting their money out of the bank.

What happened to the fix? In 1994 some bright chaps at Morgan Stanley came up with a new financial gadget called a credit derivitive. Their concern was that they had a lot of risk exposure (investment loans to companies) and correspondingly had to have large reserves. They wanted to reduce the amount of risk and required reserves. They came up with a gadget.

The idea is simple; a credit derivitive is, in effect, an insurance policy. The bank pays a premium to the insurance company; if there is a loss the insurance company pays it off. That's okay, you might say - insurance companies are regulated too, and they have to keep reserves. Ah, but here's the catch. Credit derivitives have the effect of insurance but they aren't insurance and they are NOT REGULATED.

So all of a sudden the banks and other financial institutions had a way around the need to keep adequate reserves. As it happens there is a lot of money to be made in making loans, even bad loans, if you can pass off the risk. The system had just reinvented the boom and bust cycle of the 1800's. All that was needed to get it going was to find a speculative boom.

Enter the housing market. The essence of a speculative boom is the greater fool theory. If the price of something, houses for example, is going up then it pays to borrow money to buy that something and make a profit. It's called leverege. When people notice that they can make money that way, they start buying that something, which creates more demand, which makes the price go up, which means that more money can be made. Up and up the price goes. The theory is that you may be a fool to buy it at that price, but you can make money anyway because you can sell it to a greater fool. Eventually the supply of greater fools runs out, and the whole thing collapses.

In ye olde days it was hard to get a mortgage; you needed things like a down payment and a good income. However if the lender can sell off the risk, they can take some profit up front and pass the risk onto someone else. Since the risk is gone there is no longer the need to be fussy.

All of the pieces were in place; all that was needed was time.

Election follies

In the midst of the chaos, McCain and Obama had their first debate. I watched part of it. My reaction was very simple - neither candidate has a clue. Between them I think Sarah Palin would make a better president.

Congress in action

“With yesterday’s rejection of the bailout package by representatives of both political parties, it proves once and for all, that when an issue is important enough, that both houses of Congress can come together quickly, put aside their differences, and in a bipartisan manner, accomplish nothing.”

--- Anon

The tooth scraper screwed up

Early this year my dentist informed me that I needed a root canal on a certain tooth. It was going to be very difficult so he referred to a tooth scraper in Sioux Falls who was a quote specialist unquote. My dentist thought highly of him. I did not. His office was managed by incompetents. He pushed and shoved on my head, face, and tooth in an alarming fashion. And his bill was rather higher than I thought it ought to be.

After his so called ministrations the tooth was never what it ought to have. It was always a bit tender and got infected several times. My dentist kept reassuring me that the root canal had been fine whereas I insisted the tooth scraper had screwed up. Finally I gave up and had the tooth removed. When it came out we discovered that the tooth scraper had cracked a root of the tooth when he was screwing around.

I really hate being right.

Paris Hilton For President

Well, why not?

Credit cards and college students.

Last time I promised to rant about credit cards and college students. The whole thing is really very simple. The motivational researchers who used to work for Big Tobacco inventing subtle ways to entice our youth into taking up smoking have moved on to working for the Credit Card Industry, a segment of our society modelled on the blood sucking parasite. (I did promise a rant, didn't I?)

When Johnny arrives at college he is deluged with credit card offers. Now Johnny is not employed and has approximately zero credit worthiness in his own right. However the credit card vendors are quite aware that Johnny has a proud mama and papa who will bail him out. Johnny uses his card, gets over-extended, incurs penalties and interest, and runs to mama and papa with his tail between his legs. Better yet, he borrows money on his student loans to pay his credit card bills. The motivational researchers reassure him that, after all, he does need a car and a full suite of consumer electronic gadgets.

When Johnny graduates the spigot gets turned off. He's on his own now, out there in the cold with a pile of student loans and credit card debt.

It's a simple scam. The credit card business is a good example of why we are in a financial mess. They have influence, aka, our congress and various state legislatures are in the tank. The usury laws have disappeared. The bankruptcy laws have been manipulated to the advantage of the usurers. Fees and little tricks have multiplied. Where are the guardians of our republic who are supposed to protect us from financial malefactors? Sleeping the sleep of the well fed, having dined on campaign contributions, speaking fees, and "arrangements".

There. I promised you a good rant. I don't know about you but I'm satisfied.


This page was last updated October 1, 2008.

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