Tuesday, 23 September 2008

“IT’S ALL DOWN TO GREED” the interviewee said!

The interviewer was asking the interviewee, a financial expert, about the reason for the present financial crisis, and I listened with amazement as he carried on, with total honesty, saying “the bonus culture and the risk taking in search of big profits was at the heart of the problem”.

You will hear a lot more soon; I am sure, about Credit Default Swops (CDS). These are in essence an insurance contract between a protection buyer and a protection seller covering a corporation’s specific bond or loan. A protection buyer pays an upfront amount and yearly premiums to the protection seller to cover any loss on the face amount of the referenced bond or loan. Simple isn’t it, after all isn’t this just like a normal car or household contents insurance contract, what’s the fuss? Well, actually there is a catch in the contract.

CDS’s are bilateral contracts, i.e. they are private contracts between two parties but the next bit you may find hard to comprehend because CDS’s are subject to a clause known as counterparty risk. This means that if the insurance provider does not have enough money to pay the insurance buyer in the case of a default event affecting the subject of the insurance, or if the insurer goes bankrupt (Bear Stearns and AIG, American International Group almost went that way) the insurance buyer is not covered. Yes you read that correctly, no cover and kiss your premiums goodbye as well. This is the reason for those massive and mind blowing sums the US and UK governments are pumping into the financial system.

The problem was that those engaged in speculation were unable to see that house price rises in the US and the UK were not sustainable, and when the housing market collapsed it, like a house of cards, brought all around it down as well.

The lunacy of loaning money to people who were unable to repay, on the premise that house prices never fall and so if people default on their loans the increase on the property prices will still give a healthy return, has come home to roost. As we know, this has all happened around the time the world hit peak oil and peak food.

From an environmental point of view it is completely impossible to exaggerate the significance of the situation the world is now in. CDS’s emerged in the in the early 1990’s and since then the world has experienced unlimited consumerism, urged on by an unaccountable, and some would say corrupt, financial system which has driven on the non-stop destruction of the environment that has been a feature of the last 25 years.

1 Timothy 6:9 sums this attitude up perfectly: “But those who want to get rich fall into temptation and a snare, and many foolish and harmful desires which plunge men into ruin and destruction”. Knowing just who will be paying for this desire to get rich, all I can say is Amen to that Timothy...


homebrewlibrarian said...

A couple years ago, I was vexed by the complete inability of the US government to provide assistance to the people harmed by Hurricane Katrina. At the same time there were reports of bribes to government officials (here in Alaska) and other sorts of problems. When I looked at the whole thing, I realized that it all came down to greed.

Sadly, that's still the case. The US financial system is insolvent, the effects of climate change are becoming more severe and social injustice runs rampant. It's all connected and it's all due to greed. No one wants to hear the truth so even if Timothy were alive today, he'd be ignored or ridiculed. Some things just don't seem to change. I pray for the best but prepare for the worse.

Kerri in AK

Margaret's Ramblings said...

The further western civilization has moved from being in touch with providing for themselves, the closer they have moved towards the situation we all find ourselves in.I have no knowledge of financial markets or how governments work their budgets but I do know the lessons my mother taught me. Never buy unless you have the cash, if something looks too good to be true it usually is and rely on your own efforts not those of others. I have always grown and harvested our food and used the skills I was taught as a child. As I needed new skills I learnt them. Now I find my more "wealthier" friends coming to me asking for tips on how to manage as their budgets don't meet their needs. I just hope that when this crisis is over we would have learnt the leason of wanting what you can't afford brings disaster but I don't hold much hope. One final thought, if governments budgeted the same as someone on a fixed income did, maybe we would have more to fall back on when these financial bumps happen.

equa yona(Big Bear) said...

Wonderfully apt quote for our present dilemma. Alas, the US and British empires are built on the foundation of greed. The "Founding fathers", as we so love to call the wealthy planters and slave owners who brought about the bloody break from Britain, were primarily concerned with maximising profit and avoiding sending taxes back to the old country.