Wall Street thread

am, It's not the borrowing of money. Our economy lives on borrowed capital. It is how much some of these firms were allowed to leverage their assets by lenders. Wall Street played this high-stakes game of poker for at least the last 15 years. It was insidious in a few ways. One, they screwed shareholders. They did that by leveraging up the cash provided by shareholders (which more and more include regular people who own either stocks or mutual funds that own those stocks) and used that debt to accumulate giant portfolios of securities. Those securities included things like those derivatives and swaps that have exploded on them. The Fed -- our government -- actually enabled them. To try to bolster the economy and make things continue to look better than they were, they kept interest rates low and continued to reduce rates, even when we started to see a trend toward inflation. As those rates went down, the value of those Wall Street portfolios swelled. Their massive debt, in effect, became cheaper to carry. And it yielded them gigantic returns, even though they had very little equity as collateral for what they owned.

We actually had some warnings that no one heeded. There was the Asian currency crisis. The tech meltdown. But they were able to skate through with just a little damage, and aside from those relatively few scares, this has been the game Wall Street has played since the early 90s.

As long as interest rates remained low and the economy was growing, they could play that game. But economies don't grow forever. We have economic cycles. And the deeper they got into that game, the bigger the fall they set up. In the mean time, though, based on the enormous profits they were seeing, employees of those firms got huge compensation packages and bonsuses.

The obvious flaw that was bound to bite them in the ass eventually (what we are seeing now) is that Wall Street turned from a place where profits came from recurring businesses -- actual businesses that created economic growth -- into a place living on a wing and a prayer on huge amounts of leverage and huge risk. When their good luck turned about a year ago, all of the shareholder wealth supporting their leverage got wiped out and it started to fold like a house of cards.

The problem now is that the damage has already been done. It's been being built up for 15 to 20 years. There is no government bail-out that can undo it. And putting all Americans $700 billion in debt, when that is a drop in the bucket when looking at the magnitude of the money that has been lost, is a bad idea because it creates a host of OTHER economic woes that can only serve to extend the recession this whole thing is going to make worse. It was short-sighted thinking. Even if it it had had a positive short-term effect, it wasn't worth the negative long-term effects. But politicians don't consider the long term. They consider the length of their elected terms.

 

jg, I didn't see it. But I believe the dollar amounts are that high.

A lot of people pointing fingers right now throw in the "unregulated" characterization over and over again. It may not surprise you, knowing me, that I don't think this should be regulated. If people want to be stupid with their money, they should lose it. We don't need regulation. This isn't a matter of anyone infringing on others' rights, so we shouldn't be legislating it. Let Lehman and JP Morgan and Merrill Lynch pay their price. If I am stupid with my money, I pay my price.

The real regulation occurs when people hopefully learn from their mistakes. The problem with regulation that is trying to protect people from themselves (and not from each other) is that it relies on our moronic elected officials knowing how to regulate things, without arbitrary political decisions and special interests forcing irrational regulations on us.

If I want to go out and spend all my money on horse dung and I put up my house as collateral to do it, there shouldn't be "regulation" stopping me. I am stupid. When I lose everything, I got what I deserved.

America was kind of founded on financial freedom and liberty. The Boston Tea Party epitomizes our early principles.

Regulation (and I am not talking about the types of necessary regulations, or laws, that protect our rights from others infringing on them) implies: 1) You can protect people from themselves. 2) Elected officials will do things with pure motives.

I don't believe either of those things are true.