Financial Architecture Fundamentals
Posted by WARREN MOSLER on June 11th, 2009
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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.-
MMT: Taxes function to regulate aggregate demand, and not to raise revenue per se.
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June 11th, 2009 at 6:33 pm
Warren, I don’t understand how having all these people and brain power engaged in the Credit Swap tricks in the article below makes the world better. That brain power could be put to 3d solar cells, or solar space concentrators, or asteroid deflection shields, or biotech life extension research. Keynes warned about this a long time ago in his sermons on “liquidity fetishes” We have all these people engaged in abstract trading of things abstracted out 5 or 10 times – it serves no PUBLIC PURPOSE does it?
Today’s Wall Street Journal carries the amazing story of a small Texas brokerage that pulled a fast one on some of the biggest banks in the world.
The short version goes like this.
Amherst, the Texas brokerage, and others sold hundreds of millions of dollars of credit default swaps on bonds back by $29 million of subprime mortgages to JP Morgan, Goldman, UBS RBS and other banking giants. The banks paid steeply for the swaps—up to 90 cents for every dollar of insurance—but thought it was easy money. After all, these were Lehman packaged California subprime loans made in 2005, a class of loans that pretty much define toxic. The upside seemed limited but almost certain.
What happened next is that a loan servicer, probably at the behest of Amherst, turned around and bought up all the mortgages, paying them off in whole. Apparently because the original amount of loans backing the bonds was $335 million—meaning the amount of outstanding loans had fallen to just 10% of original amount due to defaults and refinancings—the mortgage servicer was free to buy them up and make bond holders whole.
Of course, this meant that the entire $130 million of credit default swaps was suddenly worthless. The banks are sure that the mortgage servicer was acting on behalf of Amherst, which would mean the 100 person Texas brokerage had made a tidy sum by buying toxic mortgages while selling insurance on the bonds.
The banks are crying foul, although it’s not clear if anything illegal happened. It may just be that the banks were simply outsmarted by a wily brokerage who had found a way to exploit the unhealthy appetite for these credit default swaps. We can squint out eyes and see this as Wall Street getting punished for its greedy desire to go massively short these mortgages.
http://www.businessinsider.com/tiny-texas-brokerage-crushes-wall-street-with-daring-mortgage-trade-2009-6
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June 16th, 2009 at 5:51 pm
Warren how can you say that all imports are a benifit and in the very next line call for cutting oil imports in half? Lyle
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June 16th, 2009 at 6:27 pm
good question!!!
imports are benefits
problem with oil is a foreign monopolist is controling price and extorting ever higher real terms of trade.
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September 26th, 2010 at 3:27 pm
Smart, organized, clear, classic Mosler.
“Unilaterally drop all import restrictions”
I think this takes a much too extreme side of the free trade debate. My objections are at least three fold. There is the infant industry argument. There is the self-sufficiency argument where critical industries to the functioning of the country might cease to exist due to competitive disadvantages domestically making us dependent on foreign countries. And there is the possibility of too much competition creating undesirable levels of stress in both the competition winners and loser’s lives.
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WARREN MOSLER Reply:
September 28th, 2010 at 11:00 am
I don’t buy any of them at the moment.
Sustaining domestic full employment, etc. along with the ‘right’ incentives here and there should do the trick.
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