Good Layman's guide to the financial crisis

[Bullmoose Bailey]

Friends, I cannot speak authoritatively to this subject but have made some distrbing observations; i.e. massing Asian & Europaean ownership of US Debt, negative savings, high inflation.

I cannot find a solid answer as to where the "bailout(s)" cash is coming from.

Is the BEP merely printing it ?

Or is the FRB merely typing it into existence ?

If so what projections will you make as to the effect on inflation ?

[Watcher In The Middle]

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time

Link to Term

If demand isn't there (and for most items defined as "goods and services"), right now it's not, it's hard to see any immediate inflation in terms of price inflation.

Course, you pump $800 to $900 bil into the economy, who knows what's going to happen. Looks like we're going to find out.

[Ski]

The cash is coming from the traditional sources - the Gulf States and China. This is probably the last time they will lend to us, so what ever the plan is, it better be damned good.

Right now there is no inflation. There is a good deal of deflation going on right now however, and as WITM stated, when the trillion dollars is floated into the economy, the potential for inflation is going to increase greatly.

[Bullmoose Bailey]

The cash is coming from the traditional sources - the Gulf States and China. This is probably the last time they will lend to us, so what ever the plan is, it better be damned good.

Right now there is no inflation. There is a good deal of deflation going on right now however, and as WITM stated, when the trillion dollars is floated into the economy, the potential for inflation is going to increase greatly.

Roger that sir, but I thought we were inflating the currency supply (what used to be known as M3) in order to artificially prevent deflation & support both the borrowers and lenders who suffer under inflation & deflation respectively by severity.

Will not a new influx of currency per capita induce further inflation by increasing the monetary velocity ?

Still trying to understand and thought you might like to enlighten.

[Ski]

Look at the costs of products for an indicator of deflation. One of the best to use as a guide is food, mainly because supermarkets work on razor thin margins based on the amount of food is moved through the market. It's usually 2-4%. It's already happening in Europe. http://economics.about.com/cs/inflation/a/deflation.htm - this is a simple explanation of how deflation occurs and what effects it has on the marketplace.

The new influx of currency will cause inflation in time. Most of the money being used for the TARP is not seeing the light of day - it's being used to buy off the toxic debts and assets that the banks have accumulated over the last twenty years. Mainly in the form of derivitives and mortgages that have been sliced, diced, minced and then repackaged.

The new initiatives by the Obama crew is going to be more tailored towards people and other industries. The problem is that we, as a country, don't produce much of anything. 2009 marks the first time in US history where there are more government jobs than manufacturing jobs. So there aren't many goods being produced - all the money that is spent on goods is going to multi-nationals at best, to foreign companies at worst.

Will carry on later, have to eat dinner with the family unit.

[bourbon]

TESTIMONY OF HARRY MARKOPOLOS, CFA, CFE. CHARTERED FINANCIAL ANALYST, CERTIFIED FRAUD EXAMINER BEFORE THE U.S. HOUSE OF REPRESENTATIVES COMMITTEE ON FINANCIAL SERVICES. WEDNESDAY, FEBRUARY 4, 2009.

Markopolos has an Army SOF background, and has been investigating Madoff and feeding info to the SEC on him since 2000. He handed Madoff to the SEC on a platter, and they did nothing with it. Accordingly, he shares his opinion of the SEC in part II of his testimony. Markopolos did an excellent job this morning. See the video here.

The SEC seems to be a captive agency that purposely ignores the large frauds....

Hmm, sounds familiar.

[bourbon]

Bernard Madoff, the Mafia, and the Friends of Michael Milken, by Mark Mitchell. Deep Capture, February 3rd, 2009.

Investors Overseas Services was the biggest Ponzi scheme in history until last month, when Bernard Madoff’s Mafia-affiliated operation was revealed to be the new all-time biggest Ponzi scheme.

Investors Overseas Services was a straight-forward swindle. Bernard Madoff’s $50 billion Ponzi was more complicated, involving not just his fund management business, but also his brokerages.

Madoff’s brokerages engaged in naked short selling (offloading stock that had not been borrowed or purchased—phantom stock), likely on behalf of miscreant hedge funds looking to drive down prices. In fact, Madoff successfully lobbied the SEC to enact a rule that allowed market makers such as himself to engage in naked short selling. At the SEC, this rule was called “The Madoff Exception.”

Moreover, a source who has seen some of Madoff’s trading records says that Madoff filled buy orders for stock by naked short selling the stock to his customers’ accounts. So, perversely, significant buying volume through Madoff’s brokerages in a firm’s stock would generate yet more phantom shares, putting downward pressure on the price of that stock.

All of this naked short selling created massive liabilities (probably accounted for as “stock sold, and not yet delivered”). Those liabilities, plus the money that Madoff simply pocketed instead of buying or borrowing real stock, surely accounted for a large chunk of that $50 billion figure.

Last summer, naked short selling (phantom stock) burst into public view as an integral factor in the implosion of the U.S. financial system. In November 2008, former SEC Chairman Harvey Pitt, echoing the words of many other experts and officials, said, “Naked short selling is what’s causing a lot of the problems in the market.”

In other words, Madoff’s operation was not just the largest known swindle in history. It was also a phantom stock machine. And that makes it but one participant in a much bigger scandal — a crime that might have brought us to the brink of a second Great Depression.