It
seems that those lessons painfully taught back in 1929, 1973 and 1987 were not
learned by both investors and brokers. This crisis has 2 fundamental
foundations. On the one hand, the real economy delivering a growing trend of
oil and energy prices due to speculation rather than a structural shortage of
production. A trend that eventually pumped up transports costs, utilities and
manufacturing costs in general; binding corporations and companies to rise
final prices. On the other hand, the financial markets gave birth to a couple
of financial debt instruments called ABS (asset backed securities) and CDO
(collateral debt obligations).
ABS and CDO turned out to be disguised
"junk bonds" basically by blending good will mortgages -a few of
them- with NINJA (borrowers with No Income, No Job nor Assets) mortgages -a
large amount of them- plus a lot of naive savers, and greedy but blind
investors willing to buy such alluring masterkeys to wealth. Nevertheless, most
of the holders neglected or simply unknew a financial principle and law: the
greater the risk, the greater the potential profit.
The risk behind ABS and CDO was due to a lack
of a proper warranty other than the houses and buildings themselves. Given the
fact that the real estate market was heavily overvalued; most of the holders
realized that they had bought a very expensive asset and cash needs were
claiming to close positions. By closing, the volume sold of "junk
bonds" by large market makers dragged down the whole financial markets so
thus, leading the booming prices on commodities and raw materials to an
expected crash.
How this situation happened? Well, both perfect
competition and efficient markets exist in economics books, only. This was real
life and a 90% of world economy is based on finance rather than an economy
driven by goods & services.
On the real economy front, we can find the
following practices: Speculation by withholding amounts of fuel, electrical
power, commodities and raw materials. Cartels and oligopolies. Lack of
regulation or a lawful punishment about practices against gambling with first
need goods.
On the financial front, we can suffer the
following behavior: Fraud by misleading information, lack of performance bonds
(real warranties) guaranting the return of the facial value. Not enough
technical equity available to perform some operations. Government´s patronage
with taxpayers´ funds. Lack of criminal laws prosecuting ventures and corporate
gunslingers performing large-scale grifts.
All and all, cheap loans are going to be
available to the same institutions causing this recession. Taxpayers' money
will be used to rescue transnational banks and enterprises but no money will be
provided to help customers in broke, swindled or facing difficulties to honor
their mortgages. Employments are destroyed at an outrageous rate and welfare
benefits are scarce or vanished since long ago.
Laws and a financial stimulous retrieving the
customer´s trust and other related measures increasing its purchasing power are
desperately requested.
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