Wednesday, May 19, 2010

Cascade of consequence. Have I got this right?

Once upon a time in lots of far away lands.
Some people who really couldn't afford them were enticed to take out mortages that they (obviously) couldn't afford for up to 100% of the purchase price on "bubbled" or over-priced properties. As was always going to happen they couldn't meet the repayments so the properties were forclosed. Then when the mortagees in posession tried to sell the properties they could not realise the dollars they had lent to the home buyers. This led to the arse falling out of the market for securities that had been crafted to fund these mortages. It was discovered that the finance companies who had crafted these products had been playing fast & hard with these securities and had investors from all sorts of areas of the economy. The Fear contagion spread impacting far and wide from pension funds to local governments. Money had been streaming into these products from anyone looking for a good return on some spare cash they had. Unfortunately for some (See Storm Financial) some people had even borrowed against personal assets to invest in theses instruments.

So now the banks are massively constrained with no more funds coming in the banks had no funds to lend out to new homebuyers. Profits and divedends fall, sparking a migration out of banking & finance stocks. Banks often trade on the capital they have in a porfolio of shares in their own company so as the share price dropped, the value of that protfolio dropped, so they could borrow less against it for lending to all sectors of the economy. This further constrainined the suply of cash into the economy. The banks wobbled & some (none in Australia) but some like Northern Rock got a big chunk of pretty pretty government bail out cash. In Australia we responded with a suite of measures from ca$h handouts to bans on short selling and the government bought up some of these mortages, to inject cash into the system to keep it rolling.

Some of the finance companies that had provided streams of cash into the banks through these securities products saw the banks get some and claimed they were "to big to fail" and got some lolly to. Some of them anyway, others were thrown on the pyre of political expediancy.

Some US car making companies who had been staggering for years put their hand out and got some after a dog and pony show about arriving in Washington on private jets, then hitchiking in sackcloth & ashes.

Now Governments are in difficult straights. Governments funded much of this largess with Bonds issued and sovereign wealth funds. The bonds are sold on a competitive market where they have to in effect out bid other bonds with return over risk. Some governments espescially in Southern Europe have reached a risk level were they have to pay credit card rates of return on bonds to get anyone to buy the things. The Bonds are also fixed period devices so when they are due, the holder expects his cash. Some governments are now having to borrow (issue more bonds) to pay out previous loans (bonds) sort of like paying a Visa card debt (at 15%) off with an American Express card (@25%.) Not good.

So now some supra government bodies like the IMF and the European Central Bank are providing bail outs to back these bonds.

Let's recap.
Joe Sixpack can't pay his mortage on his 3 bedroom brick & tile.
Banks struggle through losses and increased costs of funds.
Finacial institutions who were supplying the banks collapse.
Big corporations like car companies fall over.
Governments step in to supply emergency funding measures.
Some Governments then have problems with their income streams.
So SupraGovernment organisations step up to back the failing Governments.

Who the hell is going to bail out the IMF & ECB?


  1. Popped this into GB's blog this morning, but thought it might amuse you too!

    Black Economy.

    Black plumes of volcanic ash,
    Economies feeling the lash.
    Greece on its knees,
    A salary freeze!
    What is it with Wogs and cash!



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I was the proud recipient of the worlds first monkeys ass to human face transplant. Friends of the donor monkey says it took well, I'm not so sure.