The Other I

December 3, 2008

More fantasy money in our economic black hole

I thought I broadly understood how the world got into the financial meltdown which has shaved almost 50% off the major indexes in the last year, and ripping through the retirement funds so many people were relying on.  I managed to get my head around collateralized debt obligations, (CDOs),  credit swaps, subprime mortgages, and the Libor.  I thought I understood how the fantasy money was created, and I felt vaguely disdainful of those mega-paid bank CDO’s who really did not understand what was going on.

I apologize for my arrogance.  I have just read a mind-boggling article on the credit crunch recommended by my nephew, who is getting his doctorate in economics at Princeton, and discovered that there was a whole layer beyond CDOs and credit swaps that multiplied fantasy money many times over.

I don’t fully understand yet how they did it, and it doesn’t really matter, I suppose, if I don’t ever get it.  It took me about 30 minutes to read the article on-line and I came away stunned.  No outsider – no average investor who simply followed the traditional rules of investment safety – could possibly have known the depth of hollowness on which the whole global financial edifice has been built for the last 20 years.  Within the trade itself, the ignorance, the greed, and the corruption were impenetrable.  Only very cynical and knowledgeable insiders were able to grasp just how bad it was, and they were few and far between.

If you’re interested, read more.   If you don’t know what collateralized debt and credit swamps are, it’s possible to skip over the parts you don’t understand without missing the main thrust.

The only thing you really need to understand is arrogant stupidity and utterly ravenous, insatiable avarice.

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