Letters to the Editor
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Hold on
If the entire property damage from a mega cat were borne by cat bonds, there would not be a massive meltdown. The total cost would still be in the $50Bn to $100Bn range. Believe it or not that can be handled by the capital markets. They would not be happy, but they could handle it.
Compare that to this credit mess, which is more than twice as much as any natural cat has been. (And the markets are doing fine - not happy to lose money, but still going to work every day) Fannie Mae and Freddie Mac between them have lost $60Bn this year, and that is only two companies. The cost of natural cats is nowhere near big enough to cause serious problems with the capital markets. That is why it makes so much sense to put as much of this cat risk there as is possible. A hurricane can wipe out a reinsurance company. But it is just a bad day on Wall Street.
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Disaster management capitalism
And people call Naomi Klein a paranoiac.
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This is the problem with capitalism
Some people get so focused on the money that they forget that it's just a means to an end, not the end itself. When the goal becomes making money instead of providing a service or product, then something gets lost. Generally, the service or product, to start with. But things have gotten so complex that nobody can even keep track of the money anymore. How many Enron's are out there? How many companies exist that are really just empty shells that funnel money to greedy investors? And what does it mean for the rest of us when these corporations are exposed as the empty shells that they are?
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I'm amazed...
The full extent of the subprime disaster still isn't known yet, but Wall Street is already pushing a new kind of mystery meat investment. What is wrong with investors? Are they like dope addicts who are so strung out that they'll shoot up even though the pusher is known for cutting his stuff with rat poison?
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Where can I buy some of this?
Disaster is good for the economy. CNBC Cramer came on after Katrina with his buy list, including the insurance companies, which he said, will raise rates, and more than offset their losses, which in this case they already offloaded. beautiful. Where can I buy some of this?
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Old wine in new bottles
This is Lloyd's of London. Brokered shared risk pools, basically an exchange for insurance risk pools just like a stock exchange. Except they're bundling it now and packaging it so that anyone can get in on the action.
Keep in mind that it is still 'risk' aka the probability that a series of events will occur, more or less. If it was certainty wouldn't it be a strip or an annunity?
In fact what would be wrong in converting all the CDO's into a straight exchange in its own right? You could marginalize the purchases and spread the risk even further, plus you could leverage price fluctuations and sell a loss short. You could make money from losing money. Seems like a proposition worth considering.
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Naomi Klein's warning
Wow. I finished Naomi Klein's book "The Shock Doctrine - The Rise of Disaster Capitalism" just a few weeks ago, and here it is in action.
I swear, Wall Street will bet on betting.
The shock is coming. We had better be prepared.
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New wine in bloated, about to pop, goat skin tummy bladders?
apologies.
Money confuses me. I like the saying:
'A true rich man/women is benevolent and so generous.
Pockets are not sowed into a wealthy person's cloak.'
I think I am jealous because holes are in my pocket?
interesting read.
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Except that Naomi Klein is neither an economist nor a historian
And been debunked.
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Hold On, I'm Coming
Only problem with the risk spread management solution is the capital markets haven't much capital, just inflated assets. If Wall St weres to sell as little as 50bn of their paper assets they might start a death spiral in the markets. Have you noticed that in this stock market bubble there are no pullbacks, that's because the market cannot afford them, and B Ben knows it, which is why he paniced in Aug, and did a 50/50 full gainer into the markets (cess)pool of liquidity. In the event of a major cat, the insurer defaults, the reinsurer defaults and the government picks up the tab. That means you the taxpayer, but not under Bush, where the costs are simply added onto the deficit, and the markets continue to surge ahead. so not only do we offload the real risk on the taxpayers, but we offload them on unborn taxpayers, which is why the bush people support the right to life, for a future generation of indentured servants.
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except that the probability of paying out is rather low
Think of banks. They have reserve requirements that are 30%. Think of life insurance. Your probability of dying tomorrow is pretty well known. Think of a lottery. The ticket is cheap the reward is huge the odds are absurd. A run on the banks scenario is fairly unlikely.
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Bush's MORAL HAZARD (or someting like that)
May you live in interesting times.........
My family often visited a farm in what is a hidden
valley. A small pocket of a few hundred people nearly
cut off from main roads and electricity. We were warmed by
wood stoves, and read by oil lamps. I realize now, that I
lived, briefly, in the late 1800's (or 17, or even 1600's).
That experience will never fade. Among stacks of books
on economics, philosophy, and all the theories and histories
we accumulate, memories of those months of vacation visits
are like a huge monument: a formidable logic and emotional
refutation (or affirmation), of all the books. Anyone who lived
or lives in that world, cannot fear hunger or cold as they are feared
in war, in revolutions, or in financial collapse. But life is far more
complicated than fresh cream on wild strawberries after baked
fresh salmon, or snuggling in buffalo robes by the fireplace at Christmas.
That is why they had to write the books, and why we study them,
and rewrite them.
Economic, financial, business 'models' (theories) are a phoenix
which ascends from the ashes of the previous collapse. The
'New Deal' emerged this way, and has slowly been abandoned,
margainalized, administratively starved, refuted, legislated into
oblivion. It becomes an interesting PR problem to read of whole
sectors of the economy dying like polluted lakes, the news of
which is crafted to avoid any semblance to a 'Depression'. The world
has wobbled, stabilized, wobbled again........ then along came
George... It is interesting to watch the ('we create our own reality'),
Bush admin realize that they dont have a clue as to what is happening
or what to do about it. As Jimmy said: " this is the moral equivalent of
war..." ---But Jimmy, we have already flunked the Real one. George
is up there spinning his legs in midair like the dollar speculator, who
suddenly realizes that nothing but air is holding it up, as in Paul Krugman's
description of Wyle Coyote. This is good teaching, in that the moral
equivalent and logic required is about the level of grade 6: Mary loaned
Billy 8 lollipops, (just add 12 or more zeros), Billy is broke, so just enter
8 zillion zillion zillion lollipops in the Red column,then hide the leger in the
woodshed. Goldman Sachs, Citi, do the same.....
ARGONNE