The Mansion

One of my favorite authors in the world of Finance ever since my days involved with trading.Article taken from Portfolio.com


The Mansion: A Subprime Parable
by Michael Lewis October 2008 Issue

When Michael Lewis and his family move into a house they can't afford, he gets a taste of the new American nightmare.

I was looking to return to New Orleans, where I’d grown up, to write a book. The move would uproot my wife and three children from California, and I felt a little bad about that. They needed a place to live, but places to live in New Orleans are hard to find. Ever since Hurricane Katrina, the real estate market there has been in turmoil. ­Owners want to sell, buyers want to rent, and the result is a forest of for sale signs and an army of workers commuting from great distances.

At the bottom of every real estate ad I saw was the name of the same agent. One woman ruled the market, it seemed, and her name was Eleanor Farnsworth. I called her and threw myself on her mercy. She thought my problem over and then said, “I only know of one place that would work for you.” She’d suggested it to Brad Pitt and Angelina Jolie, she said, before selling them their more modest place in the French Quarter.


That shouldn’t have been a selling point; it should have been a warning. I should have asked the price. Instead, I asked the address.

As soon as I saw it, I knew it—the mansion. The most conspicuously grand house in New Orleans. As a child, I’d ridden my bike past it 2,000 times and always felt a tiny bit unnerved. It wasn’t just a mansion; it seemed like the biggest mansion on the street with all the mansions, St. Charles Avenue, an object of fascination for the tourists on the clanging streetcars. But it was hard to imagine a human being standing beside it, much less living inside it, and as far as I could tell, none ever did. There was never any sign of life around it; it was just this awesome, silent pile of pale stone. The Frick Museum, but closed.

Thirst for big homes
Inside, it was even more awesome than outside. It was as if the architect had set out to show just how much space he could persuade a rich man to waste. The entryway was a kind of ballroom, which gave way to a curved staircase, a replica of one in the Palace of Versailles. The living room wasn’t a kind of ballroom; it was a ballroom, with $80,000 worth of gold on the ceiling. The bedrooms were the size of giant living rooms. The changing rooms and closets and bathrooms were the size of bedrooms. There were two of everything that the rest of the world has one of: two dining rooms, two full kitchens, two half kitchens. Ten bathrooms and seven bedrooms.

I didn’t ask the price—I was renting—so I didn’t know that the last time it changed hands it had sold for close to $7 million, and was now valued at $10 million. I imagined how it would feel to live in such a place. What it wouldn’t feel like, clearly, was anything close to being in the other houses in which I’d lived.

Upper middle class: That’s how I’ve always thought of myself. Upper middle class is the class into which I was born, the class to which I was always told I belonged, and the class with which, until this moment, I’d never had a problem. Upper middle class is a sneaky designation, however. It’s a way of saying “I’m well-off” without having to say “I’m rich,” even if, by most standards, you are. Upper-middle-classness has allowed me to feel like I’m not only competing in the same financial league as most Americans—I’m winning! Playing in the middle class, I have enjoyed huge success.

Why Euro will fall further

Why the Euro Is Set to Fall Further ...
by Jack Crooks


Is anyone less thankful this year than last year? It's probably safe to bet on YES.

I don't have to run through it all — we've been bludgeoned by all that's bad in the global economy and financial system all year long. And I'm sure there are plenty of individuals out there who aren't quite in the mood to be thankful — turkey on the table or not.

Last week I discussed the effect of tight coupling on financial markets. I said when the mechanics of some market or some asset of immense complexity becomes loose, it's liable to create a downward spiral for all the moving parts tightly coupled with it.

That's exactly what's happening. And it means ...

Assets Collapse, Markets Crumble and Capital Flow Shifts as We Enter an Ice Age

Governments are taking all kinds of efforts to bailout key institutions and contagious markets.

They understand the severity of the cleansing cycle that's begun; and are very afraid of what they see.

Eventually though, they're going to have to take their economies, and the financial system, off life-support. If not, after too long, they may be left with a system incapable of organic growth.

In the meantime, Mr. Consumer is starting to get very worried. His wealth has been hammered by lower housing and stocks, and now his job is either already gone or in jeopardy.

This fear is leading to a major uptick in savings. That means spending takes a back seat. And in the end, global consumption takes a hit.

A very smart guy named Stephen Roach, Chairman of Morgan Stanley Asia, recently commented on the economies of Asia and how they're faring in this environment. He said:

"[There is] no country in Asia that is either not declining, or in recession, or slowing sharply. No one is spared. [They're the] most linked region of the world for the rest of the global economy."

Bingo!

He went on to say China is "slowing very, very sharply."

You see, China has come to represent a very important middle-man between developed and emerging market economies — in Asia and across the globe. Their low-cost, cheap-labor production model entails gobbling up input products and raw materials from emerging economies in order to satiate the demand from developed economies.

Signs that China is in trouble stem from, among other items, collapsing demand for the stuff they produce. And the ramifications of China slowing down will spread far and wide.

Which side are you on?

Are You Optimistic Or Pessimistic About The Economic/Corporate Earnings Outlook?
By The Money Gardener on November 29, 2008

One of the reasons why stocks change hands a million times over everyday is because no matter how great or dire the economic/corporate earnings outlook is, there is always two sides to the story. Optimists and pessimists will always disagree, and each side can usually make a compelling case to either leverage yourself to the hilt and buy stocks with all your resources, or to sell everything stash most of your cash underneath your mattress and use the rest to build a bomb shelter. I think most would agree that it feels like we are on a very bad footing right now economically, but yet stocks are still finding bids, and the sun continues to rise every morning. Here are some reasons to be optimistic or pessimistic about the near-mid term economic/corporate earnings outlook:

Pessimists

* Consumers and businesses are buckling down for a number of reasons which include economic uncertainty, rising unemployment, recessions, falling home prices, and trouble obtaining credit.
* The U.S. government is building a massive debt load, and recent actions that they’ve taken shake the very foundations of capitalism and promise more risk aversion, and government regulation, of industries and markets in the future.
* The former ‘BIG 3′ automakers are in trouble, putting millions of more jobs at risk.
* The growth within emerging markets like China and India is slowing and recent terrorist acts add to the fear and uncertainty in these markets.
* Deflation is now taking over from inflation as a worry because the price of goods are declining quickly.

Optimists

* Fuel and other commodities are much more affordable than they were just months ago. This allows consumers and businesses to cut costs and leave room for consumption and investment.
* The S&P 500 index has fallen over 40% since the start of 2008. Shares of many companies can be bought for significantly less now versus in 2007. Severe declines in forward earnings have been priced into many stocks making them less risky investments.
* Interest rates around the world are coming down making credit and mortgages cheaper for many.
* Emerging markets like China and India are still growing at very high rates and demographic, and lifestyle trends indicate that they will require the rest of the world’s goods and services in a big way for years to come.
* In a Darwinian type of way, plenty of the inefficiencies, mismanagement, redundancy, greed, and waste is being washed from the system. Most of the issues which have been dealt with and are being dealt with right now will come out the other side cleaner, leaner, and more stable. (ie Big 3, Financial sector, credit markets, consumer debt)

BAD SELECTION

The 8:00 AM Thanksgiving train from New York to Boston was full of self satisfied New Yorkers including myself, smug in their knowledge that they they were able to circumvent the maddening crowds at the airports and the bumper to bumper traffic on the highways during the busiest travel day of the year in US. Indeed, as the train sailed smoothly towards Boston's Route 128 station, the majority of the passengers began to gather by the exit smiling at the fact that the whole journey took a scant three hours to complete. Suddenly, however, the train lurched to screeching halt and a sickening smell of burnt rubber enveloped the car.

We were no more than four minutes away from the train station but now found ourselves dead still in the middle of suburban Massachusetts wilderness surrounded only ominous looking trees and and a track full of twigs. A grim faced conductor rushed by and said, "Go back to your seats. We are not going anywhere for a while."

What happened? After a few minutes of frantic cell phone calling to friends and relatives at the train station we pieced together the basic facts of the story. A man had apparently wandered on to the track and was unfortunately struck by our train. Although injured, he was not dead and by now the whole rescue apparatus of the state of Massachusetts was involved in the incident.

The moment the outline of the story became known, a hundred Iphones and as many Blackberries lit up in frantic attempt to find out how soon the whole mess would be resolved. As i watched my fellow passengers armed with the latest gadgets of the information age struggle vainly with getting an answer I smiled ruefully knowing how pointless it was.

By now, the accident triggered a long and complicated bureaucratic protocol and no matter how many times my fellow travelers refreshed the tiny screens of their web-enabled cellphones they weren't going to expedite the process. So as ten minutes turned into a half an hour and half hour turned into an hour and an hour turned into two, we watched the Amtrak local train which left New York an hour after us and was supposed to arrive two hours later pass us by as we remained trapped less than a mile away from our final destination.

Sitting in a cafe car nursing a cold cup of coffee, I realized how this little unexpected and unfortunate adventure was similar to trading. I saw clearly how even the best laid plans, accompanied by the latest information technology can still fall victim to fate. All of our clever travel planning, all of gadgets could not help us on this Thanksgiving day. We were simply subject to forces outside our control.

As traders of course we see this phenomena all the time. No matter the trade plan, no matter the analytics, no matter the money management, sometimes we simply make a Bad Selection. The good news for the passengers is that we finally arrived to Boston safe and sound and enjoyed a great Thanksgiving with our families . A point to keep in mind next time a trade blows up in your face. Bad Selection is part of life as it is part of trading we should take it all in stride.

China to Spend on Airports and Highways

China to spend 1 trln yuan a year on airports, highways in next 2 yrs - state TV
2008-11-11 05:38 UTC (GMT)

BEIJING (XFN-ASIA) - China's fixed asset investment in the transport sector, excluding railways, will be around 1 trln yuan annually in the next two years, China Central Television (CCTV) reported.

Citing Ministry of Transport spokesman He Jianzhong, the report said that there are 12,000 kilometers of express highways currently under construction in the country, which are expected to consume 12 mln tons of steel products and 100 mln tons of cement in total.

The report quoted He as saying that according to the ministry's estimate, China's 2008 fixed asset investment in the transport sector will be 800 bln yuan, of which 300 bln will be completed in the fourth quarter.

The transport ministry is now in charge of the air, river/sea shipping and land transport, with the rail sector managed separately by the Ministry of Railways.

China's State Council announced on Sunday night a four trln yuan stimulus plan for the economy to counter the impact of the global economic slowdown.

The government formally adopted 10 measures to boost domestic demand, including lifting credit controls as well as speeding up investment in rural development, railways, highways, airports and other infrastructure projects.

(1usd = 6.83 yuan)

The Hidden Hand

The free markets scream the capitalist, but is it so an efficient market as claimed?

Some research has been done here and using extracts from some links and a time line with the chart embedded in the graph.

So you decide on it.

Just follow the time line and enjoy reading!

1)JANUARY 30, 2005: U.S. loses track of nearly $9 billion in Iraqi funds

The CPA provided less than adequate controls for approximately $8.8 billion of Development Fund for Iraq (DFI) funds provided to Iraqi ministries through the national budget process. [CPA Report, 1/30/05]

2)MAY 11, 2005: Bush signs supplemental spending bill, providing nearly $76 billion for military operations in Iraq and Afghanistan [State Department, 5/12/05]

3)FEBRUARY 3, 2006: Bush requests additional $70 billion for Iraq and Afghanistan, $120 billion total for 2006 [Washington Post, 2/3/06]

4)JULY 12, 2006: White House budget document reveals that administration will ask for another $110 billion to fund the wars in Iraq and Afghanistan [White House Office of Management and Budget, 7/12/06]

5)JANUARY 19, 2007: $8.4 billion: The cost of the Iraq war per month. “It rose from a monthly ‘burn rate’ of about $4.4 billion during the first year of fighting in fiscal 2003.” [LA Times, 1/19/2007]

6)FEBRUARY 2, 2007: Bush requests another $100 billion for Iraq
"President George W. Bush will ask Congress for $99.7 billion for the Iraq and Afghanistan wars for rest of fiscal year 2007 and more than $145 billion for fiscal year 2008. … That money comes on top of $70 billion that Congress approved for the current fiscal year, adding up to a total of $170 billion and making it the most expensive year yet for the war.” [Reuters, 2/2/07]

7)MAY 12, 2007: Billions in oil missing in Iraq.

“Between 100,000 and 300,000 barrels a day of Iraq’s declared oil production over the past four years is unaccounted for and could have been siphoned off through corruption or smuggling, according to a draft American government report. Using an average of $50 a barrel, the report said the discrepancy was valued at $5 million to $15 million daily.” [New York Times, 5/12/2007]

8)JULY 19, 2007: Report: Iraq war to cost $550 billion by October. [Bloomberg, 7/19/07]

9)OCTOBER 8, 2007: Brown announces phased withdrawal from Iraq, says troop reductions have made Basra ‘calmer’. [BBC, 10/8/07]

10)NOVEMBER 9, 2007: Iraq veteran healthcare may be $650 billion claims a group of noted physicians. [Boston Globe, 11/9/07]

11)NOVEMBER 13, 2007: The economic costs to the United States of the wars in Iraq and Afghanistan so far total approximately $1.5 trillion, according to a new study by congressional Democrats that estimates the conflicts’ “hidden costs”– including higher oil prices, the expense of treating wounded veterans and interest payments on the money borrowed to pay for the wars. [Washington Post, 11/13/07]

12)FEBRUARY 6, 2008: Bush administration abandons long-term “security guarantee” with Iraq, CQ reports. As one administration official said, “We say, look, if you want a security guarantee, that will be a treaty, and a treaty will have to go to our Senate,” endangering the whole agreement. [CQ, 2/6/08]

13)Oil trading manipulation probe by CFTC.http://money.cnn.com/2008/05/30/news/economy/oil_cftc/index.htm

14) The last entry is history now!

OIl price from 50 to 150 range??

Oil to $50 ... or $150?
by Sean Brodrick

When people ask me if I think crude oil is going to $50 or $150, I nod sagely and say: "Yes, Hmmmm …. probably."

I'm not being flip. I'm simply giving both the short-term and the long-term time frames.Short-term, crude oil is probably heading lower, even though it's nearly 60% off its highs.

The last chance to hold the line on oil prices was at OPEC's emergency meeting. And the oil cartel choked like a cat on a hairball. They cut 1.5 million barrels per day of production when they needed to cut about 3 million barrels per day.

The OPEC meeting was the last obstacle in the way of deflationary forces that are driving oil prices lower in the short-term. Long-term, there are forces that should drive oil much higher. And one of the paradoxical things about the oil market is the longer that prices stay lower, the harder, faster and more furious the rebound will probably be.

The good news is you can make money on both sides of the market. We'll get to the long-term forces in a minute, as well as potential trading opportunities. First, let's look at the short-term forces.

Short-term Force #1:
Economic Weakness

The prices of commodities and stocks are down across the board as investors resign themselves to some form of global recession. Economies from Boston to Beijing are grinding into low gear. And demand for crude oil and gasoline is falling off a cliff.

Here in the U.S., Americans are using around 18.6 million barrels of oil a day, a drop of 1.8 million barrels year over year. Demand for gasoline is decelerating rapidly.

Take a look at this chart from Calculated Risk and you'll see what I mean.Americans drove 15 billion fewer miles this past August compared with the same month a year ago — a drop of 5.2% and the biggest single monthly decline since 1942, the first year data was collected.

Short-term Force #2:
Hedge-Fund Selling

Hedge funds were responsible for much more of oil's climb to $150 than I or a lot of other analysts thought possible. Now, hedge funds are being hit by heavy redemptions as investors cash out and run for cover. One report concludes that investors pulled $210 billion out of U.S. hedge funds during the third quarter, forcing the funds to dump assets, including oil, thereby driving down prices.The good news is that hedge funds can't sell forever. And in fact, the worst of it should be over by the end of this year as investors square their books and take their lumps.

Short-term Force #3:
The Rising U.S. Dollar

As investors flee for safety, they sell risky assets and go into U.S. dollars. This has pumped up the dollar's value. And since oil is priced in dollars, a higher greenback tends to push crude oil prices lower. With the economy on the skids, why is the U.S. dollar looking like a safe haven?

The reason is that Europe has been hit by the credit crisis even harder than the U.S. And Eurozone countries are responding to the crisis separately — not working as a group.

This undermines confidence in the euro, and makes the U.S. dollar shine by comparison. Also, many foreign banks need dollar financing. That's all the worse for them, because they can't get loans from U.S. banks as the credit crunch worsens.

Looking at this chart, you can see that crude oil and the U.S. dollar are mirror images of each other now.But the U.S. dollar is due for a pullback in its rocket ride. That said, crude could easily go to $50 a barrel before its correction is over — becoming as deeply oversold on the downside as it was overbought on the upside.

Now, Let's Look At Some Long-Term Forces That Could Push Oil Much Higher.

Long-term Force #1:
Mexican Production Is Falling Off a Cliff

Yes, this has been going on for a long time. But it's getting worse, despite the Mexican government's frantic efforts to reverse the trend.For the month of September, Petroleos Mexicanos (Pemex), the state-owned oil company, said monthly crude output fell to the lowest since November 1995.

Production fell to 2.7 million barrels a day in September, a decline of 14% from a year ago. What matters to us, though, are exports — Mexico is the #3 supplier of imported oil to the U.S. And since Mexico uses more and more of its own oil, exports to the U.S. fell to 845,000 barrels a day, the lowest since October 1995.And it's not just Mexico — production is also falling in Russia, Kazakhstan and other oil exporters.

Long-term Force #2:
Production in the U.S. Gulf of Mexico
Is Trending Lower


Hurricane season is nearly over, but we're still feeling the impacts of Hurricanes Gustav and Ike. The Minerals Management Service recently said approximately 38.6% of the production in the Gulf was still shut-in, for a total of 32 million barrels of crude oil and 165 billion cubic feet of natural gas production in the month of September.

We can expect more drops in Gulf of Mexico production in the future in the wake of future hurricanes, because hurricanes are becoming both more frequent and more powerful.

Since 1995, there have been 207 named storms in the Atlantic basin, which includes the Gulf of Mexico — a 68% increase from the previous 13 years, according to statistics from the National Oceanic and Atmospheric administration. Of those storms, 111 were hurricanes, a 75% increase over the previous period.

2 Ways to Play This Wild Market...

If you want to play the potential downdraft in crude oil — a move that could take it to $55 or even $50 a barrel, here's how to do it... The PowerShares DB Crude Oil Double Short ETN, symbol DTO, is an exchange-traded note (ETN) that gives investors twice the inverse performance of the DB benchmark crude oil index, plus the monthly T-Bill index return.

However, the DTO is not heavily traded, so there is a gap between bid and ask that is larger than I'd like. So you might consider the UltraShort Oil & Gas ProShares ETF, symbol DUG. It is very liquid and targets twice the inverse of a big basket of energy sector stocks.And when oil bottoms and starts to head higher ...

You could consider the PowerShares DB Crude Oil Double Long, symbol DXO. This exchange-traded note backed by Deutsche bank gives investors exposure to twice the monthly performance of the DB optimum yield crude oil index, plus the monthly T-Bill index return.DXO is more liquid than the DTO — the DXO recently traded about a million shares a day.

But for real liquidity, consider the Ultra Oil & Gas ProShares (DIG). It recently traded 20 million shares per day. And it's a mirror image to DUG — DIG targets twice the performance of a basket of energy stocks including Apache Corp., Chevron, Devon Energy and more.These are incredibly volatile times in the commodity markets, and crude oil is no exception. But this painful pullback will lead to some amazing opportunities, and clear the way for the next leg up

Europe on the brink of currency crisis meltdown

Europe on the brink of currency crisis meltdown
The crisis in Hungary recalls the heady days of the UK’s expulsion from the ERM.

By Ambrose Evans-Pritchard
Last Updated: 10:52AM GMT 26 Oct 2008
Comments 73 | Comment on this article
The financial crisis spreading like wildfire across the former Soviet bloc threatens to set off a second and more dangerous banking crisis in Western Europe, tipping the whole Continent into a fully-fledged economic slump. Currency pegs are being tested to destruction on the fringes of Europe’s monetary union in a traumatic upheaval that recalls the collapse of the Exchange Rate Mechanism in 1992.

“This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon. Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from Austria – the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down – and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits.

The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the emerging market bubble, now busting with spectacular effect.
They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles.

Europe has already had its first foretaste of what this may mean. Iceland’s demise has left them nursing likely losses of $74bn (£47bn). The Germans have lost $22bn. Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash is a vastly underestimated risk. It threatens to become “the second epicentre of the global financial crisis”, this time unfolding in Europe rather than America.

Austria’s bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund. Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama.

Amazingly, Spanish banks alone have lent $316bn to Latin America, almost twice the lending by all US banks combined ($172bn) to what was once the US backyard. Hence the growing doubts about the health of Spain’s financial system – already under stress from its own property crash – as Argentina spirals towards another default, and Brazil’s currency, bonds and stocks all go into freefall.

Broadly speaking, the US and Japan sat out the emerging market credit boom. The lending spree has been a European play – often using dollar balance sheets, adding another ugly twist as global “deleveraging” causes the dollar to rocket. Nowhere has this been more extreme than in the ex-Soviet bloc.The region has borrowed $1.6 trillion in dollars, euros, and Swiss francs. A few dare-devil homeowners in Hungary and Latvia took out mortgages in Japanese yen. They have just suffered a 40pc rise in their debt since July. Nobody warned them what happens when the Japanese carry trade goes into brutal reverse, as it does when the cycle turns.


The IMF’s experts drafted a report two years ago – Asia 1996 and Eastern Europe 2006 – Déjà vu all over again? – warning that the region exhibited the most dangerous excesses in the world.
Inexplicably, the text was never published, though underground copies circulated. Little was done to cool credit growth, or to halt the fatal reliance on foreign capital. Last week, the silent authors had their moment of vindication as Eastern Europe went haywire. Hungary stunned the markets by raising rates 3pc to 11.5pc in a last-ditch attempt to defend the forint’s currency peg in the ERM.

It is just blood in the water for hedge funds sharks, eyeing a long line of currency kills. “The economy is not strong enough to take it, so you know it is unsustainable,” said Simon Derrick, currency strategist at the Bank of New York Mellon. Romania raised its overnight lending to 900pc to stem capital flight, recalling the near-crazed gestures by Scandinavia’s central banks in the final days of the 1992 ERM crisis – political moves that turned the Nordic banking crisis into a disaster.

Russia too is in the eye of the storm, despite its energy wealth – or because of it. The cost of insuring Russian sovereign debt through credit default swaps (CDS) surged to 1,200 basis points last week, higher than Iceland’s debt before Götterdammerung struck Reykjavik. The markets no longer believe that the spending structure of the Russian state is viable as oil threatens to plunge below $60 a barrel. The foreign debt of the oligarchs ($530bn) has surpassed the country’s foreign reserves. Some $47bn has to be repaid over the next two months.

Traders are paying close attention as contagion moves from the periphery of the eurozone into the core. They are tracking the yield spreads between Italian and German 10-year bonds, the stress barometer of monetary union. The spreads reached a post-EMU high of 93 last week. Nobody knows where the snapping point is, but anything above 100 would be viewed as a red alarm. The market took careful note on Friday that Portugal’s biggest banks, Millenium, BPI, and Banco Espirito Santo are preparing to take up the state’s emergency credit guarantees.

Hans Redeker, currency chief at BNP Paribas, says there is an imminent danger that East Europe’s currency pegs will be smashed unless the EU authorities wake up to the full gravity of the threat, and that in turn will trigger a dangerous crisis for EMU itself. “The system is paralysed, and it is starting to look like Black Wednesday in 1992. I’m afraid this is going to have a very deflationary effect on the economy of Western Europe. It is almost guaranteed that euroland money supply is about to implode,” he said.

A grain of comfort for British readers: UK banks have almost no exposure to the ex-Communist bloc, except in Poland – one of the less vulnerable states. The threat to Britain lies in emerging Asia, where banks have lent $329bn, almost as much as the Americans and Japanese combined. Whether you realise it or not, your pension fund is sunk in Vietnamese bonds and loans to Indian steel magnates. Didn’t they tell you?

The Genesis Of Banking part 1

The genesis of banking started in England during the era of the early Blacksmith days (good ol’ Smithy!) that made strong boxes for customers who wanted to store his or her valuables. Whenever a person who had excess Gold for safekeeping, he would take it to Smithy, who always had an extra “safe” or strong box in the back of his place. The Blacksmith would issue a warehouse receipt so that he could collect his gold on demand after paying a “warehouse fees”.

As usual with human nature, the Blacksmith became greedy; they assumed that since everybody didn’t go to collect their gold all at the same time, he could lend some out on a rental basis. And this was the birth of illiquid banking which we now term as “Fractional Reserve Banking”.

Eventually the governments got on to this scheme as well and when there was not enough Gold or Silver in their coffers to punch out hard money or you can say par value money.They recognized the profit and the power to create money out of thin air, just by simply printing “warehouse receipts”. When the Government took over this scheme the receipt was renamed “currency” and the created banks called their receipts “Cheques”.

Currencies were guaranteed by the reserves of gold or silver in the bank, while the bank Cheques were guaranteed by the capital of the banks. The governments had rarely had that much of gold or silver in their reserves, plus borrowings could equal all the requests for gold redemptions at any one time. Since the people had trust in Governments to redeem on demand there was no demand. (All depositors assumed that the gold was available!)

Banks made incredible profits as long as there no mismanagement and they had the ability to create money of thin air and lending at interest to eight or ten borrowers at the same time. The method greatly expanded the system of expansion of money supply and it became the most profitable business.

The Banking function operates the opposite to all other types of business as the cash deposited into the bank is a liability to the bank as it is owed to the depositor. Money is then lent out to the borrowers which will capture in the books of the banks as a profit/asset.

To put it in weird circumstances if you deposit one Ringgit it has become a liability to the bank as it has to lend out to eight people simultaneously and creates eight ringgit out of thin air. So as you can see the banks are indeed risky because they accept deposits which they guarantee to repay on demand, and lend out for a 20 years mortgage.

If a major problem arises and a majority of depositors tried to withdraw all at the same time, most banks would just go belly up. It is so strange that most people would trust banks as they are the most illiquid institutions on earth.