Financial Literacy 101: How Money Works Today

September 29, 2007

There once was a time when the answer to the question “what is money?” was pretty straightforward. The coins we traded were perceived to have actual value based on the type and amount of material they were made of, or there were paper notes that explicitly told you that you could exchange them for a set amount of gold (or silver). By tying the amount of money in circulation to the amount of precious metals in the country’s treasury, it was possible to keep the money supply pretty static.

Now, money has become an abstraction. By breaking the link between paper money and precious metals (i.e. the “Gold Standard”), the money supply has taken off, the purchasing power of the US Dollar has dropped precipitously since 1913, and most of us either don’t know why that has happened, or how it affects us.

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A Couple of Things…

September 26, 2007

Another busy week for me, so while there’s been some interesting things going on, I haven’t had a whole lot of time to write. Here’s a couple of quick things that caught my eye, though.

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Goldman Sachs Wins Big

September 20, 2007

How’d ya think they managed this?

As the credit markets fell apart over the summer, causing the prices of hundreds of billions of dollars of mortgage-backed bonds to plunge, Goldman Sachs (Charts, Fortune 500) had already positioned itself so that it would profit massively from a decline in those securities. Thursday, Goldman reported earnings for its fiscal third quarter that were far above expectations.

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Chucked Under the Bus… Again

September 19, 2007

So our friendly inflation-hawk Fed has caved to public pressure and lowered interest rates by a half percent. Wall Street has shown Mr. Bernanke & Co. immediate gratitude with a nice spike in the Dow. This is appropriate, since the main effect of yesterday’s move will be to reward hedge fund operators, institutional bankers and other kingpins of the political donor class for their past history of ignoring potential risk in their reckless pursuit of financial gain.

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The Shock Doctrine

September 18, 2007

Author Naomi Klein’s new book “The Shock Doctrine” is on my list of titles to read. Check out this short movie to get a different perspective on how the world works these days. Very well done.

“The Shock Doctrine” follows on Ms. Klein’s past work on “Disaster Capitalism” as a way to force through major changes in politics, economics and social issues by taking advantage of major catastrophes and world events (war, terrorism, etc). The perfect example of this is the way the Patriot Act was forced through Congress in the wake of 9/11, with most legislators not even having taken the time to read the bill.

I’m a regular reader of Urban Survival, and as some of you may know, George Ure puts a lot of credence in the predictions of the ‘time monks’ over at Half Past Human and their ability to foretell future events in general ways via lexical parsing of huge chunks of internet traffic. The HPH gurus are prediciting a major event of some sort to happen anytime between now and the end of the year, without getting specific as to what that event may be. There have been suggestions that it’ll be war with Iran, or a major series of earthquakes, a financial crisis (much larger than what we’re seeing now), among others… Regardless, if something big *does* happen, pay attention to the laws being proposed and/or passed in the aftermath of these events.

Sinking Like a Rock

September 17, 2007

This isn’t receiving a whole lot of play in the US media other than the business section of major newspapers from the looks of things, but there’s a bona fide bank run taking place in the UK right now.

Northern Rock Goes Into Freefall

Withdrawals Continue at British Bank

Norther Rock Shares Plunge; Customers Flee

There are many other similar stories out there today. Northern Rock is similar to Countrywide in that it’s primary business is mortgages, but it has a banking arm as well. Like CFC, Northern Rock’s business has been affected by the continuing unwinding of the subprime mortgage contagion, and they whipped up a panic with their banking customers when they were forced to tap an emergency loan from the Bank of England late last week. NR customers weren’t encouraged by their inability to access their accounts online on Friday, either. Never a good thing when you can get at your hard-earned cash…

It doesn’t appear that Northern Rock will implode… it’s more likely that they will be taken over as their share price continues to drop. Still, this is the second major institution after CFC to experience a customer panic/run on their bank, and we’re just getting into the main period for subprime ARM resets, which is expected to peak sometime between this winter and the end of spring 2008. I suspect we’re going to have a bumpy ride getting there, for it seems like one issue pops up right after the last one dies off.

Greenspan: Iraq War Mostly About Oil

September 16, 2007

From the ‘No Shit, Sherlock’ department:

Former Federal Reserve chairman Alan Greenspan, for years an inscrutable seer on the economy, is causing a stir by alleging in his new memoir that “the Iraq war is largely about oil.”

It must be wonderful to be old, retired & filthy rich, for Mr. Greenspan, a man known more for obfuscation versus clarity during his time as Fed Chairman, is now stating all sorts of things directly that will lose him friends in Washington.   Now, will he admit that encouraging Americans to take out ticking timebombs (aka ARM mortgages) was a stupid idea?