A run on non-banks

The Great Depression of 2006: Cash Only

Jim in San Marcos explains that it's probably not the banks we need to worry about, but the financial entitities that are NOT covered by Federal deposit insurance.

And Karl Denninger also details other areas threatened by financial contraction.

Little boxes

In India, where many people cannot read, you sign for the State pension by thumbprint. This seemed like a secure system, until a man was caught with a tobacco-tin full of thumbs.

It would have made no difference had it been a tin of cloned credit cards. You don't need to know what's in the box, or how it works; you need to know what it does, and who it's for.

Once you start thinking along these lines, things get so much clearer. For example, you don't have to be a "quant" like Richard Bookstaber, to know that derivatives are about risk. More precisely, they're for increasing risk.

Supposedly, a derivative reduces risk; but if you look at its use, it's a box that tells lenders and gamblers how far they can go. Seeing the fortunes that can be made in high finance, there is the strongest temptation to push the boundary.

My old primary school had a lovely little garden behind it, where we played at morning break. One game was "What's the time, Mister Wolf?". You went up to the "wolf" and asked him the time; he'd say nine o' clock; to the next child he'd say ten o'clock and so on, until he'd suddenly shout "Dinner time!" and chase you. Obviously, the game was not about telling the time.

So it is with financial risk models that service the need to maximise profits: always another trembling step forward. There's only one way to find out when you've gone too far.

But what if you could ask the time, and know that someone else would end up being chased? I think that explains the subprime packages currently causing so much trouble.

The bit I don't understand is why banks started buying garbage like this from each other. Maybe it's a case of the left hand not knowing what the right hand is doing, since these organisations are so big. Or maybe it's that everyone has their own personal box.

Then there's credit default swaps, and other attempts to herd together for collective security. They don't work if the reduction in fear leads to an increase in risk-taking. United we fall: no point in tying your dinghy to the Titanic's anchor-chain.

In fact, I think this opens up a much wider field of discussion, about efficiency versus survivability. In business, economics and politics we might eventually find ourselves talking about dispersion, diversity and disconnection.

Liberty update

Bernard Nothaus is retaliating and preparing for his court case.



As Chumbawumba sang:

I get knocked down
But I get up again
You're never going to keep me down
We'll be singing
When we're winning
We'll be singing

... good luck.

Better to be rich and mis?

Elmer, a Filipino living in Hong Kong, comments on insurance group AXA's "Life Outlook Index". He wonders whether being happy and optimistic holds back economic progress in the Philippines. For, of eight Asian countries surveyed, the Singaporeans had most insurance and were the most miserable.

So I'd ask whether economic progress is more important than being happy and optimistic. Read "Insurance - The White Man's Burden" and decide.

UPDATE

...and a nice little thread in Market Ticker's forums section, on rat-race dropouts who've taken to the beaches in Hawaii

The Dow is a shape-changer

A brilliantly clear and succinct essay by Nadeem Walayat for Financial Sense, showing that the Dow tends to rise long-term simply by adding winners and dropping losers. Not only that, it's vulnerable to manipulation for official "feelgood factor" purposes. And the 30 stocks are not equally weighted, so a few stars can carry a load of duds with them.

An argument for betting on the index, if you're not an attentive stock-watcher.

This, I suggest, is one to bookmark, or print and put in in your wallet.

A moment of sanity

At times of crisis, unlicensed preachers and wild-eyed prophets roam the streets, gathering their crowds. But their rule never lasts.

My grandfather used to say, things are never as good as you hope or as bad as you fear. As I reported some while ago, members of the Chicago Stock Exchange in 1934 papered their club room with what they thought were now worthless stock certificates, but within five years were steaming them off the walls again.

The Thirties crash hit debtors, unwary investors (especially those trading with borrowed money) and insolvent banks. The lessons from this are easy to learn.

Unreal

Richard Daughty (the Mogambo Guru) refers to articles by Nouriel Roubini and Sharon Kayser, giving us debt -threat vistas of $1 trillion and $1,000 trillion respectively. Then he returns to Terry Pratchett's Discworld dwarves' favourite song ("Gold, gold, gold, gold...").

Two problems: one is, I can't visualise anything with many zeroes, so it's not real for me. More importantly, if there's a major meteor-strike financial bust (i.e. deflation), I'd have thought cash in hand is what everyone will want.

Unless a crazed government opts for hyperinflation. In which case, I'd rather have pallets of canned baked beans, boxes of ammunition and many brave, loyal friends. You can't eat gold.

But as with all truly terrible imaginings, the mind bounces off this like a tennis ball from a granite boulder, and we turn back to normal life with determined optimism.