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Monopoly Money Round Two with a Teetering Economy

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Remember the whole scam of "repackaging" sub-prime mortgages with "good" instruments to get AAA rated investment instruments, which then fed into the credit default market, which brought the global economy to its knees (where we still are)? Well ... they are doing it again.

According to a report by Matt Apuzzo with the Associated Press, Wall Street's way out of the economic mess is virtually the same one that got us into the mess.

In recent months, banks have tiptoed toward a possible solution, one in which the really good bonds get bundled with some not-quite-so-good bonds. Banks sweeten the deal for investors and, voila, the newly repackaged bonds receive AAA ratings, a stamp of approval that means they're the safest investment you can buy.

"You've now taken what was an A-rated security and made it eligible for AAA treatment," said Richard Reilly, a partner with White & Case in New York.

As for the bottom-of-the-barrel bonds that are left over, those are getting sold off for pennies on the dollar to investors and hedge funds willing to take big risk for the chance of a big reward.

Do we have the oversight issue fixed? No. Do we have any controls in place? No. Have we "plugged" the leak that allowed the wild escalation in the derivatives market? No.

What we have done is throw trillions to Wall Street and financial institutions (while they throttle credit and raise interest rates) to "restabilize" them.

All that "repackaging." Why? Who benefits?

In "Fun with Derivatives," James Kwak notes:

Which brings me back to something Mike Konczal ... discussed a while back - why do so many "innovative" financial products included embedded options? In Mike's words, "When I was discussing this prepayment penalty theory with a very smart person from a hedge fund, he told me that selling people embedded options is always deviously clever because people don't understand that they are buying them, and often don't understand their value."

Ah ha! Why all of this unbundling and rebundling? To deceive, defraud, and make quick, short term profits.

So given that nothing has substantively changed in the system (while the world has changed for most of us), it is not too surprising that Nouriel Roubani is warning there may be a double-dip recession. Roubini calls the U.S. and European economies "anemic," and likely to remain that way for the next couple of years. Further, policy makers (and national banks) are walking an economic tightrope between inflation and depression. He states:

... the global economy "could not withstand another contractionary shock" .

And there are plenty of possibilities for a "contractionary Shock" from oil prices, to natural disaster, to a real pandemic, to radically increasing food prices due to a variety of causes. Like many of us living on (or over) the unraveling edge, we pray that not one bad thing will happen. Unlike us as individuals, nothing major happening in the WORLD for several years is damned unlikely.

 

Rowan Wolf is an activist and sociologist living in Oregon. She is the founder and principle author of Uncommon Thought Journal, and a Senior Editor for Cyrano's Journal Online with her own page being CJO's Avenger.

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Sometimes I think either I'm nuts or the world is.... by Rowan Wolf on Thursday, Aug 27, 2009 at 3:29:18 PM
We will - of course. However, while I think we wil... by Rowan Wolf on Friday, Aug 28, 2009 at 1:05:28 AM