My, how time flies when you're looking for work. Hard to believe that the banking crisis was all of five years ago, when the world's financial system was on the brink of collapse, and more than a few Wall Street high-living banksters were meekly coming to Jesus, praying humbly for salvation or a bailout on the taxpayers' dime, whichever comes first.
Well, we all know which came first. No surprise there.
Those who have the gold, make the rules. That's the golden rule that you won't find in your Bible, but it's the one by which the world works.
So Jimmy Carter, knowing which side his campaign bread was buttered on, got that ball rolling, and it was greatly accelerated by Ronnie Reagan, and before you knew it, we had the Mother Of All Asset Bubbles going. Not just one, but several, one after another. Leveraged buyouts. Savings and Loan. Internet. Dotcom. Telecoms, etc. And, doing what all bubbles do, they popped. One at a time. Each time, being carefully reinflated by our illustrious Financial Wizard In Chief, Alan Greenspan, who learned his brilliant financial wizardry from Ayn Rand -- who said that everyone could get rich by beggaring everyone else. Now, with financial genius like that running the show, the only surprise is that the boom times lasted as long as they did.
But if you thought that last bubble-pop was spectacular, you ain't seen nothin' yet. That last one was triggered by a "derivative" (really just a fancy contract) called "mortgage-backed securities," or MBSs, a.k.a., "toxic assets." A full explanation of what they are and how they work would be longer than a southern Arizona well rope, and just about as interesting, so I'll just say that it was just one small part of the various kinds of debt securities floating around out there. A small part. The key word there, is "small."
Here's the part you need to understand: They, and securities like them, are often a part of what is known as a "collateral chain." Now, if that sounds vaguely like something you don't want to co-sign for, it should. Works like this: I take out a mortgage, and the mortgage company doesn't keep that mortgage on its books, but he sells it to an investment banker, who puts in one of those MBSs I mentioned. That MBS is bought by an investor whose been duped into buying it, because it pays a comfy return and he's been convinced you're good for the money, and even if you don't, there's an insurance policy on the contract that says the insurance company will pay. But that investor may have actually bought the MBS with borrowed money, so he puts that MBS up as collateral for that loan. Which gets put up as collateral for yet another. And that loan becomes collateral for yet another loan. Etcetera, etcetera.
Is it starting to become clear, now?
That's called "chained collateral." All manner of things are used for the base collateral, some more trustworthy than others, and different "derivatives" of various descriptions are "secured" with them, but all you need to understand is that the guy out on the end of the collateral chain, who has no idea at all at how long that collateral chain really is, has gotta trust everyone ahead of him to pay up and on time. Good luck with that one, Bucko.
It gets worse. Last I heard, no one had a good handle on how much of this chained-collateral derivatives mess there is out there, but it's a lot. I've seen numbers ranging from $500 trillion (Wikipedia) to $623 trillion (Business Insider) of these outstanding collateral chains in total around the world. Given that the entire world's economic output is on the order of $90 trillion per year, it doesn't take a certified public accountant to figure out what those numbers mean. OK, I've been told that about 92% of that amount would "net out" -- people owing each other money and cancelling, for example, or A who owes B, who owes C, who owes A, etc., would simply cancel each others' derivative obligations -- but that still leaves $49 trillion by my grade-school math. That still means everyone on the planet is gonna to have to work for more than six months just to pay down someone else's debts. You can if you want to. I'll pass.
By now, it should be crystal clear. Back when I was growing up in cowboy country in Idaho, when a fellow tried to pull a stunt like that, they called that "fraud," and they sent him to prison for a really long time, and branded him a criminal. When he got out, he spent the rest of his days loading garbage trucks or unloading milking barn stalls. If he was lucky.
But with neoliberal financial deregulation newthink, they now call it "financial engineering," and they reward him with a banking license and a million-dollar-a-year job on Wall Street, and brand him a "financial genius". He pronounces himself the smartest guy in the bar, as he buys everyone a round of drinks bought with someone else's money.
But somehow, it just never got over being fraud, did it?
Therefore, when the banking/financial system collapses next time (notice I didn't say "if"), it's gonna happen so hard, so fast, and so broadly, that Ol' Yellen just won't be able to bail it out, simply because the Fed won't be able to invent money and throw it at the problem fast enough. Think "collateral chain reaction," boys and girls. It'll all melt down quicker than a Fukushima reactor core.
When the owner of the hardware store down there on Main Street - you know, that upstanding fellow who was always the chairman of the county Republican Party, and president of the local Chamber of Commerce, shows up at the bank one day, and discovers the door locked -- and the ATM is dark -- and those platinum cards in his fat wallet don't work anymore - he won't take it lightly. When, on investigation, he discovers that the dark-skinned, foreign born socialist Muslim from Kenya that occupies the Oval Office actually had nothin' to do with it, he's gonna suddenly have an epiphany. Because he will, if he thinks about it for even a little while, come to understand that nearly all his life, he has been manipulated and cynically used by those heroes of his, the Wall Street capitalists he trusted implicitly with his money, his business and his future. They played him like a fiddle for all he was worth.
He's gonna be lookin' for vengeance and, folks, it ain't gonna be pretty.
And now this is where the asphalt comes in.