February 4, 2009


Okay here’s how it works, Salesman “A” is hired by virtue of being an exemplary salesman, which is the same as saying that selling toxic waste to one’s grandmother wouldn’t be a problem. As cold as that might seem it’s pretty much what sums up the truth about capitalism, it’s vulgar, plain and simple, vulgar.
The bigger problem is that most of us in America don’t fully appreciate how this is the general assumption about us that is shared by most of the rest of the world. How else do you think socialism could survive, let alone flourish occasionally? It’s failing to appreciate that it’s our blessed ignorance of that vulgarity that’s been our savior. Who cares of just how predatory our bankers are, how gluttonous our consumers behave and how lazy our public regulators prevail. As long as they keep on track capitalism flourishes as it was meant to, that’s the primary reason that America thrives when the rest of the world merely survives.
So what happened? Well, if you look at all the past market disasters you‘ll see a trend that begins with the notion that the value of an asset is only worth what someone will pay for it. Lately that’s nearly zero, but if a buying mood should emerge the general rule is that value can only be arrived at relative to an asset of which the value is known with greater certainty. For example when we buy a car we think we know its value because we compare the horsepower, count the options and measure the features. We know the value of one asset and derive the relative value of another to justify its purchase. This also neatly translates into appreciable assets, such as real estate, or stocks or bonds and the transaction is sometimes referred to as a fair exchange, or more often referred to as an arbitrage.
Arbitrage is the preeminent method by which the financial industry makes s money. This is how it works, you’re walking along a road and you look down and see a ten dollar bill. Now it’s pretty certain that you know ten dollar bills are not supposed to left lying on the ground, so you look around and see if anybody is around to witness your find. If the coast is clear you pick up the bill, put it in your pocket and walk away a richer man. Being of wise intent the financial industry knows that one can’t assure a long term profitable business on the hopes that in the future our streets will be littered with ten dollar bills. So they sought an arbitrage that wasn’t as easily recognized and found it in invention of mortgage backed securities and credit default swaps. The arbitrage is simple the MBS and CDS are like ten dollar bills that will be sold to you by the person who found it and won’t tell you where, for nine dollars. Now that widget can’t sell itself, so in my judgment it doesn’t qualify as a worthy purchase if no one understands it. Which brings us back to Salesman “A”, to make everything crystal clear for us (and grandma) and if that’s the talent we keep hearing about, we’re not going to learn the lessons of the bailout.

Or are we?

Rule: If it looks too good to be true, it probably is.

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