Investment in debt = investment in minus zero

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Posted by Thinker on October 15, 2008 at 07:58:27

In Reply to: Re: Laying the blame for the economy posted by Newsman on October 12, 2008 at 12:31:26:

It's all fine to lay the blame. In the end you could say it was both Democrats and Republicans together.

What surprises me is how little attention is being given (not just on this forum but in the media in general) to the fact that the crisis was caused by investment in debt stocks--investment in negative or minus-zero values caused by deregulation, not increased lending. Bigger Institutions would buy out debts from smaller collapsing banks and sell debt stocks to the public. These stocks might as well be called Debt Futures, because they were traded just like futures in the commodities market. The situation went something like:

BIG BANK SPEAKING TO SMALLER BANK: These debts which are worth $1 billion. You haven't succeeded in collecting them and you're going bankrupt. No problem, we'll take them over for you, because we're big enough to absorb minus $1 billion (the US gov told us so and promised to bail us out), and in the process we'll get to make some money by collecting the interest on the $1 billion. In fact, we project we'll be able to collect $100 million in interest in the next X number of years. So In the meantime, let's get the public to back us up in this enterprise by buying stocks in the $100 million we're gonna collect.

Absent from their formula was the fact that these smaller banks were collapsing in the first place, because these debs couldn't be paid up.

Most investors didn't know what they were actually investing in because the stocks were neatly packaged as funds where fund managers did your thinking for you. And the more debt stock was bought, the more it rose.

To say greed caused the crisis would not be wrong, but no one and everyone is to blame. Everyone does their little bit. Collective behavior is very predictable in game theory.

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