The Country has gone through an Economic Speculative collapse, the likes of which we haven't seen in ages.
Until we come to terms with WHAT happened and WHY -- and put in place corrective actions -- we will likely still be subject to the same "Speculative forces" that literally gutted the Housing Market, and the life savings and consumer confidence of far too many Americans.
Specifically, in my opinion, until the general public understands the following "Speculative forces" -- and until the relevant Regulatory Agencies DO something to reign in these abuses, we as a County will not entirely heal ... recover ... grow, again.
- Buying on Margin
- Derivatives
- Credit Default Swaps (CDS)
- Churn, Flash Trades
- OPM
I will attempt to explain these in plain English, using common analogies, in hopes of preventing that "glazed over" syndrome ...
1) Buying on Margin: Hedge Funds and Investment Bankers have been using this little trick more and more in the last decade. It lets them move Mountains, from their Molehill perch ...
Imagine you went to the Race Track to bet on the Ponies -- but you only have limited funds, say $10 to bet. To make the most of your funds, you decide to bet only on the Horses with the longest odds. If you bet on a 1 to 100 odds Horse -- for every $1 you risk, you have the potential to leverage that into a $100 in Winnings.
In the Stock Market, Buying on Margin kind of works that way, Risk a little, Gain lot. Margin Rates of 1:30 and 1:40 were common in the last decade. Except in that Market when a Horse loses badly you can end up paying MUCH more than you "put up" initially. That's the dreaded Margin Call -- which easily can make you go broke, if the Horse/Company breaks a leg, etc.
2) Derivatives: Hedge Funds and Investment Bankers have been using this little trick (also known as "Options Trading") more and more in the last decade. It lets them bet on Action, with limited Risk, and WITHOUT taking Ownership of anything ...
Imagine you know a Bookie, who has contacts who can place Bets in Vegas. You decide to Bet a hundred dollars on the Super Bowl. You don't need to fly to Vegas, you don't even have to invest any time watching the Teams -- you just need to pay the Bookie, who will take his cut, and make sure the "spread points" are in his favor.
On Wall Street, Derivatives work like such gambling bets. You can bet on nearly anything these days, with the Option to buy the underlying Stock or Security, but not the requirement to (few rarely do). Basically, Derivatives let you bet on whether the price of something, say Coffee or Cotton, will go down Up or Down, and how quickly -- without the need to buy a Mill or a Gin, to process the goods of Capitalism, you are betting on.
Collateralized Debt Obligations (CDO) made famous by the Housing Bubble collapse -- are an advanced form of Derivative Contracts designed to turn Mortgages into just something else to bet on. As long as Home Prices kept going Up, and most Home owners kept making their house payments, CDO's were pure gold. What could ever go wrong with this picture?
3) Credit Default Swaps (CDS): Lets the issuers of CDO Contracts get a little insurance on their Vegas operations. CDS let them off-load their Risk to some other remote (unsuspecting) party (or remote Counter-Bank, as in AIG).
Imagine you get on "good terms" with your Bookie after making a dozen bets -- soon your "Credit is your Bond". The Bookie no longer expects you to put up your $100 CASH with each bet -- but he does expect Prompt Payment, in FULL, with a processing fee, when you DO Lose. NO Exceptions.
AND -- If you DO "Default" on your "Credit Risk" -- he is going to "Swap" your Face, with his Fists ... or worse. The CDS Contract is the Bookies' ultimate Insurance -- sort of. Afterall, IF you ain't got the Funds to cover your 1 to 100 Bets -- the Bookie will ultimately have to be "good for it" himself -- or take it out your hide, or from someone else (family member) who will "Back up" your gambling addiction.
-- and Bookies hate that -- hate being on the Hook for anything. They've rather just "Leverage" your money, Not be responsible for it. Not go through the hassle of Default Collections.
4) Churn, Flash Trades: Hedge Funds and Investment Bankers have been using this little trick more and more in the last few years. Automated Computerized trading systems empower them to Buy and Sell Stocks and Derivatives in a blink of an eye -- in microseconds. Making literally 1000's of Trades per day -- automatically!
By investing Millions, or Billions on each micro trade -- Bankers are indeed turning Molehills of Price-ticks, into Mountains of Profits! But they aren't really helping the Economy much.
Imagine, you could set the compound interest rates on your CD Saving Account -- up to 1% on any Time Frame you pick ... and Imagine your told your Bank to set your interest to compound at 1% -- every second -- well at the end of 6 Months when you cashed in the CD, you could probably retire. Hedge funds are skimming in Billions, in much the same way. They are raking in Billions -- that Mutual Funds and Pension Plans, ordinary people use, will never get a piece of.
5) OPM: Other People's Money -- this is the oldest Bankers secret of them all. Bankers rarely put up their own money, when they make investments -- that's what they have Customers for!
It used to be they took your savings, and made loans to businesses. A generally low return, low risk way to make money -- Off of Other People's Money.
But with Deregulation of the Banks in the last decade, they now can use your Money to invest in other investments -- those that are high return, high risk . The Firewall between them and your Money, has been torn down. The Federal Govt was left to back up any bad investment decisions. The Federal Govt and its Taxpayers, were left to be the CDS Insurer of Last Resort (as in the TARP Bailout should have painfully taught us.)
Now that the Banks leveraged and bet and speculated on the Value of our Home Mortagages, as much as inhumanly possible, and trashed that market, and GOT Bailed out for doing so -- Now, after all that, they have their eyes set on our Retirement Funds, on the Social Security Trust Fund -- it is the Mother Load of OPM.
It's what GOP Privatization Plan is all about. Making Millions on the blood, sweat, and tears of Other People's efforts.
As I said in the intro, until relevant Regulatory Agencies actually DO something to reign in these abuses, we as a County will not entirely heal ... recover ... grow, again.
"Speculative Forces" and pace of competition are Too Strong to be self-correcting, as even Greenspan recently admitted.
And if the Govt is just going to backstop the Bookie Bankers -- instead of Taxing them -- what Incentive do they have to change their greedy ways?
Little to None.
Without the fear of Corrective Taxes, Without the fear of losing OPM, most Bankers have only the Incentive to keep doing More of the Same --
Taking bets, taking risks, leveraging your Trust, leveraging your Savings
all for the sake of making themselves Rich.
Afterall the Bookie is always looking for their Next Mark ... it's what OPM is all about!