Bob Knakal Will Not BS You About the Wall Street Crisis
Massey Knakal chairman Bob Knakal prefaces his latest commentary thusly:
Now I know that some of you will jump down my throat and accuse me of wearing my rose colored glasses and laying some broker BS on you just based on the title of this installment. So let me first acknowledge that, looking at the financial sector as a whole, we are in troubled times and in unchartered territory. Our entire “free market” philosophy is being challenged, 158 year old fi nancial giants are going bankrupt and the Government has seized the country’s largest insurance company. Inflation is high, credit is tight, mortgage delinquencies are rising, foreclosures are rapidly increasing, consumer spending is slowing, consumer confi dence is in the toilet and people are liquidating money market accounts based upon fear and these accounts have always generally been considered as good as cash. Budget defi cits on the City, State and Federal level are ballooning and not too many people are talking about how to address them. The Misery Index, which is calculated by adding the rate of infl ation to the rate of unemployment, is being referenced in the Wall Street Journal. This index hasn’t been discussed since Jimmy Carter was in the White House.
But! There are silver linings in the city's building-selling arena. Mostly, the credit crunch of the past 12 months and counting has driven property prices downward in some cases, particularly in Upper Manhattan, creating opportunities for those investors wanting to seize them. (Mr. Knakal's commentary can be read here.) Generally, sales are down or flat.
[T]he market has softened, but not significantly. We expect that prices may have fallen another 5% or so and volume appears to be steady as we get the word out about the relative health of prices. Is there a reason to be optimistic? Notwithstanding my first paragraph today, I think so.
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This ain't no free market, and I wish that the ignoramus opinion makers would quit treating it as if it were. The Feds have intervened in every possible way and then some-- folks gotta have their heads in the sand if they think that this meltdown is the result of a "free market".
The president will have to assume FDR-like powers to solve the derivative collapse.
He should declare all derivatives placed outside of legally regulated markets (90% of them) null and void. These "bets" - worth $180 trillion according the U.S. Office of the Comptroller of the Currency in America alone, and up to $450 trillion worldwide - could not have been made in regulated markets, because the players had insufficient collateral.
If the parties object to the elimination of their derivative bets, they should be reminded of the penalty for fraud; it is inconceivable they did not know they were establishing positions far beyond their ability to repay.
For every buyer there is a seller, so the amounts lost would zero out and no party would gain an advantage. We would just get to reset the clock. This is as fair as things can be made, given where we are.
What is causing the panic in the markets right now is the realization that the losers have insufficient money to pay the winners. The domino effect of multiple collapses cannot be stemmed by any government, even by running the printing press overtime. The only solution is to wipe the underlying derivatives off the books and ensure these bets are never made again by creating laws to send those who make them in the future to jail.
If the parties object to the elimination of their derivative bets, they should be reminded of the penalty for fraud; it is inconceivable they did not know they were establishing positions far beyond their ability to repaysohbet
"..it is inconceivable they did not know they were establishing positions far beyond their ability to repay."
One can make the same argument about fractional reserve banking, the pyramiding scheme that enables financial shenanigans of all sorts; derivative markets included.
"The only solution is to wipe the underlying derivatives off the books and ensure these bets are never made again by creating laws to send those who make them in the future to jail."
An emphatic 'No'. Making more laws won't accomplish anything other than to increase the size of the Federal Register- some 26' deep at last estimate. The only solution to this problem is to let the market clear and prices to readjust to economic reality and in the process to let those reckless institutions fail so that they can no longer wreak their havoc upon society.