Greedy Goblin

Tuesday, February 3, 2009


The economists and politicians around the world are scared because the No1 monster, the recession (GDP decrease) is coming in 2009. It gained the No1 monster status by causing huge unemployment, decrease of state incomes and decrease of sells (and profit and manager benefits) for companies.
Several business gurus and politicians are fabricating plans against it, asking for your money. Don't give them, it will make no good. Recession is inevitable. I try to explain why.

To understand it, you don't have to know anything about CDS market, shorting, any kind of derivatives, stocks or even the existence of money itself. To understand it, you only need to understand a very simplest of economies:

X hunts for meat, Y creates pottery. They need the product that the other one product so they barter. So far so good, the GDP is 1 meat + 1 pottery (products consumed by the producer are not counted into GDP).

Let's say that Z has an idea of growing corn. It needs seed, it needs workforce (Z must eat and have no time to hunt himself, must work on the fields) and generate product only after a year. In this case X can choose to give loan to Z by giving him meat now and accepting only a promise in return that Z will give him corn at the end of the year. In this case the GDP is 2 meat + 1 pottery + 1 corn.

Loan is good, since it allowed Z to create corn and to buy meat. Without loan the GDP would be just 1 meat + 1 pottery. Without loan the only way to increase GDP were to produce something else than you're good at, creating deposits and make your investment from that deposit. For example Z could create 1 pottery too, selling only half for meat (being frugal on eating), so in 2 years he would have a pottery deposit, he could trade that pottery for meat while he is working on the fields.

Let's say that instead of Z we have L, the loser guy who says that he will grow corn at the end of the year but he won't. X believes him, give him loan, but L could not return it. The GDP is 2 meat + pottery. 1 meat's value was lost to X, but GDP (Gross Domestic Product) does not care about personal losses and gains, and the 2 meats were created and sold!

Next year L promises again that he will grow corn. Of course X will not believe him, will not give him meat in advance and in lack of buyers, he will not hunt it. So the GDP will fall back to 1 meat + 1 pottery.

This is exactly what happened now. The sub-prime loaners (loser guys) bought houses and other stuff from loans (promised that they will repay it). The houses and stuff were created, therefore counted into last year's GDP. Next year no one will give the sub-prime guys loans so they will be able to buy nothing, so these things cannot be produced, therefor their value will be missed from next year's GDP.

The "crisis" of today is nothing more than the cries of X because he just realized that he will never get anything for the meat he gave to L. The governmental intervention is nothing more than distributing this loss among the people, forcing Y to give some free pottery to X in order to decrease his loss (protecting bank accounts from vanishing using taxpayer money).

Nothing can make the people believe in the sub-prime loaners again. They will get no new loans, so they won't be able to consume (so much as they did before), so the production of those items must decrease. This recession is inevitable and will last until new buyers come, with money. They are maybe former sub-prime loaners, who, after losing their home, finally go to work to climb back to the lower-middle class. They are maybe people in foreign countries who make enough money to buy western goods.

Today everyone says that the "problem is that the banks don't trust in each other, don't give each other loans". It is not a problem. It is inevitable since the banks are right about not trusting each other. They all gave sub-prime loans and they all bought poisoned derivatives. Until all these loans are repaid by someone (most probably by the taxpayers) and the poisoned derivatives are not solved somehow (most probably by someone accept the loss, go bankrupt or ask for governmental help) no one shall trust in no one.

The problem is the sub-prime loan itself, the fact that loser guy got loan what he never had a chance to repay.

The gurus and politicians are theoretically right about the freezing of good loans. The banks don't dare to give loans even to good investments (X doesn't dare to give meat of Z in advance since he burned himself with L). This event causes a further GDP loss as good investments can happen only on deposit base instead of loan base. So they are theoretically right that the markets should be de-frozen. Practically they are the very same guys who gave the sub-prime loans, traded poisoned derivatives and picked up billions of dollars of premium for the crisis year, despite the government just saved their bank from being bankrupt.

So my advice: until these guys are removed from every influential positions, don't give a single cent for "market saving" actions. Vote no for every such attempt and all the politicians who support them. Don't throw your hard earned money into a bottomless bag!

Some fun to the end of this not-so-optimistic view: How do the brokers call the sub-prime people? "No Income, No Job or Assets". What's so funny in this? Read the capital letters :-)


Speartip said...


Rytis Petrauskas said...

to your Publication i can add this lovely video:

Knife said...

"So my advice: until these guys are removed from every influential positions, don't give a single cent for "market saving" actions. Vote no for every such attempt and all the politicians who support them. Don't throw your hard earned money into a bottomless bag!"

Your advice/call to action would be correct in a perfect system of black and white policies.

Indulging you- let's say we all do just that: don't give a single cent to bills to save [insert industry]. The fact is, due to lobbyists, large corporations, dummy corporations on behalf of large corporations, and the bulk of the business-world, these "bail-outs" are going to go through.

Speaking from America, even if I vote NO on everything and America doesn't give a cent to American companies, someone else will. If we don't give them money they'll cry to Europe. If they still don't get money they cry to China, or India, or [anywhere else]. Net result- even if it involves a third world nation selling its nuclear arsenal on the black market in order to provide money to bail-out these companies, it WILL happen, your vote or not.

The poisoned assets/derivatives will be paid for, somehow. Is it wrong? Yes, but it will still happen.

What if it doesn't? What if your suggested strategy "works" and all of these ridiculously influencial industry "leaders" are forced out?

Well, first off, think of how many people they'll lay-off before they admit to being bankrupt (both morally and financially). 3million last month. What if Citi, BoA, Wells/Wachovia, TD and all the rest just throw up their hands and say- you know, Gevlon's right. We're corrupt. We'll step down now...and shut down our banks, give ourselves bonuses, make sure we're set for life and then leave.

3million jobs lost will look like a drop in the bucket compared to that. But then what happens? You know that plastic credit card you own that has $10,000 on it because you couldn't afford stuff before and charged everything (think of the vast majority of societ)? Well, there's now no more Visa, Mastercard, or any other company willing to provide credit because they have no backing. Hooray- you're free of Credit Card bills, you now fully own your car and your house and anything else you have a loan on...except the entire financial industry is gone. No banks. No loans. No credit. No market.

Then what happens? There's suddenly no money at all to pay for things. As in anything. Supermarkets can no longer "wire" money to trucking companies to pay them to deliver food. Car parts...well, that's a fantasy any way you cut it. The steel industry, agriculture industry, heck even the box/cardboard industry no longer can ship anything unless they have the cash on hand. Even if that works- if you know a trucker is carrying $100k worth of stuff plus $30k in his pocket, why wouldn't you steal his truck? I don't condone it, but what logical reason would you have for not doing it besides the moral one?

Bottom line- the only reasonably intelligent way to bail companies out is to force the head executives and all management to leave prior to getting bailout money. That way at least the corrupt leaders aren't getting the bailout cash...the only issue is that now you have inexperienced people in leadership rolls.

I don't want to give my hard-earned money to the government, don't get me wrong. I just see no other solution to the problem which won't cause a national and then global economic shutdown.

Artorin said...

Knife I'm pretty sure that is what Gevlon was talking about... obviously we need banks and creditors but not ones who are as greedy and selfish as these goblins are (see what I did there?) Sadly though it is a cycle that will continue forever.

Gevlon said...

Knife: Just because the "company" goes bankrupt, its building does not collapse, nor its employees turn stupid. The government could instantly reopen banks and industries in the same buildings, with the same employees, with new leadership. Granted government own business is not the best, but they could be privatized when the economy comes back online. (continued in next paragraph)

@Artorin: they were not just greedy. They were greedy AND stupid. Deadly combination. I would never give any subprime loan, even if my premium is decreased. Not because I'm nice and responsible, but because I rather get 100000$ for 30 years than 500K for 1 and then go bankrupt. I wouldn't be one of these CEO-s, with all their millions. One day (very soon) they will be watching into the barrel of a shotgun of a guy who lost everything because of them.

Their stupidity is the reason why I think they must be put out of business. It's not the $4B I cry for that they payed to themselves from the taxpayers money. I'm worried about the other $696B that they going to spend with such wisdom and care as they already displayed.

Knife said...


Who are these "they" you speak of? - "@Artorin: they were not just greedy. They were greedy AND stupid."

"They" are everyone. Everwhere. Ever. If you have 10 apples and I have 1 apple and a bat, I'm going to beat you and take your apples. I'm then going to watch you until the end of time, bat in hand, not noticing that someone else just stole both of our apples from me.

Overly simplistic? Maybe, but it gets the point across. Any time you have more stuff than 90% of other people, you get big, fat and stupid. Why not rest of your laurels? You have $90B in your account.

We agree that these CEOs should NOT be put in charge of more of our money ($700B seems a bit excessive when the avg CEO we're talking about already has taken his 2B bonus...). If a child just beat up five children, why would you give him a bat?

The gov't could privatize credit, you're correc there's nothing stopping them (nothing that they couldn't work around anyway). It would temporarily solve the problem, but we'd have a different one. Have you ever been audited by the IRS? I have been, unjustly. It took 3.5 YEARS for the gov't to admit fault, give me back money, refuse to give me interest on the money they seized (my idea...), and then proceeded to audit me on every tax return since. My point is- yes, the system would be fixed, but it would take you an unreasonable amount of time to get ANY amount of credit due to the gov't.

David The Machine said...

Knife, might I point out to you that these high-flying CEOs have no choice but to take the money. Government does what it does because it can forcibly fine you and put you in jail. I have no problem with that if government is fining and jailing rights disrespecting criminals, and these "greedy" CEOs are hardly in that category.

Part of what the government is foolishly trying to do is to keep liquidity up, but that will only result in inflation, and continue the poor lending practices that got us into this financial crisis in the first place, but going into more detail on this is beyond the scope of this blog, or even this comment.

Anonymous said...

You seem to think sub-prime loans are the work of the devil, at first they were a brilliant idea people got homes and banks made money, then another bank saw this money, got greedy and stupid and started giving out sub-prime loans like candy.

They were wonderful for a short time but greed in this case fostered stupidity.

In any case the recession has been good for anyone who has retained their jobs since everything has dropped in price with these 60% of sales and interest rates slashed to their lowest ever.

I'm a uni student at the moment so it doesn't really affect me much at the moment since my course has been declared a national priority thus i don't have to worry about paying it.

So yeah the recession here in Australia isn't that bad yet, we are in a fairly interesting position in that we relied on the U.S for some time and have felt the shudders from your collapse but we have since started trade deals with far more stable economies like china's.

So i think it's safe to say Australia will be able to ride this one out better than most western countries