Global financial crisis

[Nsof]

This has been on my mind pretty consistently in the last few months and I thought that I'll be happy to learn what people here think on the subject.

As for myself, I have kind of accepted this as a fact and at this point I'm more focused on practicality (what to do) rather than theory (triggers/causes, prevention, solutions) and could there even be an opportunity in this?

Do you think it will happen in the next couple of years? How long will it last?
How should one prepare: Horde food, guns, gold, Yuan?

[MNOWAX]

Learn farming.
_________________
The Man The Myth The Legend
MNOWAX

[Trojan Horse]

Get out of debt. Save some money. Buy the same emergency supplies you'd buy for other emergencies: fires, floods, etc.

And then don't worry.

[MatthewV]

It depends on which side of the Pacific you are on. The US fears a depression and Germany fears hyperinflation. Right now, being in debt in the US is rewarded-- it will be easier to pay off your debt with worthless dollars.

The best protection is still precious metals. Gold has been a form of money for thousands of years. There is something about it people like and will always value gold. No matter what happens. And buy real gold instead of paper gold. Silver works also.
Precious metals are also good as an investment. If there is an economic recovery they might loose value relative to other investments. But it will happen slowly. Even still, gold and silver will still be worth something. If there is an economic collapse, it will happen quickly and it will already be too late. The dollar/euro could become completely worthless in a matter of months.
My prediction: December 2012, after Ron Paul isn't elected. The Mayan thing is partly a self-fulling prophecy.

[Nsof]

I have a friend who thinks similarly to you. He is in the process of converting 10% of his money into gold. Half of it in a Swiss bank the other half buried somewhere in a field in the US. Every time i think on this i imagine a treasure map and pirates but he is actually doing it.
_________________
Will sell this place for beer

[Death Mage]

You know, if someone else digs up that gold....
_________________
* These senseless ramblings brought to you by Insanity™. If you just can't figure the dang thing out, it must be Insanity™.
[YOUR AD HERE!]

[Scurra]

Even though I only understood about 2/3rd of this article, it really worried me, simply by virtue of how we had been told that the crisis of 2008 was all over and although it was going to be a slow recovery, it was over. This piece sounds as though the "fun" has barely begun.

MF Global and the great Wall St re-hypothecation scandal

And oh what a surprise to learn that the City of London is largely responsible, again...
_________________
_{still Quiz Olympiad champion. Must get a life.
New definitions: COFFEE - someone who is coughed upon}

[Jack_Ian]

Interesting article, but I have a question. Perhaps somebody with more financial savvy could elucidate.

If I understood it correctly (which I probably did not, hence the puzzlement):
A owes B $100 but has $500 in deposit, so hypothetically, $100 of the $500 belongs to B.

B can leverage this $100 as if it was $140 as collateral for financing (140% allowed in U.S. rules).

B then borrows $140 from C putting its share in A's funds as collateral.

Since "hypothetically" C owns the $140, it can use this (+ 40%) as collateral in a further financing deal.

The amount grows, even though the original collateral remains.

And it's worse in the U.K. because there is no limit at 140% and it is up to the lender to come up with appropriately secure terms.

And my question is:
Why would it ever be considered reasonable to treat your share of the collateral as a multiple of its actual value?

[Zag]

And my question is:
Why would it ever be considered reasonable to treat your share of the collateral as a multiple of its actual value?

Because it is expected that you're good for the rest, because you have other sources of income. If your credit is not good, they wouldn't do that.

Also, this is not completely true. If A owes B $100, then B can't use that full amount as collateral; it is reduced by an amount that depends on A's creditworthiness.

On a very large scale, this works fine AS LONG AS the evaluations of creditworthiness are fairly accurate. Say I lend 1000 people $140 each, with a promise that they will pay me $150 back by the end of the year, and each puts up something worth $100 in collateral. I have judged the creditworthiness of them and I believe that the chance for any one of them to default is, say, 1%. Also, I expect that I'll only get $50 value for the collateral, because I'll have to go through a fairly expensive process to acquire it and sell it again. Finally, the cost of setting up all these loans is, to me, $500

Given out: 1000 * $140 - $500 = $140,500
Taken in: 990 * $150 + 10 * $50 = $149,000
Profit: $8500

I make all these loans, then I want to make a quick buck rather than waiting for the year to go by, so I sell you the whole bundle for $141,900. For no work at all but letting your money sit there for a year, you make 5% profit on your investment. I've made only $1400, just 1% of my investment, but I did it very quickly, and I can do it a dozen times more this year, with the same money, so I'm making a good profit, too.

Me
Given out: 1000 * $140 + $500 = $140,500
Taken in: $141,900
Profit: $1400 (Only 1%, but I do it 12 times a year, reusing the money you paid me.)

You
Given out: $141,900
Taken in: 990 * $150 + 10 * $50 = $149,000
Profit: $7100 (5%)

I do this for a few years and I have a lot more money, so I've tripled my business. However, I have pretty much tapped the market for these 7% loans, and I still want to expand. On the other hand, I know that you'll buy these up, because you've been making steady money with them, so I relax my standards a bit on the credit check. Not only do I find more business, but the cost of acquiring 1000 loans has gone down to $300! Unfortunately, with my new standards, the chances of a default are now 2%. Oh well, that's your problem.

Me
Given out: 1000 * $140 + $300 = $140,300
Taken in: $141,900
Profit: $1600 (Up to 1.14% profit, times 12 per year)

You
Given out: $141,900
Taken in: 980 * $150 + 20 * $50 = $148,000
Profit: $6100 (4.3%)

You grumble at me, but I tell you that everyone has a bad year, and it's not like you LOST money. Meanwhile, I'm quite happy with my increased profits and pay myself a large bonus. Of course, this means that the standard gets even lower. My cost of making loans is down to 200, but the chance of a default rises to 4%. Furthermore, with all the collateral items suddenly on the market cheaply, their value has dropped, and you only end up getting $20 back after paying your repo guy (whose rates have gone up because of all the repo action going on).

Me
Given out: 1000 * $140 + $200 = $140,200
Taken in: $141,900
Profit: $1700 (Up to 1.2% profit, times 12 per year! Big bonus this year!)

You
Given out: $141,900
Taken in: 960 * $150 + 40 * $20 = $144,800
Profit: $2900 (2.04%)

Note that these were 7% loans. When we are talking about 4% loans, the margins are even lower and you are losing money pretty quickly.

[Scurra]

I almost understood that. Thanks.

Still doesn't make the original article any less terrifying though...
_________________
_{still Quiz Olympiad champion. Must get a life.
New definitions: COFFEE - someone who is coughed upon}

[jesternl]

Zag, I applaud you!
That was probably the best one-page explanation of credit swaps I have seen so far.