So, you want to understand the financial markets and the great new world of finance that was introduces after 2001 under the stewardship of Alan Greenspan? Good.
Rule Number One
Anything told to you about the brave new world of finance by a Government or regulator, particularly that it was new, is untrue.
There have always been bubbles. Go back to the Tulip bubbly times to look to the South sea champagne gas fuelled economies to etc., etc.
An over optimistic view of the economy is not new. In simple terms, an optimist is a pessimist that does not understand. The pessimist is bound in the end to be right, the only question is for how long.
Rule Number Two
The globalisation of economies is not new. See rule number one. Check it out. Before the first World War people and money flowed far more easily than they do today
Rule Number Three
There is no such thing as an efficient market and never will be
Various reasons have been put forward in support of the idea that the markets should be de-regulated, including and especially the efficiency of the market. First, the markets are not de-regulated, particularly in the USA, the great espouser of de-regulation is in fact a regulator par (or perhaps sans) excellence. Secondly excuse me for this, but in order for a market to be efficient there would have to be a group of people operating in that market as buyers and sellers who were capable of analysing the price for a given good, service, company or financial instrument in an objective fashion, instead of merely jumping on the bandwagon. Plain enough or do I really need to spell it out?
Added to that there are all sort of government (our money) incentives and disincentives that create ans suppress demand artificially. Ethanol form made from crops grown in the USA is a prime example.
Rule Number Four
The banking system is one big humungous Ponzi scheme.
Nearly....so, you open a bank account tomorrow with one of the banks still left and one month later get an overdraft of 100, 000 USD, you do the same with a second bank (in some countries that will be it, no more banks to choose from, but let's say you are in a fictitious European country).You then do the same with a third. The first 10, 000 you repay to bank 1 with money borrowed from bank 2, which is repaid 30 days later with money repaid from bank 3. and then you start again cos' you have to pay bank 3, so that has to be done with money from bank 1. This is a bad thing to do. Illegal, punishable and rightly so,. DO NOT DO IT. IT IS VERY VERY BAD.
This is what the banks, in essence, do. Banks have something called leverage. This means they borrow money. You deposit money in a bank. Lovely word, actually you lend money to the bank, for which generosity they generally charge you extortionate fees and provide you with a touch tone call centre of enormous patience trying capabilities.
Banks lend money for a living, this money mostly comes from you. It is a bit like a farmer getting eggs from you to sell to the dairy and charging you for the pleasure of being able to sell your eggs. Actually it is a lot like that. Worse in figuring out how much leverage they have they generally include your deposit...which is really a loan, on the asset side of things.
In return for this you get security (?).
Hmmm.
If a bank is highly leveraged that means it has shed loads of debt, buckets of the stuff, all shleeshing and a' shloshing around like the oil in a Sheik's back garden. It has borrowed more than its assets, including your loans (sorry deposits) to the bank.
But a bit like the scheme above, which is bad, VERY BAD and absolutely banned, VERBOTEN, NOT ALLOWED, so long as the money keeps on going around it looks okay.
When the money stops-----credit crunch-----well, move over Bernanke.
'Nuff said?
