11 December 2012

Just Tap the Brakes

And now, a trip down the educational memory lane. For those who don't or won't remember their "Physics for English Majors" class, how does it happen that multi-ton vehicles manage to brake to a stop with brake lines with an inside diameter of a pencil lead??? Give up?

It turns out that some fluids, particularly liquids, are incompressible. So, consider a pressure vessel one foot cube. On one side, put a 1 inch hole, and attach a pipe with a piston pushing in. On the opposite side, put a 4 inch hole, also with a piston, but connected to a pressure gauge. Now, push on the 1 inch piston with the force of 10 psi (pounds per square inch). What's the pressure on the 4 inch piston on the other side of the vessel? One might expect it to be proportionately lower, which with proper arithmetic could be calculated exactly. Yes? Well, no.

Turns out, this is true in the financial services game, too. Recall that the Banksters got their little slaps on the wrist for nearly cratering the Western economies for good and all. They were forced by circumstance to cease raking in enormous profits from flaky housing deals, and to pay a bit of restitution. The media was all abuzz on how the great had been brought low.

Ah, but the Little Piston That Could went to work. Within months, we saw these same Banksters pushing on all those small accounts with new fees and restrictions. Living high on the hog under Dubya's hegemony wasn't going to be relinquished. If the little people didn't pay by taking on stupid mortgages, they'd pay someway. Push. Push. Push.

Today's news is chock-a-block with the problem that won't go away: the Banksters continue to demand high on the hog profits, and socialized losses. HSBC has gotten a pass. Surprise, surprise.
State and federal authorities decided against indicting HSBC in a money-laundering case over concerns that criminal charges could jeopardize one of the world's largest banks and ultimately destabilize the global financial system.

Yet another case of being not only too big to fail, but too corrupt to convict. The piece isn't quite that explicit, but rather close.

Then, in the Business section, we find the Brits and US attempting to work out a method of punishing the next bunch of mortgage fiddlers (or whatever the scam ends up being).
In essence, they aim to take control of the sick bank and keep it operating while inflicting losses on its shareholders and, if necessary, its creditors.

Well, that didn't happen last time, to any meaningful extent (if you weren't of Lehman, that is). Lots of high priced jobs were lost in the City, of course. But most of those were mid-ish level quant related, not the Corner Suite Set.
Fearing financial instability, officials may balk at doing anything to harm the interests of creditors and opt for some form of bailout instead.

I recall it was Krugman (at least) who said something like, "When I die, I want to come back as a bondholder". Simon Johnson, of MIT and a thorn in the side of both Banksters and the regulators:
"The big problems we've seen are almost always systemic. So, does it solve the core of the too-big-too-fail problem? No."

Stay tuned. With QE4 set to stuff yet more money into the maws of the vampire squid...

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