Event Horizon: the Aramanth collapse

[phantom power]

Every so often, I'm reminded of how far-removed the markets have become from "real" economic activity, i.e. trading goods and services. When major portions of an economy are based on trading "bets on differentials in other people's bets on the price of things," that economy is set up to vaporize -- because most of it is already vapor. All that's left is for the Coyote to look down and realize he's run past the cliff.

The story this coming week, I think, will be how much the collapse of the Amaranth hedge fund may end up infecting other "playas" in the big leagues of finance. Hedge funds being what they are -- rackets using "leverage," or other people's promises to pay, to make bets on "spreads," or differentials in other people's bets on the price of things -- there are a lot of other people out there who might get sucked through the event horizon of one big fund's black hole of bad betting.

(...) the Amaranth fiasco has made about six (or is it eight?) billion of somebody's dollars disappear. Either those dollars have meaning, and those somebodies will suffer from the loss of them, and so will the people who the somebodies owe money to, or else the dollars will have had no meaning per se -- they may not have been dollars so much as IOUs denominated in dollars, or loans of bundles of IOUs, or promises of future loans of bundles of IOUs -- in which case their value as a medium of exchange will be perceived to be less than was previously assumed.

(...) This is the season when crashes like to happen. Perhaps it's something about the frost on the pumpkin, those premonitions of the dark and freezing nights ahead, that provoke hard-wired human brains to get real. When people get real and the basis of their currency looks more and more unreal, shit will happen. And unhappen.

(...) Myself, I think something's gotta give. There are too many real things that are going wrong. A tapped out public with no savings. A glut of houses sinking the sprawl-meisters. Nobody buying cars. Balance of payments steadily worse. Overseas adventures failing. . . .

http://jameshowardkunstler.typepad.com/clusterfuck_nation/2006/09/shit_unhappens.html

[Warpy]

1. Hedge funds often stay afloat on tactics like

naked short selling, technically illegal but who's watching? Not this administration!

Most of them turn out to be Ponzi schemes. The super wealthy who get in on the first day get astonishingly good returns on their investments. The moderately wealthy who learn about them six months down the road get taken.

They're absolutely correct that this system is unsustainable. They can't cut wages and expect people to float their existences on debt for long before the whole thing collapses.

This country keeps reminding me of a gigantic soap bubble. Its exterior is bright and shiny, but there's nothing holding it up but hot air.

[farmbo]

2. Remember LTCM and the Greenspans' Fed "billionaire bailout"??

http://news.bbc.co.uk/1/hi/business/the_economy/184505.stm

Alas, Hedge Funds, an investment restricted to the super rich, are considered by the government to be " too big to fail" and will be bailed out by the taxpayers.

[phantom power]

3. Ya gotta love that "privatized-profit / socialized risk" rackett.

Looks like Ford and GM are about to get a nice fat bailout courtesy of us taxpayers:

http://www.planetark.com/dailynewsstory.cfm/newsid/38198/story.htm