“Credit-default swaps – where you insure your neighbor’s house just to destroy it and make money from it…” – German Chancellor Angela Merkel
Remember in the classic movie It’s a Wonderful Life how Old Man Potter was ready and willing to give all the other banking heads 50 cents on the dollar for their depositors’ shares during a bank run? George Bailey, you’ll recall, declined Old Man Potter’s offer. Over the course of the Great Depression, Old Man Potter did his best to buy up all the land and businesses in Bedford Falls, but he could never get his bony fingers around the Bailey Building and Loan.
That was a time when banks were backed by more than just the good faith of its depositors. The bank actually had assets consisting of real property and precious metals, and the art of fractional reserve banking was less far-reaching than it is in today’s non-gold backed, electronic web of deception.
Imagine if George Bailey had secretly funneled funds to Violet Bicks to finance an exorbitant lifestyle in New York City. The risk to the Bailey Building and Loan would have been considered minuscule compared to the current global financial system, which allows for the opportunity of great reward while offering up almost nothing in the way of risk.
The analogy I tried to explain to a friend recently regarding Derivatives or Credit Default Swaps – the largest unregulated financial ‘insurance’ scam in history – is as follows: A bookie takes a $100 bet from a gambler but only expects a penny upfront with the balance to be paid should the gambler lose the wager. And what is the wager? That someone else will not make good on a previous similar wager. The bookie keeps taking these bets, assuring prospective gamblers of his solvency based on a ledger that shows future income from all the previous bets. The fact is he only has a penny from each of the previously-placed $100 bets. As bets are mostly won by the gamblers, the bookie tells everyone not to worry about getting their money as it’s safely accounted for in his ledger. He even encourages them to feel free to place yet another bet based on the same criteria as before. No one’s getting paid off, but the IOU’s are worth something, right?
In the end, neither gambler nor bookie can lay claim to anything of value to offset the losses incurred. Fortunately, in the example, its just gambling losses. But in the real world, the astronomical losses from these Credit Default Swaps fall on the shoulders of the taxpayers, wherever they reside, from Athens, Greece to Athens, Georgia.
That is why the Eurozone, and even the U.S., could use someone like Old Man Potter to step in and take over, using his genuine, real assets to keep them afloat in the face of a complete financial meltdown. After all, as nasty and greedy as Old Man Potter was, he still had the means and business acumen to grow his empire. He may have taken advantage of malingerers and deadbeats, but isn’t that the way of the world? Back then, “No free lunch” eventually led to “Buddy, can you spare a dime?” But nowadays, it’s a case of “Government, can you pay off my mortgage, my student loan and my cable service so I can continue watching TMZ?”
I can’t imagine Old Man Potter and George Bailey ever having gotten to the point where either one expected, let alone demanded, a government bailout. Why should they have? They both understood the point behind the use of a balance sheet while practicing simple mathematics.