[quote GH]There is a concept of money on the sidelines which never really comes into play then there is the money which is actually in play, then there is money which through credit default swaps and derivatives etc, which mirrors other money but is more along the lines of imaginary money (until a crash), when it suddenly becomes very real and very serious.[/quote]
You are listening too closely to the ‘talking heads’.
“Money on the Sidelines” – talking heads use this to imply that people are waiting to buy and you better rush in before the money on the sidelines does. In reality, there is no such ‘sideline’. The ‘money’ will be allocated to cash, commodities, stocks, bonds, put under the mattress.. or a combination of the aforementioned.
then there is money which through credit default swaps and derivatives etc, which mirrors other money but is more along the lines of imaginary money – Actually credit default swaps are not money. It is closer to a liability than an asset. In reality it is an insurance policy. Derivatives are closer to combined loan-asset ‘packages’.
[quote GH]which means the derivatives and credit swaps come into play as millions of individuals and businesses fail and their debts are made whole in a bizarre world where debt and money are created and destroyed with little relationship to it’s underlying value.[/quote]
Actually it is intimately tied to the underlying asset. A credit default swap covers the difference between the debt used to fund the purchase of an asset and the value that the asset fetches on BK/foreclosure/default. The person who loaned the money for the asset pays a monthly/yearly fee for the credit default swap.
[quote GH]For the banks this is great as they loaned nothing and get paid with real dollars and thus will end up owning more than 100% of everything.[/quote] Then explained why so many large banking institutions went T-U? The banks actually loaned with real money. This was money that they either borrowed, from cash holdings or depositors. The banks used credit default swaps to make sure they could cover the losses should the borrower default (a credit default swap is an insurance policy against default – ie credit-default and hence its name. The organizations underwriting the the credit default swap don’t want to call it an insurance policy because it would cause it to be regulated as an insurance item.. so they got creative and called it a ‘swap’.). The only one that could ‘create’ money from thin air is the Fed through direction from US Congress.
[quote GH]For the people this is very bad as we have seen the middle class in America strip mined… [/quote]
The middle class is getting ‘strip mined’ because it lost focus and started to think that a property (house, car, RV) bought with a loan is really a free and clear asset and demonstrates how much they are really worth. They ignored the liability in the form of the loan (A loan is an asset for a bank though..). The middle class is also getting ‘strip mined’ because it listens and believes the talking heads and doesn’t bother to educate themselves on financial matters — buy on your Discover/Visa/Master Card today!!! who cares that you have to cover it at a 19% interest rate later! The FICO score became the all-knowing rating, even though it is based primarily on credit cards.
