Wailing Wall Street

Quote of the week:
'I do not feel obliged to believe that the same God who has endowed us with sense, reason and intellect has intended us to forego their use.' - Galileo Galilei.

Some previous articles from the IWB have been picked up by the International Business Times. Please click here and vote on how great you think they are. This way, perhaps the usual monotone coverage of Muslim issues found in the media will change for the better.


Commentary of the week:

Wailing Wall Street:

Once again, Wall Street has let us down. Here we were, planning to do an IWB on why taking a vacation is beneficial for the economy but have been dragged back from our fanciful musings into the nitty gritty of investment bank bankruptcies and Insurer fold-ups. It just seems that for all their education, smarts and financial sophistication, most people working in finance have perhaps missed their true calling as apprentices to donkey-cart drivers. Perhaps now they will have the opportunity to work in the field in which they should have been all along rather than wasting their lives brokering large deals between those who need to waste money and those with money to waste. The only question that keeps me up these days is - which section of idiot-financiers is dumber than the others? Is it the government regulators who have used up untold amounts of tax-payer money to shore up companies not worth their weight in cow-dung, or is it the people who spend years dreaming up complex, leveraged instruments only to pass them onto people just like them but with some more money?

So where did all this begin, you ask? Well, most things really begin after world war II, but we will skip over some decades and come to the early 70's. This is when President Nixon decoupled the US$ from gold and suddenly we could make as much or as little paper money as the banks that make up the Fed decided to at any time without necessarily having any gold to back it up. Of course, gold prices shot up (or rather, the worth of the US$ fell over the decade), but soon things became more predictable as people found a new way to do business. Everything suddenly became not just trade-able but a potential commodity to speculate with - Oil, Gold, Currencies, Wheat, Soyabeans and even the unmentionable animal. At the same time, some flawed geniuses in the US looked at bank (or savings and loans entities) balance sheets and realized that all these mortgages that people had, which were paying the lenders quite a bit of interest, but were essentially just sitting on the books (I am paraphrasing just a bit here). In the 1980's then, firms such as Bear Stearns (read the IWB obituary here) came up with ways to turn these mortgages back into cash by having one lender simply sell them as a package to investors looking for income. This is when the trading of fixed-income instruments (bonds) really took off and soon home-purchase payments your parents were paying diligently could actually be ending up at a small pension fund in Latin America that was unlucky enough to be a Bear Stearns customer.

Fast forward now to the present day and not only is it just the mortgage principals that are being traded, but interest payments and even the insurance on the mortgages. Actually, everything from credit card payments to the financing you have taken for your local mechanic's bill or marital furniture is ultimately being traded somewhere by a short man wearing glasses or by the computer program he has created to replace himself. All this works fine as long as no one cog in the machine creates problems, but alas, the machine was not made in Germany so breaks down. Since this one is American, lots of things break down and do so quite frequently.

Think of the US economy as a car, and money as gas. If a few people cannot pay their mortgages in the US, one of the cylinders in the engine is not really working and the car is not as efficient anymore. The Fed notices and jumps in to give it more power by giving it more gas. Since that doesn't solve the problem of the faulty cylinder, the car continues to run hotter than normal for bit and then the extra heat breaks something else down. This time, it is the mortgage-backed bond market, where nobody wants to invest anymore, and the Fed jumps in with yet more gas. Suddenly, all the bills for the companies that are involved in the mortgage market are unaffordable because they have no revenue - the Fed jumps in with yet more gas. Then the insurance companies that bought mortgages find that they are not getting paid - the Fed does the usual gas trick. After the insurance companies realize that they are toast (as per our views here), the investment banks realize that they have no customers - the Fed jumps in with High Octane gas. All this while, the car is slowing down because even though there are small explosions taking place in the engine, the engine is not really producing much power (think GM). Let us now suppose that the global political situation is such that the car has to travel uphill. So you have something with the shape of a car, with the engineering of a car, with the heat and sparks of a car, but the performance characteristics of a gas-tank with a lit fuse. It has lots of flammable gas, sparks but no real momentum. Clearly, the natural course would be for it to go screaming downhill while on fire.

The tragedy here is of course twofold. One, all of the gas the Fed, the Bank of Canada and others pour into this American junker is stolen from our cars as governments have one source of revenue and that is the taxes we pay either obviously or through the silent avenue of inflation. Two, many of the donkeys that were previously free will now be stuck with over-eager donkey-cart drivers looking to prove that it wasn't their fault.


Credit to Shahzad Siddiqui for suggesting the topic (and title) and Siddiq Mohamed for forcing me to say something about the tax implications.
Ramadan Mubarak - May this month be full of blessings for you all IA.

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Upcoming Events:
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Useless fact of the day:
Campestral: something or someone that thrives in open countryside and under open skies, as opposed to the usual growth found in cubicles.

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Finance News:

1. Two for the price of one ... both Lehman Brothers and Merrill Lynch go under (but in different ways) ... read more here

2. Bill gates buys $32B worth of Garbage, and we are not even talking about Windows ... read more here

3. Time for many Investment Bankers to realize their true calling and become donkey-cart drivers ... read more here


Economic News:

1. I think the Chinese might end up 'saving' Wall Street ... read more here

2. The Economist opines (finally) on why things are so bad ... read more here

3. Why the underwriting of $62Trillion worth of derivatives may be a bad thing ... read more here


Islamic / Middle East / Emerging Markets:

1. One of the foremost Economists of Islamic Economics (a person who has researched the relative efficiency of debt vs. equity on an economy-wide basis) has written a piece on Ethical Investing. A must read ... read more here

2. Why the Sovereign Wealth Funds have not jumped in to save Wall Street (well, not yet anyway) ... read more here


Interesting but not all Finance:

1. Is there a food shortage in the world, or is there a water shortage? ... read more here

2. Teaching kids a financial lesson ... read more here