Case # 1: The Wrong Bet -- MarketWatch.com
November 20, 2015
'His name is Joe Campbell, and he claims he went to bed Wednesday evening with some $37,000 in his trading account at E-Trade. One notable development on the pharma front later, and Campbell woke up to a debt of $106,445.56. Now, he may end up liquidating his 401(k). And his wife’s.
That’s where you come in. At least where Campbell desperately hopes you come in. Of course, sympathy in the trading community over such gaffes is typically in short supply.His is a cautionary tale of getting caught on the wrong side of one of the riskier bets on Wall Street.'
In the case above Joe Campbell played a Wall Street game and lost, then asked for financial charity via the donations of kind strangers to help cover his losses.
Case # 2: Debt Games: Leveraged Debt That Wasn't Based on Fundamentals -- Washington Post -- July 14, 2014
Excerpt from The Washington Post--
'Depending on whom you ask, mortgage securities were at the heart of the crisis. The billions of dollars of losses on mortgage securities freaked out the markets. It triggered a loss of confidence in the nation's financial system that reverberated around the world.
Losses on the mortgage securities were so severe that it shut down lending, prompted a $700 billion bailout of the nation's banking system and led to the $188 billion bailout of Fannie Mae and Freddie Mac.'
Banks saw a way to profit and they paid little attention to the fundamentals. They lent out more and more loans because there was a greedy profit motive when it came to packaging the loans and selling them as mortgage backed securities to investors.
Whether or not the loans could be paid back didn't matter too much, it seems. So while most people thought the hot real estate market leading up to 2008 was a sign of a growing stronger economy it was mostly just an over abuse of a leveraged debt scheme.
Case # 3: Quantitative Easing: Giving More Money to Banks
CNBC Video (Nov. 12, 2013)
Quantitative easing is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. -- Definition from Investopedia
In this video former Federal Reserve official, Andrew Huszar, gives his thoughts on the quantitative easing program that he used to oversee during his time at the Federal Reserve.
Here are some excerpts:
'Despite the Fed's rhetoric, my program wasn't helping to make credit any more accessible for the average American. The banks were only issuing fewer and fewer loans. More insidiously, whatever credit they were extending wasn't getting much cheaper. QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash.'
'Trading for the first round of QE ended on March 31, 2010. The final results confirmed that, while there had been only trivial relief for Main Street, the U.S. central bank's bond purchases had been an absolute coup for Wall Street. The banks hadn't just benefited from the lower cost of making loans. They'd also enjoyed huge capital gains on the rising values of their securities holdings and fat commissions from brokering most of the Fed's QE transactions. Wall Street had experienced its most profitable year ever in 2009, and 2010 was starting off in much the same way.'
'Unless you're Wall Street. Having racked up hundreds of billions of dollars in opaque Fed subsidies, U.S. banks have seen their collective stock price triple since March 2009.'
'As for the rest of America, good luck. Because QE was relentlessly pumping money into the financial markets during the past five years, it killed the urgency for Washington to confront a real crisis: that of a structurally unsound U.S. economy.'
In other words, according to Andrew Huszar, the benefits of quantitative easing were mostly only experienced by the big banks and Wall St, these benefits weren't experienced by people that go to work everyday and do their best to save and build a certain degree of comfort for their retirement.
When I read Mr. Huszar's open letter which was published by the Wall Street Journal, I believe he was trying to tell everyone to forget about financial schemes and go back to fostering an environment where the work of people all over the country can produce real results in their earnings and savings.
Yes, it is possible that leverage debt can pay off great returns however the debt that is leveraged has to be based on something real, it has to be based on something that produces real positive output such as:
The dependability of people working and producing goods and services
Strong employment #'s that shows stability in people paying their rent and mortgages on time.
Even with these dependable factors the timing has to be right for there not to be a financial downfall. Quantitative easing isn't based on the real value of production, instead it is a debt facilitator. QE is a very short term fix that doesn't deal with the root causes of unemployment and low savings.
Which means the problem grows bigger for it to be dealt with in the future.
People who live on a fixed income, like the elderly are perhaps hurt the most by these debt games because most elderly people are past the point of earning substantial income that can outpace the low savings rates and inflation.
Instead of putting complete and blind trust trust in what Wall St brokers and financial pundits on TV say about your money let's remember that it's workers everywhere that contributes value through their work for themselves and others.
The food we eat, the homes we live in, the cars we drive, the clothes we wear, etc are all the end result of worker contributions. The income we and others earn from hard work deserve an environment to grow that is not manipulated or eroded by central bank policies like quantitative easing.
Wall St. value can go up or down at a moments notice but if we have a better understanding of the cause/effect relationship of our money and the finance world in general then we can better protect how our money is handled.
The value of real work and financial awareness can have a longer lasting effect on our lives than the latest stock market high, especially a stock market high built on debt games.