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July 11, 2012 / 74

The Divorce of Risk and Reward

As the entire world slips into depression, as the price of stocks crash and factories close because jobs are evaporating, a clear and to me obvious cause presents itself. Underlying the numbers games being played by those in and out of power we can see that there was, and there continues to be, a disconnect from the real world.

If we look at the atmosphere of the run-up to the continuing process of bubble deflation,  the disconnect occurs at the junction of Risk  Street and Reward Street.

As house prices went up and up, I heard the words “it’s EASY” and “you can’t lose” and “ANYBODY can do it” quite frequently. But the words, “you could lose your ASS!” and “Gambling – pure and plain” were not in evidence.

Like the run-up to “Black Thursday”, when the 1929 stock market bubble went *POP*, there was the feeling that the markets could only go UP, and there was no way to lose. Actual values of companies was ignored. PE ratios were soaring to the stratosphere – and many felt that the economy and the markets had entered a new universe where money was just lying around free for the taking.

The idea of REWARD was huge, but the concept of appropriate and proportionate RISK was almost absent.

Does this sound familiar?

Today we see this disconnect in just about every aspect of our society. We see governments, local and national, gambling on economic conditions and borrowing against what they think are guaranteed returns.

We see millions of people buying houses and gambling that they will be able to make the payments – that interest rates on their variable rate mortgages will either stay the same or go down, as their earnings from employment can only go up.

And we see global investors risking their own and other people’s money on new unproven “instruments” such as “Mortgage Backed Securities” where the risk is laid off under “credit default swaps” (CDS) where if a security busts, the CDS pays off the entire loss in exchange for the defaulting security.

So the global economy has taken a flight on the Risk Elimination Carpet. Why assume risk when you can just shift it to someone else? And that someone else assumes that even if some of those risks cause losses, there’s NO WAY that they will ALL crash! – which is a pure cut case of denial. If you can’t SELL risk, you simply DENY it exists!

Military folks refer to how a process like that “works” as PFM. “Pure effing Magic”!

And that is what the global economy has been using for an operating principle since Alan Greenspan began building his Magic FREE and EASY Money economy.

We hear how Bill Clinton created one of the nation’s longest business booms!

PFM.

We see Goldman Sachs and other Banksters and megabanks who, after the final repeal of the 1933 Glass Steagall Act made it possible for the Banksters to use depositor’s money to gamble with, made billions of dollars on everything they touched. The repeal of Glass-Steagall laid off the downside risk to the US Taxpayer as these are/were “FDIC insured” deposits. (The Glass–Steagall Act mandated a separation between commercial banks, which take deposits and extend loans, and investment banks, which underwrite, issue, and distribute stocks, bonds, and other securities. *)

PFM.

We have seen the GW Bush and the Obama administrations spending money that the US doesn’t have and will probably never get, and sending the nation DEEPLY into debt that it seems will never have to be paid back!

PFM.

America? World Leaders? Got a tip for you.

There ain’t no such thing as magic, pure or otherwise.

You can’t spend what you don’t have. You can’t borrow what you can’t repay. You can’t give away what isn’t yours to give.

So knock it off with the PFM.

********* ********* *********

* http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929

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2 Comments

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  1. John / Jul 18 2012 01:45

    Technically, PFM refers to the art of fixing a problem by merely showing up, usually after being woken up at three in the morning to fix said problem. Or when you fix something but don’t really understand how you did it, or you understand, but don’t feel like explaining a complex solution to somebody who won’t understand it anyway. An example would be if a phone ckt malfunctioned in the middle of the night, and a technician is racked out to fix it. The technician dresses, swears a little, then reports to the effected space with a toolbag, only to find out that the phone ckt started working just fine about the same time as he was woken up. At which point the tech takes credit for the fix, saying that the mere thought of his intervention caused the faulty circuit to behave. That’s PFM.

    Of course, I think your point here is that these people are counting on PFM to save their butts from disaster, and it’s not going to happen. The fact of the matter is, there is no magic to PFM, just ignorance on the part of one or all of the parties involved. When I told people I’d fixed something with PFM it was because that was the shorter way of saying I was a competent technician who had spent hours upon hours reading tech manuals and troubleshooting, to the point I could make difficult fixes seem easy to people who didn’t know my job as well as I did, which was everyone. That, or I didn’t want to admit that even as good as I was at my job, I had no idea how the problem was resolved, or what caused it in the first place.

    Anyway, the point I’m trying to make is that PFM is used for problems that have been solved. For problems such as the current state of the economy, the military acronym that might be more appropriate is GFY.

    • Anonymous / Jul 23 2012 07:57

      Thanks for the clarification, John. When I was in the Navy, we didn’t have the term PFM… at least not that I REMEMBER… ;-D

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