The US economy, or the world economy, lost…What? Hundreds of billions? Trillions? …of dollars when Wall Street firms and banks went belly-up. Many are asking where the money went. Obviously, somebody raked in the loot. Who? The helpful commenters on Xymphora suggest…two guesses? The Jews! How did you guess?
Leaving aside for the moment whether or not “the Jews” got rich off Wall Street getting its clock cleaned, we should deal instead with the issue of whether anyone at all got rich off the massive losses on Wall Street, or whether the billions or trillions of losses went into anyone’s pocket.
My position is that no one got rich off the Wall Street crash and burn, as the money lost never even existed in the first place. You know, paper money, paper profits, all that.
Any readers have any thoughts on this?
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Dear Robert
A lot of the money was wasted. There was a building boom in the US and many other countries. If you build a house or office which can’t be sold after it is finished, you wasted your money, although the people in the construction industry benefit from it. Granted, most new houses in the US were sold, but they were sold to people who couldn’t afford it and who bought only because of lax lending standards. In that case too, there was a transfer of wealth from the financial sector to the construction sector. Unfortunately for most Americans, a lot of the money that was spent on construction went to immigrants, legal or illegal.
The point to remember is that building or making something for which there is no demand is a waste of resources. If a house is built for 200,000 dollars and it stands empty after completion, then this is as much a waste as burning down a comparable existing house.
A waste of resources should not be confused with a transfer of resources due to price fluctuations. Suppose that Peter owns a pice of wasteland near a city. Paul thinks that in the foreseeable future it will become a residential zone, so he buys it from Peter for 2 million. Later it turns out that no construction will take place on that piece of land, so its price falls to 200,000. Due to this price fluctuation, 1,800,000 dollars has been transferred from Paul to Peter. The point to remember is that a lot of people benefitted during the real estate and stock market boom. They are the ones who sold when the market was high.
As you said, a lot of losses are paper losses. The only losses that count are the differences between the purchase and the sale. If you haven’t sold, you haven’t really lost. Suppose that you buy stock for 15 dollars a share. During 5 years the price rises to 100 dollars per share and then collapses to 25, at which time you sell. You had a paper loss of 75 dollars but you still had a real gain of 40% over the 5-year period. What counts are the initial and the final price, not the fluctuations inbetween.
A lot of people out there are complaining without justification and a lot of other people are secretly smiling. If I had sold my stock 8 months ago, I would be smiling too.
It doesn’t take many bad loans for a lending institution to be in financial trouble. Suppose that a bank has 10 million in deposits. It lends out 9.5 million. If only 6% of those loans become worthless, the banks liabilities are already bigger than its assets. This doesn’t mean that it has a negative cash flow, but it is in a vulnerable position.
Have a good day. James
Yes, but that debt effectively amounts to a promise that the US military will ensure that the world provides goods and services to that value, for however many generations, to … well, to who? That’s what money means these days.
” No do-over for anyone but the hundred or so billionaires who have just been endowed with enough free money to become America’s ruling elite for the rest of the 21st century.” Michael Hudson on Obama’s new bailout, in today’s Counterpunch.
And 1/2 of that hundred billionaires are…?