What’s Wrong with the World

The men signed of the cross of Christ go gaily in the dark.


What’s Wrong with the World is dedicated to the defense of what remains of Christendom, the civilization made by the men of the Cross of Christ. Athwart two hostile Powers we stand: the Jihad and Liberalism...read more

Electric brinkmanship

Object lesson.

As I write, the price of credit default swaps on GE senior debt is soaring. That would be General Electric Co. Its CDS is being quoted in "points up front," which in Wall Street argot means that to "insure" $10 million in GE debt for five years you have to cough up a million dollars up front, plus 500 grand annually.

Who the hell is selling these swaps? is what I would like to know. They are playing a game of high-stakes poker, whoever they are, and we could all get sucked into the misery. If GE fails, thus defaulting on its debt, how are these sellers going to pay? Where will they come up with the pay-outs to all the GE bondholders already counterparty to the CDS contracts, to say nothing of the speculators right now buying up the CDS in a frenzy?

On the other hand, if GE survives, why then they've probably made a handsome profit indeed. This is brinkmanship of a very base order, magnified by the appalling potential consequences.

Observe the lunatic incentives imbedded in this usury: the sellers of GE CDS (again, General Electric Co.!) want the company to careen toward disaster, right up to the edge of collapse, but never quite collapse. They want GE to approach ruin and default -- but never quite get there. They profit most if this old American titan of industry creeps right up to the precipice, to the very farthest point of desperation, just short of falling off; but of all things they profit least if GE actually falls off.

Note again that nothing tangible is actually being exchanged here. What is skyrocketing in "value" is little discrete packages of risk, little mathematical abstractions supposedly estimating the possibility of GE chance of defaulting on its senior debt.

I hope I do not need to belabor the obvious point that a failure of General Electric Co., impelled by another derivatives panic, would be catastrophic for the economy. GE is a major participant in, for instance, the commercial paper market, the near-collapse of which, you'll recall, was one of the primary drivers of the crash last fall.

Comments (4)

Need I state the obvious fact that now that the U.S. government has made every indication they will bail out those like GE "too big to fail" instead of letting them (and the rest of society that enabled them) get what they/we deserve, companies like GE will do the profitable thing and continue to milk the taxpayer for as much as they can get away with?

You can't half-control a technocratic private sector that abstracts out morality from their profit-making techniques. It either has to approach full control or approach no control.

The current administration likely realizes how half-control measures will lead to the private sector destroying the credibility of free markets and thus _justify_ the approach to central planning.

But we delayed the inevitable destructive contraction for a few months or years, so it's all worth it, right?

This kind of speculation is sometimes defended on the grounds that it generates useful information about the economic value of a company.

Is information a "tangible" product?

I found this.
"tangible asset is an asset whose value depends on particular physical properties. These include reproducible assets such as buildings or machinery and non-reproducible assets such as land, a mine, or a work of art. Also called real assets. Converse of: Intangible asset."
Now I would think that a tangible product i information that applies to something I can touch or physically do. Sort of like a recipe. I have the information on how to cook a dish, but when I learn it and then make the dish it become tangible.

Kevin J. Jones:

Is information a "tangible" product?
I don't think there is anything inherently wrong with intangible products. Modern people steeped in materialism tend to think that the only things which are real are material; but that just isn't the case. That said, any information we can use is encoded into some kind of material substrate. The substrate is tangible; the information, not tangible.

I think part of the issue is a kind of Heisenberg problem: sure, there is information here, but there isn't only information. By bidding up the swaps (or naked short selling or any number of other things) speculators can drive GE to the brink of bankruptcy and cash out from the greater fool effect. There is more than just "observation" going on there.

Post a comment

Bold Italic Underline Quote

Note: In order to limit duplicate comments, please submit a comment only once. A comment may take a few minutes to appear beneath the article.

Although this site does not actively hold comments for moderation, some comments are automatically held by the blog system. For best results, limit the number of links (including links in your signature line to your own website) to under 3 per comment as all comments with a large number of links will be automatically held. If your comment is held for any reason, please be patient and an author or administrator will approve it. Do not resubmit the same comment as subsequent submissions of the same comment will be held as well.