Financial Terms Explained
I, like most of the world, never have a clue when watching Sky News what the hell they are talking about. Here, as best as I can make out, are the most common terms used on the financial crisis and what they mean.
Deregulation
This is the government taking away the rules governing the financial markets. The major aspect of deregulation was allowing companies to become a combination of investment banks, commercial banks and insurance companies. Essentially, it allowed a couple of major companies to totally dominate the market and make up their own rules.
For example, the commercial bank side would issue a mortgage to someone that couldn’t afford it, sell it onto their investment bank department who would repackage it and sell it onto the open market. The open market would then insure these packages through the insurance department. So the company has been able to turn what is a worthless house mortgage into something that was highly valued, and then insured it at a high price to cover that fake value. It’s the same as insuring someone else’s house – it’s in your interest to burn it down. In 2008, the house burned down.
Years from now, the Gramm-Leach-Bailey Act introduced in the United States in 1999 and copied throughout the Western World, will be know as the point where the world turned from what was a minor mess into a complete catastrophe. For more info on this, click here.
Sub-Prime Mortgages
This was lending to people that couldn't afford it and with no security given, often even lacking a steady wage. With deregulation, mortgages were sold in such a way that the person lending the money wasn’t the same person that was paid back the money. In other words, the person that gave money to someone so they could buy a house had no particular interest in getting it back. This is because they sold on this debt to other people.
This debt was re-packaged by banks and sold onto traders, often traders who held the purse strings of our pensions. The major scandal of this crisis is that the ratings agencies gave these AAA+ ratings. What does this mean? Basically, that they were the safest bet in the world. Often, people that invest on the behalf of a pension group legally have to buy this type of package. In reality, these packages were junk.
Financial Derivatives
No-one knows what these are, no-one. These are financial package (or mechanisms) created by physicists that became bored creating nuclear weapons once the cold war ended and decided to create different weapons of mass destruction instead.
Bond Markets
This is the big one at the moment. It seems some gigantic monster called ‘The Bond Market’ is stomping across Southern Europe determined to take down the governments there. In reality, the bond market is just where a government goes to borrow money from the world. When a government makes a bond issue, it’s basically saying to the world ‘lend us money and we’ll pay you back in the future, with an interest rate we both agree on’. If that interest rate becomes too high, the government can’t realistically keep going, because it’s obvious that they won’t be able to pay it back within the timeframe. Picture this….
A lonely Enda Kenny walks into a cattle market arena, cap in hand. Sitting in the seats are private investors, other governments and investment brokers. Dear old Enda asks if perhaps they might lend Ireland a little money, just to tide us over y’know? Gleefully, everyone points their thumbs downwards and a trapdoor opens, with Enda dropping into a pool full of IMF sharks.
What no-one seems to be pointing out at the moment is that governments are falling because of their inability to borrow money. In other words, we can’t get out of the debt crisis because we’re not able to increase our debt levels; economics, eh?
European Central Bank
The ECB is supposed to be an entirely independent body that's whole existence was to keep prices stable throughout Europe. When Greece was bailed out, it was France, Germany and a few others that cobbled together the cash. Now, governments are looking to the ECB to stump up the cash. But the ECB doesn’t do politics, or at least hasn’t until now.
The new idea for solving the crisis is to get the ECB to buy up European debt so the markets will back off safe in the knowledge that the ECB would never intentionally bankrupt a country. However, heaping the debt onto the bank is once again moving the crisis rather than solving it, and putting the banks solvency at risk is a huge step. If it fails, the Eurozone will crumble overnight.
Quantitative Easing
The financial world is as good at euphemisms as the porn industry. Quantitative easing is printing money.
