Idc Business

JUNE 2009

I

ISSUES 001

ALSO IN THIS ISSUE: -THE 1929 CRASH, WHY? -THE BANKS, WHERE THE MONEY COMES FROM -HOW DID 9/11 REALLY HURT US?

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EDITOR IN CHIEF

Jonathan Nadeau

MANAGING EDITOR Jonathan Nadeau CREATIVE DIRECTOR Jonathan Nadeau DEPUTY EDITOR Dylan Moeller DESIGN DIRECTOR Jonathan Nadeau ARTICLES EDITOR Jonathan Nadeau TORONTO EDITOR Jonathan Nadeau STORY EDITOR Jonathan Nadeau SENIOR EDITOR Jonathan Nadeau ASSOCIATE EDITOR Dylan Moeller SENIOR WRITER

Jonathan Nadeau

ART DIRECTOR Jonathan Nadeau ASSOCIATE ART DIRECTOR Jonathan Nadeau CONTRIBUTING DESIGNER Jonathan Nadeau SENIOR PHOTO Jonathan Nadeau PHOTO EDITOR Jonathan Nadeau DEPUTY PHOTO EDITOR Jonathan Nadeau PHOTO ASSISTANT Jonathan Nadeau

COPY CHIEF Jonathan Nadeau COPY EDITOR Jonathan Nadeau PRODUCTION MANAGER Jonathan Nadeau CONTRIBUTING COPY EDITOR Dylan Moeller PRODUCTION DIRECTOR Jonathan Nadeau SENIOR EDITOR, RESEARCH ASSOCIATE RESEARCH EDITOR ASSISTANT RESEARCH EDITOR

Jonathan Nadeau CONTRIBUTING EDITORS Jonathan Nadeau Jonathan Nadeau Jonathan Nadeau SENIOR MAVERICK Dylan Moeller

EXECUTIVE DIRECTOR OF COMMUNICATION Jonathan Nadeau WEB EDITOR Jonathan Nadeau DEPUTY DIRECTOR OF COMMUNICATION Dylan Moeller ASSOCIATE WEB EDITOR Jonathan Nadeau MANAGER OF COMMUNICATION Jonathan Nadeau ASSISTANT TO WEB EDITOR Jonathan Nadeau ASSOCIATE ASSISTANT TO ASSISTANT WEB EDITOR EDITORIAL OPERATIONS MANAGER Jonathan Nadeau Moeller ASSISTANT MANAGING EDITOR Jonathan Nadeau ASSISTANT TO EDITOR IN CHIEF Jonathan Nadeau FOUNDING EDITOR Jonathan Nadeau EDITORIAL INTERNS Dylan Moeller CORRESPONDENT Jonathan Nadeau EDITORIAL DIRECTOR Jonathan Nadeau

Dylan

By: Jonathan Nadeau

The roaring twenties earned their respectful position in history as a time of excess and great wealth across the United States. People had money to burn and they loved to do it, buying up land and cars as fast as they can. The skylines of major cities became doted with huge art deco skyscraper and jazz filled the hearts of all. People thought they had reached the point where they were untouchable, nothing could happen to them or their money. This is where they were all so wrong.

As people spent wildly, and played hard, work was not something most wanted to take part in, they found a solution to this, the stock market. having come home to money saved during the war, consumers placed much of what they had in the market. This worked for them at first and all seamed to be happy, but as the twenties roared on, people wanted more and more. It's funny how greed fuels the human condition, people will always find someway to have more and more.

The solution to this...burrow money to make more money. Brokers found that it they lent money to the average Joe for stock, he would build an nice little portfolio and then the broker and Joe would make a tidy little sum of money. This worked fine as long as everyone knew what type of risk was involved in this whole process. The problem was now that Joe had a little taste of what he could make, he wanted more. So Joe would burrow some more money, up 2/3 of the value of the stock. Then tell his friend to do the same, eventually so many people started into this process that all the stock kept rising because everyone was buying. People were burrowing and burrowing and borrowing, eventually it reached a point in 1929 where over $8.5 billion was out on loan to investors. To put that number in perspective there was less money in circulation in the US at the time.

This created what is know as an economic bubble, and as everyone knows bubble don't last for ever. Our old friend Joe eventually came to the point where he needed what is known all around the world as CASH, so Joe sells off his stock and pays off his loans. This leads to a few more then even more people starting to sell off their stock. When this occurs in the market, the value of the said stock will decrease...people don't really like that. So what do they do...sell out...the only problem is when they do that it drops even more and more and more. This is exactly what happened on October 24, 1929...a.k.a. Black Thursday.

Photo courtesy of Grolier Encyclopedia

Black Thursday caused massive financial devastation across the world. Countries have always been highly invested in the U.S. economy because of its shear size. In the 20's the world was deep in the U.S. market as the rest world was recover from the devastation of the war. Something needed to save the economy or the whole world could be doomed, here comes in F.D.R. and his new deal. After Hoover's inability to pull up from the economic nose dive, the people wanted someone to save them. F.D.R.'s new deal was the answer to everyone's prayer. Today as it's examined more, new criticisms have risen with it, but at the time it did what it was intended to do and created some of the U.S. most impotent financial institutions. It also paved the way for some of the most amazing make-work projects ever, including the Empire State Building.

With the creation of the FDIC and other economical protection agencies everyone thought it could never happen again...oops.

A year ago, it was hardly unthinkable that a math wizard like David X. Li might someday earn a Nobel Prize. After all, financial economists—even Wall Street quants—have received the Nobel in economics before, and Li's work on measuring risk has had more impact, more quickly, than previous Nobel Prize-winning contributions to the field. Today, though, as dazed bankers, politicians, regulators, and investors survey the wreckage of the biggest financial meltdown since the Great Depression, Li is probably thankful he still has a job in finance at all. Not that his achievement should be dismissed. He took a notoriously tough nut—determining correlation, or how seemingly disparate events are related—and cracked it wide open with a simple and elegant mathematical formula, one that would become ubiquitous in finance worldwide. For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new

securities, expanding financial markets to unimaginable levels. His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored. Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril. David X. Li, it's safe to say, won't be getting that Nobel anytime soon. One result of the collapse has been the end of financial economics as something to be celebrated rather than feared. And Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees. (Excerpt From Wired Magazine) Article by: Felix Salmon

In the mid-'80s, Wall Street turned to the quants—brainy financial engineers—to invent new ways to boost profits. Their methods for minting money worked brilliantly... until one of them devastated the global economy. Photo: Jim Krantz/Gallery Stock

By: Jonathan Nadeau

The attacks of September 11th hurt the economy much more than people would like to believe. It is the American way to pretend everything is ok and that nothing can hurt them. What people don’t know is that it more than hurt them...it very well may have been what completely financially devastated them. September 11, 2001 is a day that no one will ever forget, especially the investors. It is true that the attacks shut down the markets and costs billions to clean up, but that’s not what sealed the fait of the U.S. economy. This came much afterwards when then, Chairman of the Federal Reserve of the United States, Alan Greenspan, made a faithful decisions. He lowered the U.S. interest rate to only 1%. This did two things; first it made bonds a worthless investment for traditional investors, and second if Credit: www.commondreams.org © www.commondreams.org made money cheap for banks to burrow...and they did just that. The banks burrowed more money than anyone ever thought possible. This was perfect for everyone, mortgages were cheap and everyone could get a new home, new car, or a new boat. Investors were even let in on the action, they were sold C.D.O.’s and made billions. All was fine in the States, 9/11 did nothing to them...or so they thought. As with anything, after time things run out, the same happened with mortgages, there were no more people who could afford them, known as a prime mortgage, everyone who could have one already did. This is where the real financial genius/greed came into play. Banks did the unthinkable, they lent to anyone, a.k.a sup-prime mortgages. This is where the terrorist’s time bomb was lit...it was only time until this blew up in everyone face. Essentially the whole point of what I’m trying to say is...the terrorists didn’t leave the U.S. unscathed, they’ve actually destroyed it beyond recognition.

WE ASKED OUR ESTEEMED PANEL

JAMES RODGERS

MJ PAGE

ANDREW PORTENER

MONIQUE NADEAU

RAY JACOBS

SASHA ANDRENKOV

ARLENE NADEAU

DYLAN MOELLER

QUESTION: How do you think the economy could be fixed? ANSWERS: JAMES RODGERS: Apocalypse. MJ PAGE: The economy has to take it course, however big business like auto industry need to respond to changing market demands, and demographics faster. There is no need for gov't to support/ bail out failing industries. Governments need to investment more in education and incentives for creative, adaptive and responsive, environmentally friendly business, and provide social services and support to retrain those who are unemployed. Our poor economy is a long term adjustments to international markets too many people overspending and hoping that the get rich quick ride will last forever. ANDREW PORTENER: People need to have confidence in the economy and start spending rather than saving. MONIQUE NADEAU: With less fraudulent tactics, no more «paradises» but corruption will always exist unfortunately, so will the underworld who know all the loopholes. Communication is so fast and so easy, it makes cheating so available... It will take a lot of good will from the people who KNOW they caused or helped the situation. Good luck to you children for a cleaner future....

RAY JACOBS: Slowly. Get the banks back into good shape. Get them lending money again, to people who can afford to pay it back. Stabilize the housing market. Get out of Iraq, and concentrate our efforts into Afghanistan. Defeat the Taliban. Create electric cars that are affordable and perform well. Utilize solar, wind and water power. Establish an overview system to watchdog Wall Street. SASHA ANDRENKOV: By people pumping cash into the system, and by removing companies such as the American Car giants away from privatization. ARLENE NADEAU: Balancing of the classes. A government that is truly concerned about the working class, not big business. DYLAN MOELLER: Stop wasting money trying to support corporations that have gotten too large and consequently collapsed in on themselves. Let innovation become what's important instead of brand name.

How Banks Create Money Out Of Thin Air By Kalinda Rose Stevenson, PhD Bankers know how to create money out of thin air. In fact, banks are money factories. Banks exist to make money. You might think that banks are in business to provide services such as banking accounts and loans to their customers. It's true that banks provide essential financial services. However, the reason that the banks provide such services is that banks need money to use as raw material to create more money. Where does this money come from? It comes from customer deposits. In other words, it comes from the money you and I deposit into the bank. Notice very carefully, banks "create" money. It's not simply that banks "earn" profits when they provide bank services and loans. Banks actually "create" new money that did not exist before. Here is an example of how banks create money. You deposit $100,000 into a one-year Certificate of Deposit at 5% interest. The bank now can use your money to create loans. The Federal Reserve sets the reserve rate for the bank from 3-10%. A 3% reserve rate means that the bank must keep 3% of the $100,000 on reserve and can loan the remaining 97%. A 10% reserve rate means that the bank must keep 10% of the $100,000 on reserve and can loan the remaining 90%. For our example, let's assume that the reserve rate is 10%. This allows the bank to loan $90,000 of your $100,000 deposit. So, the bank makes Loan #1 of $90,000 and keeps $10,000 on reserve. This is the critical point where the bank creates money. According to the bank's balance sheet, the $90,000 loan to the borrower is also a $90,000 asset for the bank. By its own brand of money magic, the bank has created $90,000 out of thin air.

But the process does not stop here. Since the bank now has an asset of $90,000, it can make another loan based on this asset. Since the same Federal Reserve rules apply, the bank must keep 10% of this asset on reserve. This means it can loan only 90% of the $90,000. This means that Loan #2 is $81,000. By creating another loan, the bank has created another asset. The $81,000 loan to the borrower becomes an $81,000 asset for the bank. Once again the bank creates money out of thin air. And since the bank now has an additional $81,000 asset, it can make another loan. Once again, the bank must keep 10% of this asset on reserve. This means it can loan only 90% of the $81,000 asset. Loan #3 is $72,900. Federal Reserve rules allow the bank to make five to six loans based on the original $100,000 deposit. Each loan creates an additional asset. We'll stop at three loans, review the process, and add up how much money the bank has created. You deposit $100,000 into a CD. The bank creates three loans based on the original $100,000 deposit. Loan /Asset #1 = $90,000 Loan/Asset #2 = $81,000. Loan/Asset #3 = $72,900. The total = $243,900 in assets for the bank. This is $243,900 in new money. When you cash out your CD, you get your $100,000 deposit back, in addition to the $5,000 interest. Meanwhile, the bank has created $243,900 of new money. After it pays you 5% interest, the bank has made a tidy profit of $238,900. ($243,900 - $5,000 = $238,900.) If the numbers are confusing, go over them again until you see how magical this process is. This is how banks create money. To make this point, I have oversimplified the process. A bank doesn't really make a series of separate loans based on a single deposit. Your deposits become part of a pool of money the bank can use to make loans. But this oversimplified example demonstrates how banks create money out of thin air. A bank manufactures money by using the deposits of customers to make loans. The loans become assets and the assets turn into money. What difference does it make to see how banks use money to create money? You and I can't do what banks do, by loaning on the same money more than once. The real point of this example is to take some of the mystery out of money. The process a bank uses to create money demonstrates that money is not a commodity in limited supply, where there is only so much to go around. Money is not equivalent to currency. Money is created in money-making transactions, which means there is no potential limit to money. So, if you want more money, think the way bankers think. Ask how you can use money to create more money. If you really think the way bankers think, you will use someone else's money to create more money. The crucial idea behind all of this is: The greatest limit to money is the belief that money is limited.