Because a Little Bug With the Asian Flu Went Ka-CHOO

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Duma

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True story:

Story: Because a Little Bug With the Asian Flu went Ka-CHOO

Chapter 1:

You may not believe it, but here's how it happened,
One fine summer morning in rural Asia, a little bug with the Asian Flu, sneezed.
Because of that sneeze, a little seed dropped.
Because that seed dropped, a worm got hit.
Because he got hit, the worm got mad.
Because he got mad, the worm kicked a tree.
Because of that kick, a nut dropped off the tree.
Because that nut dropped, a turtle got bopped.
Because he got bopped, that Turtle named Jake, fell on his back with a splash in the lake.
Because of that splash, a hen got wet.
Because she got wet, that hen got mad.
Because she got mad, that hen kicked a bucket.
Because of that kick, the bucket went up.
Because it went up, the bucket came down.
Because it came down, it hit Farmer Brown.
And that bucket got stuck on his head.
Farmer Brown happened to be the President of the Regional Farmers Association.

Just before the bucket landed on his head he was on the phone to his banker trying to sort out repayment terms for his fellow farmers since the weather had been unkind to the crop yields that season. But the bucket slamming onto the farmer's head disconnected the telephone and made it impossible for the banker to call back.

The farmer's wife was out gathering up the neighboring farmers to help remove the bucket from her husband's head, so the banker couldn't call them either. The banker immediately jumped to the conclusion that the farmers were all going to default on their loans. Word spread quickly around the banking industry and pretty soon the international speculators caught wind of this and started selling off their Asian currencies and investments for fear that a banking crisis was looming.

The selling off of Asian currencies put downward pressure on their values and soon the Asians had to devalue their currencies. This proved disastrous for the Asian banks whose assets were mostly in local currencies, but who also had large US dollar denominated debt. Almost immediately the major banks were near insolvency and a run on banks had started. The expectation of the international speculators of a banking crisis was a self-fulfilling prophecy.

The Asian crisis then spilled over to Russia, already in a precarious position due to high levels of debt. Before long the Russian government defaulted on its debt.

After this series of events the international speculative community was in a mad panic and began what is known as a "flight to quality", selling down bonds of foreign governments and riskier firms and buying up on the safer US government bonds. This pushed down the prices on foreign bonds, and pushed up the prices on US treasuries. This is the same as saying that interest rates on US bonds went down and those on foreign bonds went up. In the financial world we say that spreads on foreign debt over US treasuries got bigger, or widened.

Back in the US, if you had been in the upscale town of Greenwich Connecticut, you might have been woken by a loud scream upon news of the Russian default. For little did anybody know, the massively leveraged hedge fund known as the Long Term Capital Management Fund or LTCM, had bet a substantial amount of the worlds economy on the future narrowing of interest spreads over US treasuries. But with the Russian default these spreads just got much, much wider.

In contrast to the Enron case, Federal Regulators and the US Federal Reserve realized that a major financial catastrophe may result from not intervening in the LTCM case. LTCM's collapse would have effected us all and caused the type of collapse that can cause a major depression.

In the subsequent months Wizard Greenspan was called before congress to discuss the LTCM crisis, why the Federal Reserve stepped into the supposed "free markets" and what should be done to prevent future LTCMs.. Perhaps one of the most dangerous outcomes of Wizard Greenspan's testimony was his support of the continued lax regulation of both hedge funds and the derivatives markets. In line with this, no regulation of these instruments was forthcoming. Overall, the wild derivatives markets and hedge fund players got off lightly, indeed. More blame was put on external factors than on the dangers of the extreme speculative behavior facilitated by both derivatives and private, unregulated hedge funds.

chapter two is at http://www.altruists.org/f294 along with some worryingly sensible analysis of the bullshit that is the global finacial system.
still sleeping too well? try http://www.energybulletin.net/for some bedtime reading...
 

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