Vamos Rafa

Rafa Benitez is parting ways with Liverpool FC after six seasons as the manager, receiving a £6 million pay-off to leave the club. Under Benitez’ stewardship The Reds finished a disappointing seventh in the Premiership League Table, after being a runner-up to Manchester United in the previous campaign, and the equally disappointing were the early exits in the FA Cup and the League Cup. Liverpool failed to advance out of the Group Stage of the UEFA Champions League, which Benitez won in his first season with the club. Liverpool did advance to the UEFA Cup Semifinal before being heartbreakingly eliminated by Athlético Madrid, on an extra-time goal from Diego Forlan. The season started with high expectations, but ended with no new silverware for the trophy cabinet.

In the summer transfer window Benitez sold Xabi Alonso to Real Madrid, for €30 million, a deal that made fiscal sense, but left the club with no other holding midfielder to set up the attacking players. Naturally the offense struggled mightily early in the season, the mid season acquisition of Maxi Rodriquez did not fill the vacuum of Xabi’s departure, and the club finished with sixteen fewer goals than the previous Premiership season. Shuffling of line-ups due to performance, as well as injuries, led to the mixed results, and by mid-season it was clear that Liverpool were not in-line for any football honors. Benitez’ defensive oriented style has led to moderate success, but it has led increasingly disappointing results, like losing to Reading at Anfield. More questionable has been his personnel decisions, using ownership turmoil to expand his power Benitez had free reign over the squad, but his constant buying and selling of players finally caught up him this season as Liverpool drifted away from the top squads in Europe, and perhaps has pushed the club out of the “Big Four” in the Premiership.

The “Big Four” are Arsenal, Chelsea, Liverpool and Manchester United, the four clubs account for all but one of the League Champions since the formation of the Premiership in 1992 (The Premiership was part of a reorganization of English football, and was previously League One), and regularly finish in the top four slots in the league table, which qualifies them for the Champions League. However, Liverpool has not won a title in the Premiership, from 1975 to 1990 The Reds won ten League One titles, but have not toped the table since. Meanwhile, Manchester United has claimed ten league titles, tying them with Liverpool for the most all time. What separates the “Big Four” from the rest of the Premiership is their ability to out spend all the other clubs, after a decade of glutinous spending Liverpool maybe tapped out.

Liverpool is over £350 million in debt, and is only afloat because of a £290 million loan from RBS and Wachovia, which expires in July. American owners Tom Hicks and George Gillett have again secured an agreement with the lenders to give them time to sell the club, but KPMG, the club’s auditor, expressed a “material uncertainty” about Liverpool’s ability to continue as a going concern. However, Hicks and Gillet are holding out for an offer of over £600 million, three times what they paid for the club only three years ago, and £200 million more than RBS currently values the team. With RBS pressuring a sale, along with falling revenue it will be hard to sell the club for anything other than a discount price, but the Americans seem too stubborn to acknowledge their position, even Sheikh Mohammed bin Rashid al-Maktoum, the ruler of Dubai, who really wanted to purchase the club, balked at the asking price. Fans, former players and mangers, even David Moores, who sold the club to Hicks and Gillet, have spoken out against the owners, some publicly demanding a sale. Despite the club’s unfortunate position, Liverpool fans may take solace in the fact that their greatest rivals could be facing an eerily similar situation.

Manchester United has been the most successful sqaud in the Premiership, and are considered one of best in all of Europe. While United’s on the pitch results have been more impressive than their chief rivals, they have the same off the pitch problems. Manchester United has an American owner, Malcolm Glazer, and have debts that exceed £700 million. United’s board of directors have been trying to get Glazer to sell for several years, and group of wealthy fans, dubbed the “Red Knights”, have been pursuing a £1 billion takeover bid. Since 1990 Manchester United had been a publicly traded, and it took almost £800 million to purchase all the shares, most of which was borrowed against the club’s assets, the rest in PIK loans which were sold to hedge funds. Glazer will be forced to sell the club by 2017 or he will lose his shares to the hedge funds, but he could damage the club a great deal before then. Glazer would certainly be willing to sell the club, however, as will Hicks and Gillet, Glazer is seeking an excessive offer, over £1.6 billion, and has claimed that he has already turned down a £1.5 billion offer. It is only a matter of time before Manchester United is in the same position as Liverpool, and with a much greater burden of debt.

The uncertainty about the Liverpool’s future has hamstrung the club, and while this downturn may not be as severe as what financial mismanagement has done to Leeds United, it may be a while before Liverpool are playing Champions League again. Yossi Benayoun has already been linked with a move to Chelsea, Captain Steven Gerrard has been linked to Real Madrid, and it appears a bidding war for star striker Fernando Torres will start after the World Cup. Javier Mascherano, Dirk Kuyt and Glen Johnson could all also become transfer targets, devastating the clubs starting eleven, as clubs begin to pick the carcass of a not yet dead Liverpool. Interim manager Kenny Danglish, a star and later a manager during the clubs most successful run, will had pressed to keep the core of the squad together. New chairman Martin Broughton was an odd choice, considering the turmoil he is dealing with at British Airways, and his search for a new manager isn’t going to be easy, but while European mangers might steer clear, the Liverpool job is still going to be very appealing to domestic mangers despite the turmoil surrounding the club.

The financial reality is finally catching up to clubs that spend to much, revenues are falling along with team values. The last decade saw a wave of billionaires buying up teams from long time owners, who would make a huge profit, then flipping the team a few years later, as sports teams values inflated at a ridiculous rate. Liverpool is going to have to adjust to this new reality, and an era of austerity may have to be endured at Anfield. However, with a good manager, and a focus on cheaper young talent The Reds will not fall far.

The Center of A Centerless Universe

The Globalization of the world economy dates back to the sixteenth century, essentially back to the point of the discovery of the Americas. From that point hegemony over world trade has dictated hierarchy of power across the globe, in the sixteenth century Spain, in the seventeenth Netherlands, in the eighteen century Great Britain and France, in the nineteenth century Great Britain, and in the twentieth century the United States. Now, in the twenty-first century the US hegemony over the world is waning, it’s military strength remains unparalleled, but it’s financial stability is wavering, especially the strength of the worlds most important currency, the US dollar.

In 1944 at the Bretton-Woods Conference world currency exchange rates were all pegged to the fixed value of the US dollar, which was still based on the gold standard. The US dollar came off of the gold standard in 1971, in what was called the Nixon shock, and the dollar became a floating currency with a variable exchange rate. However, dollar hegemony remained, and the world’s economies were still subject to the dominance of the dollar. The world’s dependence on a strong dollar for economic stability has been one of the biggest factors that caused the 2008 economic crisis, and a driving force in the current financial situation.

In 1997 the Thai government unpegged the Thai baht from the US dollar after stubbornly refusing to devalue the baht. The result was an almost complete collapse of the Thai economy, at a time when Thailand had a large burden of foreign debt. The resulting fear spread across Asia, with the Thai, Indonesian and South Korean economies being hit the hardest. The International Monetary Fund (IMF), another creation of Bretton-Woods, stepped in with loans for the afflicted economies, but a big change in US policy shifted it’s relationship with Asian economies. Alan Greenspan began a long term policy of low interest rates to drive working and middle class Americans to prop up global demand for Asian products. After a decade of low interest public debt more than doubled, and continues to climb.

The end of dollar-gold convertibility was the beginning of a new financial era with a great deal of monetary volatility. The floating value of the dollar was subject to speculation, it’s future value became more important than it’s current value. The US economy became increasingly dependent on interest paying transactions to not only mitigate risk, but more importantly to take advantage of that risk. These practices eventually led to the formation of hedge funds, and the development of risk hedging financial devices like derivatives. The overpopulation of risk takers in the US economy, and some financial institutions across the world is what caused the economic meltdown in 2008. The US government was very slow to acknowledge this problem, for years under Alan Greenspan encouraged it, and in fact there are many that still disagree that more government oversight of these financial practices is necessary.

In 1998 Long Term Capital Management (LTCM) received a government bailout very similar to the bailouts used to curb the recent economic crisis, and LTCM collapse essentially a mirror of what happened to wall street a decade later. LTCM aggressively short selling of bonds based on computer models the company made on small amounts of money on each bond, so the company had to invest in great quantity to make a significant profit, eventually being leveraged to the point of a 25 to 1 debt to equity ratio. LTCM also had off-balance sheet derivative positions with a notional value of approximately $1.25 trillion. After several years of remarkable success the Russian government defaulted on it bonds in August of 1998, and the result was a massive sell off of European and Japanese bonds, as investors fled to the perceived safety of US Bonds. The highly leveraged LTCM was bankrupted instantly, necessitating a $3.625 billion bailout from the Federal Reserve and several corporations. This epic collapse caused a stir on Capitol Hill, but the push back from financial institutions was too great for any new regulations or oversight to be established.

It is very important for the US to maintain a robust economy and a strong dollar, mostly to keep faith in US treasury bonds. The US uses bonds to finance the massive budget deficits the government has been running, and to pay back previously issued bonds as they mature. Without the faith that the US Treasury will be able to buys back matured bonds with a solvent currency the government would come to a standstill. The perceived safety of the investment in US Treasury bonds is essential to the stability of the country.

In todays world the dollar’s overwhelming importance is waning, however, competing currencies are struggling to exert any dominance over the dollar. The US dollar is still the world’s most common reserve currency, and despite doubts about the US economy it is still perceived to be a relatively safe currency to hold. The euro is the second most widely held currency, but the european debt crisis recently had the euro on the brink of collapse, and of all the Eurozone economies, only France and Germany maintain the strength of the euro. Meanwhile, the British pound has stumbled from it’s position of strength. China maintains capital controls on the conversion of the yuan, so it can’t be used as a reserve currency. China, Russia and the Gulf States have called for a new reserve currency to replace the dollar.

The United Nations Conference On Trade and Development proposed a new currency based on the IMF’s Special Drawing Rights (SDR). The SDR is used by the IMF for international payments, and is computed from a combination of dollars, pounds, euros and yen. The combination is reevaluated and adjusted every five years, and it’s value is computed daily, although it’s computation ends up in the form of a dollar valuation. Some variation of the SDR as a universal reserve currency would help stabilize global markets, even though it would not end speculation entirely, it would mitigate the influence of speculators. A universal reserve currency would also reduce the global panics caused by fluctuations of the major reserve currencies.

The interconnection of the global economy is not a new phenomenon, the connections are simply moving increasingly from a macro to micro scale. Individual institutions can bankrupt a nation across the world, and in an environment where the level of systemic risk is so high, governments need an equally high level of oversight and cooperation. Expansion of the G8 to the G20 is a great step forward, but with an absence of any formal structure to the organization it doesn’t achieve very much, other than being a lightning rod for massive protests. Recent economic crises should be a revelation to any doubters that a new global economic system needs to be developed, with strict rules on not only debt and budget deficits, but also guidelines for banking and other financial sectors. The IMF and World Bank need a more balanced leadership, instead of being dominated by American and European interests. The world needs a new Bretton-Woods System that reflects the new realities of a decentralized global economy, and an acceptance that markets are incapable of regulating themselves in any stable way.

Not Just A Greek Problem

With the Euro hitting a 14 month low, and with pressure from both Washington and Tokyo, the European Union (EU) finally acted in support of the Greek economy, as well as pledging aid to other Eurozone economies facing massive debt burdens. The 16 members of the single currency bloc will have access to 440bn euros of loan guarantees, and 60bn euros of emergency European Commission funding, along with another 250bn euros from the International Monetary Fund (IMF). The level of interconnection of economies not only in the Eurozone, but also around the world led to fears that the Greek debt crisis could have caused a world wide tumble as economies across the globe are starting to recover from the previous economic melt down. The stability package has eased fears of a collapse of the euro, and stock markets have reacted favorably to the news. However, there will be long term ramifications across Europe, and there is no guarantee that this package alone will ensure long term stability.

The Greek Government racked up an impressive amount of sovereign debt, by 2009 it was more than 13% of its gross domestic product (GDP), to the point that their credit rating was downgraded to junk last month. The large budget deficits were caused by excessive spending on social programs, defense and on the government itself. By some estimates the government was spending more than 50mn euro per year on pensions for civil servants that were eligible to retire in their 40s, and even their defense spending was mostly on staff and administrative costs. Furthermore, the inflated government bureaucracy has been infected with widespread corruption. For years Greek economy has been stymied because the best job to get is a government job, which generates no economic activity, and just drains the government coffers, while cheap credit and a strong euro did nothing to curb the excessive spending.

The 143bn loan from the EU and IMF is enough to stem the immediate crisis in Greece, and stabilize the euro for the rest of the EU, however, that money alone can’t fix the Greek economy. The government has already instituted an austerity package which has been incredibly unpopular even though most Greeks agree that something has to be done. Reductions in civil servants bonuses, social security payments and military expenditures have all been proposed, as well as increase in the value added tax, and taxes on fuel, cigarettes and alcohol will all be increased. The public reaction has been visceral, and in country where political and economic stability has been in short supply, it may be to much for the government to handle, there has been a bombings and protestors have been killed in violent protests. The IMF will monitor the governments headway, and try to enforce benchmarks for progress, but a protracted economic downturn unlikely. However, the Greece was not the only EU country living beyond it’s means, the crisis hit Greece earlier because it’s economy is one of the weakest of the single currency bloc.

Ireland, Spain and Portugal all could be as threatening to the euro, in some cases more so than Greece. Spain is in trouble because it’s economy for the last decade has been riding a housing boom that fueled the construction sector. That boom has collapsed, and unemployment has soared to over 20%, meanwhile the 2009 budget deficit spiked to 11.2% of GDP. Spain is one of the largest owners of Greek bonds, which led them to be the strongest supporters of the stability package. Prime Minister Jose Luis Rodriguez Zapatero has presented an economic savings and reform plan, containing similar measures to the Greek austerity package, which has not been received well. Meanwhile, there hasn’t been any progress on restructuring the economy, which will be hard to do under a strict savings plan. Portugal is suffering from an ineffective minority government that has been unable to implement any austerity measures, and has in fact passed spending measures that will increase the national debt, which was already at 9.3% of GDP in 2009. With no movement by the government, and a rapidly increasing debt to GDP ratio, Portugal looks to be as much of a problem as Greece. Ireland’s 2009 budget deficit was 12.9%, but Ireland has already implemented the type of austerity measures that these other countries are only beginning to address, although Ireland’s banking sector has struggled to recover.

The political ramifications of the stability package are already being felt in Germany, the country that will shoulder the greatest burden of any of the EU countries. German chancellor Angela Merkel‘s Christian Democrats lost an election in North Rhine-Westphalia, which no longer gives the party a majority in parliament’s upper house, leaving the government in limbo until a ruling coalition can be formed. The most contentious issue was the Greek bailout, which happened only days before the election, polls indicated 21% of voters would change their vote because of the bailout. Many Germans believe the 28bn euros German contributed should be used to ease the financial tightening at home. While the bailout has made the internal politics of EU nations tumultuous, it has also created tensions between the EU nations that are driving the economic recovery and those that are dragging the EU down.

The EU average for debt to GDP ratio is over 70%, and many of the EU member states are running budget deficits well over the 3% limit set the by the Stability and Growth Pact. Italy is not in immediate danger of economic collapse, but it’s debt to GDP ratio is 115%, has a budget deficit of over 5% and has a projected to hover around 1% GDP growth for the foreseeable future. If it wasn’t for a relatively strict banking oversight system, Italy would be in real trouble, and even so, the future doesn’t look very bright. After a disastrous 2009 and an tumultuous start to 2010, future growth is going to be slow at best, with France, Germany and the United Kingdom being the only strong economies, and even they have economic problems. Across Europe there is going to have to be a sea change in domestic policies to reduce spending to at least lower budget deficits under the 3% threshold, before every Eurozone country is carrying a burden of debt like Italy’s. Those changes are going to be incredibly unpopular, and while the public reaction might not be as violent as it is in Greece, but strikes and protests will certainly be common place as governments curb benefits and raise taxes. Nevertheless, fiscal responsibility is the only sensible way governing, but with many countries suffering from incompetent or corrupt governments the EU may be afflicted by a series of economic crises.

Riches To Rags

Dubai is smaller than the state of Delaware, but had a GDP of more than $82 billion in 2008. Dubai is part of the United Arab Emirates (UAE), a federation of seven small states, of which Dubai is the second largest. The UAE has the sixth largest proven oil reserves in the world, but the largest emirate, Abu Dhabi, has about 90% of those reserves. Therefore, Dubai has led the way in diversifying their economy away from oil and gas, in fact, the UAE as a whole is one of the most diversified economies in the middle east, with only 25% of its GDP from oil and gas, compared to 45% for Saudi Arabia. Dubai has been ruled by the Al Maktoum family since 1833, and is currently ruled through a constitutional monarchy by Sheikh Mohammed bin Rashid Al Maktoum, who is also Prime Minister and Vice-President of the UAE. Dubai used it’s oil wealth to buy up businesses around the world to displace their dwindling oil revenue, as well as building a very large service and construction sector domestically. Most of this economic activity was conducted through government owned companies, but was largely financed through borrowing, about $80 billion was borrowed from foreign investors. That is equal to the entire economic output of Dubai for an entire year, and that GDP number is largely inflated by all the money being poured into Dubai. At the end of November Dubai World, one of largest government owned corporations, announced that it would need a six month freeze in order to repay $26 billion in loans. Dubai World’s total debt is almost $60 billion, largely from it’s construction branch, Nakheel. However, the emirate as a whole owes more than that, and the government is trying to distance itself from these state owned companies, saying the debts are not guaranteed by the government. Dubai has asked their neighbor, Abu Dhabi, for assistance, and they have received $10 billion of a pledged $20 billion. However, Abu Dhabi is being very selective about how much support they are willing to give, and more importantly what they want in return, possibly a stake in the very successful Emirates Airline. Furthermore, Abu Dhabi has been copying Dubai’s model, as it to has been diversifying away from oil, and therefore has seen the same decline in property values, as well as being stung by investing in foreign companies that has been struggling in the global recession. Dubai’s stock market is in free fall, and this crisis has rippled through markets around the globe, although the full effect probably hasn’t been felt yet, as Dubai World’s restructuring has only just begun, and there are still other state run corporations with debts. European banks have led the way in lending to the emirate, but their exposure shouldn’t cause panic as long as Dubai finds away to pay back their debts in the long term. Regardless of how well Dubai gets out of this economic turmoil, the glory days of Dubai are probably gone. The domestic economic model for Dubai was essentially Las Vegas as a nation. Dubai created a destination to which people from all around the region, especially India, flocked to. These people needed someplace to live, so they built massive housing projects, which required more labor, which required more housing, and so on and so on. As of earlier this year Dubai had the fastest growing population in the world, an impressive 3.69%, which was fueled by immigration, which Dubai also led. All those new people fueled incredible growth in service and retail sectors, especially since, like Vegas, an awful lot of the migrants moved to Dubai because they had money to spend. Naturally, a bubble like this attracted speculators that drove housing prices to absurd levels, and when the world economy slowed at the end of last year, the bubble burst, and housing prices have continued to slide, some by as much as 50%. Just like in the United States, people got so giddy that they were convinced that housing prices would go up forever, which is totally absurd, especially when the property market was so obviously over valued already. One fourth of residential housing and office space lies empty. After a series of bad and very expensive investments, Dubai is in an unenviable position, they don’t have enough oil wealth to sustain themselves for very long, perhaps only for another decade. Therefore, one of the very things that made Dubai so prosperous will have to change, Dubai doesn’t have any taxes, and thats why people and corporation were so eager to flock to Dubai. But the ramifications of this would be huge, there has already been an exodus of foreigners, partially because defaulting on a debt is an imprisonable offense, leading to abandoned vehicles at the airport as expatriates flee the country, but many more will move on to the other tax free UAE states. Abu Dhabi, which has been jealous of Dubai successes, will likely be the biggest benefactor of Dubai’s woes, even if it ends up bankrolling most of Dubai’s losses. The other part of the equation is that Dubai has to modernize it’s economy with some sort of oversight, but in a country where the state essentially runs everything, there really isn’t anyone to do the overseeing, who has the power to regulate the king’s businesses. The complete lack of regulation was one of the driving forces behind Dubai’s rapid expansion, just like it did for the US stock market before the great depression, and the same for what derivatives did to world economy today, but the net effect is always the same, a crash. Dubai’s economy is run entire through only a handful of corporations, almost all of which are majority owned by Sheik Mohammed, who essentially runs everything. Business deals are like state secrets, there isn’t very much if any public information on how any of the companies are run, and in this vacuum speculation and rumor drive many business decisions. The individuals that run these corporations are friends and relations of the Sheik, all the power is consolidated among an unqualified few, who are all indebted to the absolute power of Sheik Mohammed. Which is why democracies have been so successful, as tedious as giant bureaucracies can be, it keeps the power out of one person’s hands. A Monarch is great as long as he is a benevolent dictator, who always makes the right decisions, but it’s neither pragmatic or realistic. Dubai will certainly survive, Abu Dhabi has been reluctant to help, but as stock markets across the middle east continue to get hammered, their hand will be forced. However, Dubai will probably have to give up some of their more valued assets, and possibly some of the autonomy they have from the UAE as a whole. Either way Dubai will not be the same, but more importantly, now that Dubai World is defaulting on it’s debts, will Sheik Mohammed have to go to jail?

Broken Legs

In the 1920’s the American economy was booming, the Dow Jones Industrial Average expadned from 63.90 at it’s low in 1921 to 381.17 in 1929. Prognosticators divined that American stocks would continue to rise in value for the foreseeable future, and Herbert Hoover won a landslide election in 1928, promising an age of permanent prosperity. The huge explosion of the stock market was in large part due to massive amounts of speculative investing. Men like Jesse Livermore and Charles Durrant used their huge amounts of capital to drastically move a particular stock’s value up, and then selling at a huge profit. In the 1920’s insider trading and other forms of market manipulation were not illegal, in fact there was hardly any regulation of the stock market. Investors, journalists and corporate executives often colluded, sometimes clearing millions in a matter of days. This speculation and success led to a great number of smaller investors to put their money into the stock market, which had previously been considered a risky place to put your savings, but the consistent growth and promise of huge dividends was too alluring. People were being told that you could make money without having to do anything. Small investors often did not have a great deal of money to invest, but were aided by banks with what is known as margin buying, which is essentially loaning money to be used to invest in stocks. Roger Babson was one of the few who spoke out on the risk that this boom posed, and eventually in March of 1929 the Federal Reserve realized that all this speculation was hazardous. The Federal Reserve realized that the market had become reliant on this borrowed capital to keep the machine going, and any reduction of this margin buying would create a crash, they elected to do nothing. Even though a market crash was inevitable, the market boomed to new heights, and more borrowed money flowed into the market. Durrant said as long as people had confidence in the market it would be able to sustain and grow continuously. However, the market could not grow continuously, in September of 1929 confidence failed, and by 1932 the Dow Jones was at 41.22, about an eighth of its value at it’s peak in 1929. In the 1920’s investing in stocks was essentially considered a form of gambling, and in the end thats exactly what it was for most people. The banks had essentially put themselves in a position where they were lending money on a proposition that was no better than issuing loans to bet on horses. Now there are “banks” which hand out loans to gamblers, they aren’t FDIC protected, and they aren’t looking to ruin your credit if you can’t pay them back, they are going to break your legs. The big difference between what the legal banks were doing, and what illegal loansharking operations do is simply that the loan-sharks are well aware of the risks that they take when they loan out money for wagering, and the legal banks were somehow ignorant of the fact that what they were doing would end up sinking them. After the the 1929 Crash the Government stepped in, and issued a great number of new laws and regulatory oversight on the market. Over the next fifty years the market grew and shrank many times over, but managed to avoid a drastic collapse or a great depression. However, that would not keep people from wanting to tamper with the system. Ronald Reagan took office in 1981 after a decade of economic stagnation, he appointed Alan Greenspan as head of the Federal Reserve, and began a systematic policy of limiting government regulation and interference with financial markets. This led to almost two decades of economic growth, and Greenspan was kept on at the Federal Reserve for the entirety of the boom. In the 1990’s the Dow Jones Industrial Average grew from 2365.10 to over 10,000, and Greenspan was given all the credit. One of the factors that led to this boom was over-the-counter derivatives. Derivatives are unregulated, they exist in a proverbial “black box” in which only the parties involved know the contents of the transaction, the Government has no power to interfere which is exactly how Greenspan wanted it. Brooksley Born of the CFTC tried to exert some sort of regulation on derivatives, but the very powerful financial lobby pushed back and prevented any such regulation, just as they had done in the 1920’s. There was simply to much money being made, and the suckers who were being taken advantage of could not speak loud enough to be heard over the voices of financial titans that were pushing the market closer and closer to 15,000. This unregulated market drew an incredible amount of investment, not only from corporations, but also private investors. In 1998 companies like Long Term Capital Management (LTCM) were making returns of 40% using derivatives, investors were tumbling over each other to get on board, but they were the first to fail. LTCM had borrowed incredible amount of money from most of the major banks in order to place their bets, but no one knew how severely leveraged LTCM was because all of their transactions took place in the “black box”. The banks themselves ended up bailing out LTCM, and congress began looking at regulation on derivatives to prevent such a huge collapse to happen again, but again Greenspan and the financial lobby pushed back and prevented any legislation. Furthermore, they took the extra step of preventing the CFTC from having any ability to regulate the derivatives market. Greenspan and his disciples believed that regulation would collapse the derivatives market, and destroy the economy. From 1998 to 2007 the derivates market ran out of control, expanding to $595 trillion, almost 15 times the total economic output of the the whole world. Greenspan, Larry Summers and Robert Rubin were championing an age of continuous growth. Again this monstrous bubble was largely based upon borrowed money, and again all the major financial institutions were so severely leveraged by the participation in the derivatives market that a collapse was inevitable. This was only part of what created the 2008 Crash, but without the complex web of debt banks were carrying due to derivatives they would have been able to sustain many of the other factors that destabilized the economy. Investors were once agin convinced that they had found a sure thing, and thought that it was entirely reasonable to wager billions of dollars. In the end the horses did not deliver the way they expected, Durrant’s market confidence was shaken, the result was a run on the banks, and they were far to leveraged to be able to deliver. The Government initially thought that the private sector could mitigate the problem like they did with LTCM, but that failed, and the Government was forced to intervene. The stock market is not a sure thing, but if it’s done responsibly it can be a sound investment despite the risk, but people can’t be trusted to always do the right thing if no one is watching. Regulation can and will stifle the market’s ability to boom, but it will also stifle the bust part of that cycle, which as history has shown, is inevitable. The market can not be trusted to it’s own devices, the loan-sharks operate without any regulation, and who would want to invest with them. As of today there has been no legislation to regulate the derivates market, and even worse, there have been no broken legs on wall street despite all the money they’ve defaulted on.