Now, you’d be better off buying a copy of “Nassim Taleb’s The Black Swan”:http://ko.offroadpakistan.com/2008/05/nassim_nicholas_taleb_the_black_swan.html and reading that, but here is the extremely simplified version of one aspect of the giant monolith which was the American financial house of cards:
Back in the days, we had these things called banks. They took in money from people, and lent it out to other people, who did something with that money and thus were able to pay it back with interest. Now, even back than, banking wasn’t this simple, but this portion constituted a significant part of what banks did back then. Sure, they bought lots of stuff, and invested all over the place, but as JP Morgan, the most powerful banker ever, famously said, “If you can’t draw it on a napkin with a crayon, don’t buy it”.
By and large, besides funding a war here and there, bankers stuck to the basics and made money hand over fist. Till such time they lost it all, which happened periodically, like the great depression in 1939, and Black Monday in 1987.
So this is the image which people have of things to this day – that banks take in deposits, give out loans, and make money on the interest paid on loans. Now, sure, banks and the other bank like institutions still do this, but this has been a small part of their business for the last couple of decades now. This is the part which is the toughest for people to grasp – that none of the large American banks are banks in the traditional sense of the word. Here someone might ask, if not banks, than what the hell are they?
The plain answer is that no one knows.
The short answer is that the American financial system is the greatest pyramid scheme ever, a house of cards stacked so high over the entire world that it’s collapse is going to be wrecking havoc for years to come.
Continue reading The gigantic house of cards, formerly known as Wall Street