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URL:  http://boards.fool.com/la-conqu234te-du-monde-revisited-27060714.aspx

Subject:  La Conquête du Monde, revisited. Date:  10/5/2008  12:20 PM
Author:  FastMike Number:  257741 of 499474

Dear red-eyed Fools :

I originally posted the following on March 24, 2008. It seems very appropriate to repost it. If anyone has become convinced that the bail out is the right thing to do, read on.

Reposting will make clear several points : first, ‘bailout’ theory is a futile; second, that although the Fed was center stage at the time, the Treasury Department was most likely calling the plays and might have been pushing for the ‘big bail out’ for months; and lastly, the EU is making a currency power play. Two weeks after this post, the ECB benchmark was 4%. It was raised in July to 4.25% and has remained so since.

There a few minor corrections in punctuation, style, and usage. The link to the original post follows the repost: La Conquête du Monde :

”...To promote the restoration of orderly conditions in financial markets, the Federal Reserve Board approved temporary changes to its primary credit discount window facility... March 2008”


Dear gaming Fools

Risk, is the name of a one time very popular board game. It is a game of strategy, but only to a point, at which time, winning, or losing, in one’s turn depends upon the roll of the dice.

I personally liked the version which used the small wooded pieces to represent armies. I was also surprised to learn that the original name was ’La Conquête du Monde’ , which translates to ’The Conquest of the World’. Parker Brothers, who named the American version as Risk truly understood what would make the name attractive on this side of the Atlantic.

Risk implies chance. Risk means relying on an arbitrary event, for example, that roll of the dice, in order to achieve a desired outcome. However, not all risks are the same. Risk is, in fact, a relative measure and varies in degree.

For example, by determining the least possible risk in a class say, of assets, a relative measure can be established for all the assets of the class.

Option Contracts have a higher risk than Stocks which, in turn have a higher risk than Bonds. Asset classes may be further divided into subclasses and again, a relative measure can be associated with the assets in the subclass, like the subclass of debt instruments. Commercial paper, for instance, carries more risk than US Treasuries.

In the debt instrument asset class, the yield on a Treasury, is lower than the other forms of debt instruments in that asset class. And of course the reason for this is that the risk of a Treasury defaulting is lower than the other paper in that class.

So, the risk of a Treasury is a benchmark that the risk of other debt default is based on; it’s a unit measure.

But up to here, I know that I’ve been preaching to the choir, so to say. So let me go on.

What makes US Treasury Debt so secure? We all know that it isn’t the gold reserve. Those days are long gone, and we’d be just plain foolish to return to them.

And it isn’t that the Federal Reserve can print up all the notes that it needs, although it seems that way. Treasury debt instruments are made after government spending has been legislated by congress, and the Treasury is authorized to borrow which in turns requires the Fed to create the cash for the debt.

But any nation can legislate a currency. That’s currency by decree.

What makes our bonds so credit worthy, is the ability of the public to pay taxes. Taxes are what pays the interest and taxes are what guarantees the principle. It’s the fact that our aggregate private wealth is such, that we can cover all of our debt.

Our currency is based on the economy’s ability to produce goods, services and productive reinvestment not just to ourselves, but to the world, and to be able to protect our interests here and abroad.

In a sense, we are the leading player in the game of Risk.

One shortfall of a goods and services economy, is that it encourages the Federal Reserve Bank to lower the target lending rate between banks if the economy slows. The claim is that it is better to risk inflation in order to stimulate the economy in its' free market cycle. If growth can be restored, the economy can withstand better an increase in lending rates and un-inflate the currency, at a future time.

But the financial crises that the economy is facing now is primarily due to the mis-assement of risk. Usually the economy falters and the banking system revives it. The present situation has the banking system faltering with the expectation that the economy will revive it.

Clearly, this time is different.

Aside from rate cuts and stimulus checks, the recent government remedies have removed the basic motivation for financial innovation. They have removed risk from capital markets.

When the Fed cut August 17, 2007 it was options expiration day. The equity market downside risk was removed at the wave of a hand. Also announced were the 30 day loans and acceptance of a “broad range” of collateral at the discount window.

Subsequent actions not only tried to stimulate the economy in the usual way, but continued to remove the risk of failure from the bond markets to the Treasury and Federal Reserve Bank.

The March 16 Sunday night discount window rate cut (seemed to me at least), as more directed at stock exchanges than the credit problem as the Fed only had less than 36 hours before it would finish its' complete strategy of cuts at that next meeting. The risk that stock market prices would correct was removed, by decree.

There was an article on the Bloomberg web site last evening, speculating that the Fed might be considering the outright purchase of mortgage backed securities. This is somewhat surprising, considering the EU and Bank of England denied that “they” would undertake those very same actions, just this past week.

And this morning there are reports that JP Morgan is renegotiating the Bear Stearns take over. JP Morgan undertook the risk, because the government said that they would remove the risk to Morgan. So what has changed? Morgan did its’ part.

Why should the transaction be re-negot