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... A owes B, which is a credit for B which was collateral for borrowing from C, so B owes C, which is a credit for C which was collateral for borrowing from D, and so on ... the total exposure can easily be many multiples of annual income, while at the same time the net payments to service the debt is only a fraction of annual income.

Of course, late in the Clinton administration, the Democratic administration and Republican Congress set up a system where a wide range of activities were immune from regulation. And competition among for-profit financial firms will always push them to scrimp on prudential reserves "under competitive pressure" if other firms are doing the same, which is why Panics, like the Panic of 2008, are regular events in non-regulated financial systems ... cf. the Panic of 1792, 1797, 1819, 1825, 1837, 1847, 1857, 1866, and etcera.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Oct 26th, 2008 at 04:04:08 PM EST
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