Financial Bankruptcy, the US Dollar, and the Real Economy

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by Rodrigue Tremblay / August 22nd, 2007

The U.S. government is on a ‘burning platform’ of unsustainable policies and practices.

David Walker, U.S. Comptroller General

Modern society, based as it is on the division of labor, can be preserved only under conditions of lasting peace.

Ludwig von Mises, Austrian economist

People know that inflation erodes the real value of the government’s debt and, therefore, that it is in the interest of the government to create some inflation.

Ben Shalom Bernanke, Fed Chairman

Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.

– Ben Shalom Bernanke, Nov. 8, 2002 (Fed Chairman, talking to economist Milton Friedman)

Ordinary investors and people in general will have to get accustomed to hearing a lot about financial terms they never heard before, such as the subprime mortgage market, aggressive underwriting, asset securitization, repackaged loans, subprime loans, “no-doc” loans, adjustable rate mortgage interest rate adjustment (ARM) loans, collateralized debt obligations (CDOs), asset backed securities, mortgage-backed securities, closed-end second-lien loans, subprime second-lien loans, alternative-A (Alt-A) mortgage loans, piggyback loans, asset-backed commercial paper (ABCP),…etc. As a general definition, “subprime” or “high-risk” loans are those made to people with poor credit and at lax conditions. Second-lien loans are loans that are placed in second place for any potential recovery after the primary lender on a property. Residential mortgage-backed security (RMBS) are created when mortgage lenders sell their loans (and the risks associated with such loans) to banks, which package them together and slice them into different classes before selling them to (gullible) investors. This process, called “asset securitization” is the method whereby interests in mortgage loans and other receivables are packaged, underwritten, and sold in the form of “asset-backed securities”. This is financial alchemy, through which subprime mortgage loans are transformed into AAA-rated paper for unsuspecting investors.

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