Reply #2: Market Observation

[ozymandius]

Auto Companies
Forensic Examination of Their Woes
BY ROB KIRBY

A couple of weeks ago in this space in an article titled, Theater of the Absurd: a view from the inside, a case was made that Interest Rate Derivatives, not credit derivatives, are the ‘root cause’ for the macro economic problems our global financial system is currently facing.

The gist of the piece explained how interest rate swaps (IRS), specifically, have been utilized by agents of the Federal Reserve (primarily J.P. Morgan and Goldman Sachs) to “neuter usury.” Because IRS greater than 3 years duration typically have U.S. government bond transactions embedded in them – the cancerous growth of outstanding notional amounts of these instruments (beginning mid 1990s time frame), absent end-user demand – effectively gave these players (the Fed in drag) control of the ‘long end’ of the interest rate curve, beyond the historic, accepted and generally understood purview of the Fed – namely, the short term Fed Funds (overnight) rate.

Prior to the proliferation and explosive growth of interest rate swaps, values at the long end of the interest rate curve were determined by a breed of investor / trader known as the “bond vigilantes” who regularly enforced corrective and sometimes bitter discipline on the bond markets when naturally spend-thrift governments incurred too much debt. The IRS edifice that was created was so overwhelming – and created so much artificial demand for government bonds - it “steamrollered” the bond vigilantes into extinction.

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The Auto Companies' Problems are Not Really of Their Own Making

I’ve written about this before but it bears repeating. Today, General Motors filed for bankruptcy protection. Their demise has been widely followed for years with a great deal of commentary regarding their sinking fortunes centered on ‘legacy costs’ or spiraling expenses being borne by their pension plan.

http://www.financialsense.com/Market/wrapup.htm