Thread: How our Financial System works

You've probably heard of some sort of argument that the financial system is a scam. You feel it's just not right that Wall St is paying itself billions of dollars of bonuses--- for what? you say. I'll try to explain how the smoke and mirrors work...if anyone's interested to hear. It's less scary than the doomsday scenario and much more scarier than meets the eye. Just for starters, let's take a look at this. Bloomberg.com: Bonds US banks have $11 trillion in off-balance sheet assets that they find impractical to bring back to the balance sheet. $11 trillion! Nearly one year of GDP in assets that are called "shadow assets" by some.

Originally Posted by BigBusinessIsEvil

You've probably heard of some sort of argument that the financial system is a scam. You feel it's just not right that Wall St is paying itself billions of dollars of bonuses--- for what? you say. I'll try to explain how the smoke and mirrors work...if anyone's interested to hear. It's less scary than the doomsday scenario and much more scarier than meets the eye. Just for starters, let's take a look at this. Bloomberg.com: Bonds US banks have $11 trillion in off-balance sheet assets that they find impractical to bring back to the balance sheet. $11 trillion! Nearly one year of GDP in assets that are called "shadow assets" by some.

They are off balance cause if they were counted most banks would be insolvent.

They were off-balance sheet at first to decrease the amount of required reserves held, which made the banks more leveraged and at that time, profitable. But now all these loans are imploding. Wachovia has deliquency rates going up for mortgages, consumer and corporate loans. **I'm not a conspiracy theorist** But, you've gotta admit, things are pretty screwed up. I'll start my rant somewhere. I thought of this so. MYTH: Financial advisers and professionals often tout that the stock market goes up 9% annually over the long run. FACT: These are in fact, post WWII numbers! One of the oldest stock market indexes the Dow Jones Industrial Average was created in 1896. Since then, its return has been about 5.3% compounded annually. Far less than what financial professionals tout. Let's think about it, which is more reliable, 60 years of data, or 110 years of data? Obviously 110 years is a longer period and more reliable. But the fact that the financial industry touts the 60 year data numbers, is rather indicative of their bias. Of course a more seductive number makes "investing" or whatever they're pushing more attractive. The survivorship bias: Even if we do accept the 9% figure, we have to keep in mind that many companies that go bankrupt midway are not counted! Those that are counted are usually components of the S&P 500, made up of 500 of the largest and most powerful publicly traded companies. Out of thousands of companies that "never made it", one Microsoft is enough for decades of touting. It is sort of like an American Idol show, thousands fail, just a couple make it and get famous. The whole show, or in our case the stock market, and its darlings become famous but that does not make the rest of the participants worthy of viewing/investing.