JUNE 2009 I ISSUES 001

ALSO IN THIS ISSUE:

-THE 1929 CRASH, WHY?

-THE BANKS, WHERE THE

MONEY COMES FROM

-HOW DID 9/11 REALLY HURT

US?

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 EDITOR IN CHIEF Jonathan Nadeau
MANAGING EDITOR Jonathan Nadeau CREATIVE DIRECTOR Jonathan Nadeau
DEPUTY EDITOR Dylan Moeller DESIGN DIRECTOR Jonathan Nadeau

ARTICLES EDITOR Jonathan Nadeau ART DIRECTOR Jonathan Nadeau

TORONTO EDITOR Jonathan Nadeau ASSOCIATE ART DIRECTOR Jonathan Nadeau
STORY EDITOR Jonathan Nadeau CONTRIBUTING DESIGNER Jonathan Nadeau
SENIOR EDITOR Jonathan Nadeau
ASSOCIATE EDITOR Dylan Moeller SENIOR PHOTO Jonathan Nadeau
PHOTO EDITOR Jonathan Nadeau
SENIOR WRITER Jonathan Nadeau DEPUTY PHOTO EDITOR Jonathan Nadeau
PHOTO ASSISTANT Jonathan Nadeau
COPY CHIEF Jonathan Nadeau
COPY EDITOR Jonathan Nadeau PRODUCTION MANAGER Jonathan Nadeau
CONTRIBUTING COPY EDITOR Dylan Moeller PRODUCTION DIRECTOR Jonathan Nadeau

SENIOR EDITOR, RESEARCH Jonathan Nadeau CONTRIBUTING EDITORS Jonathan Nadeau

ASSOCIATE RESEARCH EDITOR Jonathan Nadeau
ASSISTANT RESEARCH EDITOR Jonathan Nadeau SENIOR MAVERICK Dylan Moeller

EXECUTIVE DIRECTOR OF COMMUNICATION Jonathan Nadeau WEB EDITOR Jonathan Nadeau

DEPUTY DIRECTOR OF COMMUNICATION Dylan Moeller ASSOCIATE WEB EDITOR Jonathan Nadeau
MANAGER OF COMMUNICATION Jonathan Nadeau ASSISTANT TO WEB EDITOR Jonathan Nadeau
ASSOCIATE ASSISTANT TO ASSISTANT WEB EDITOR Dylan
EDITORIAL OPERATIONS MANAGER Jonathan Nadeau Moeller
ASSISTANT MANAGING EDITOR Jonathan Nadeau
ASSISTANT TO EDITOR IN CHIEF Jonathan Nadeau FOUNDING EDITOR Jonathan Nadeau
EDITORIAL INTERNS Dylan Moeller
CORRESPONDENT Jonathan Nadeau EDITORIAL DIRECTOR Jonathan Nadeau
 By: Jonathan Nadeau

The roaring twenties earned their respectful position in history as a time of

excess and great wealth across the United States. People had money to burn and
they loved to do it, buying up land and cars as fast as they can. The skylines
of major cities became doted with huge art deco skyscraper and jazz filled the
hearts of all. People thought they had reached the point where they were un-
touchable, nothing could happen to them or their money. This is where they were
all so wrong.

As people spent wildly, and played hard, work was not something most wanted to
take part in, they found a solution to this, the stock market. having come home
to money saved during the war, consumers placed much of what they had in the
market. This worked for them at first and all seamed to be happy, but as the
twenties roared on, people wanted more and more. It's funny how greed fuels the
human condition, people will always find someway to have more and more.

The solution to this...burrow money to make more money. Brokers found that it
they lent money to the average Joe for stock, he would build an nice little
portfolio and then the broker and Joe would make a tidy little sum of money.
This worked fine as long as everyone knew what type of risk was involved in
this whole process. The problem was now that Joe had a little taste of what he
could make, he wanted more. So Joe would burrow some more money, up 2/3 of the
value of the stock. Then tell his friend to do the same, eventually so many
people started into this process that all the stock kept rising because every-
one was buying. People were burrowing and burrowing and borrowing, eventually
it reached a point in 1929 where over $8.5 billion was out on loan to inves-
tors. To put that number in perspective there was less money in circulation in
the US at the time.
This created what is know as an economic bubble, and as everyone knows bub-
ble don't last for ever. Our old friend Joe eventually came to the point
where he needed what is known all around the world as CASH, so Joe sells off
his stock and pays off his loans.
This leads to a few more then even
more people starting to sell off
their stock. When this occurs in
the market, the value of the said
stock will decrease...people don't
really like that. So what do they
do...sell out...the only problem
is when they do that it drops even
more and more and more. This is
exactly what happened on October

24, 1929...a.k.a. Black Thursday. Photo courtesy of Grolier Encyclopedia

Black Thursday caused massive financial devastation across the world. Coun-
tries have always been highly invested in the U.S. economy because of its
shear size. In the 20's the world was deep in the U.S. market as the rest
world was recover from the devastation of the war. Something needed to save
the economy or the whole world could be doomed, here comes in F.D.R. and his
new deal. After Hoover's inability to pull up from the economic nose dive,
the people wanted someone to save them. F.D.R.'s new deal was the answer to
everyone's prayer. Today as it's examined more, new criticisms have risen
with it, but at the time it did what it was intended to do and created some
of the U.S. most impotent financial institutions. It also paved the way for
some of the most amazing make-work projects ever, including the Empire State
Building.

With the creation of the FDIC and other economical protection agencies eve-
ryone thought it could never happen again...oops.
A year ago, it was hardly unthinkable that a math wizard like David X. Li
might someday earn a Nobel Prize. After all, financial economists—even
Wall Street quants—have received the Nobel in economics before, and Li's
work on measuring risk has had more impact, more quickly, than previous
Nobel Prize-winning contributions to the field. Today, though, as dazed
bankers, politicians, regulators, and investors survey the wreckage of the
biggest financial meltdown since the Great Depression, Li is probably
thankful he still has a job in finance at all. Not that his achievement
should be dismissed. He took a notoriously tough nut—determining correla-
tion, or how seemingly disparate events are related—and cracked it wide
open with a simple and elegant mathematical formula, one that would become
ubiquitous in finance worldwide.

For five years, Li's formula, known as a Gaussian copula function, looked
like an unambiguously positive breakthrough, a piece of financial technol-
ogy that allowed hugely complex risks to be modeled with more ease and ac-
curacy than ever before. With his brilliant spark of mathematical legerde-
main, Li made it possible for traders to sell vast quantities of new
securities, expanding financial markets to unimaginable levels.

His method was adopted by everybody from bond investors and Wall Street
banks to ratings agencies and regulators. And it became so deeply en-
trenched—and was making people so much money—that warnings about its
limitations were largely ignored.

Then the model fell apart. Cracks started appearing early on, when finan-
cial markets began behaving in ways that users of Li's formula hadn't ex-
pected. The cracks became full-fledged canyons in 2008—when ruptures in
the financial system's foundation swallowed up trillions of dollars and
put the survival of the global banking system in serious peril.

David X. Li, it's safe to say, won't be getting that Nobel anytime soon.
One result of the collapse has been the end of financial economics as
something to be celebrated rather than feared. And Li's Gaussian copula
formula will go down in history as instrumental in causing the unfathom-
able losses that brought the world financial system to its knees.

(Excerpt From Wired Magazine)

Article by: Felix Salmon

In the mid-'80s, Wall Street turned to the quants—brainy finan-

cial engineers—to invent new ways to boost profits. Their methods
for minting money worked brilliantly... until one of them devas-
tated the global economy.
Photo: Jim Krantz/Gallery Stock
 By: Jonathan Nadeau

The attacks of September 11th hurt the economy much more than people would
like to believe. It is the American way to pretend everything is ok and
that nothing can hurt them. What people don’t know is that it more than
hurt them...it very well may have been what completely financially devas-
tated them. September 11, 2001 is a day that no one will ever forget, espe-
cially the investors.

It is true that the attacks shut down the markets

and costs billions to clean up, but that’s not
what sealed the fait of the U.S. economy. This
came much afterwards when then, Chairman of the
Federal Reserve of the United States, Alan Green-
span, made a faithful decisions. He lowered the
U.S. interest rate to only 1%. This did two
things; first it made bonds a worthless invest-
ment for traditional investors, and second if Credit: www.commondreams.org
made money cheap for banks to burrow...and they © www.commondreams.org
did just that. The banks burrowed more money than
anyone ever thought possible. This was perfect for everyone, mortgages were
cheap and everyone could get a new home, new car, or a new boat. Investors
were even let in on the action, they were sold C.D.O.’s and made billions.
All was fine in the States, 9/11 did nothing to them...or so they thought.

As with anything, after time things run out, the same happened with mort-
gages, there were no more people who could afford them, known as a prime
mortgage, everyone who could have one already did. This is where the real
financial genius/greed came into play. Banks did the unthinkable, they lent
to anyone, a.k.a sup-prime mortgages. This is where the terrorist’s time
bomb was lit...it was only time until this blew up in everyone face.

Essentially the whole point of what I’m trying to say is...the terrorists
didn’t leave the U.S. unscathed, they’ve actually destroyed it beyond rec-
ognition.
 WE ASKED
OUR ESTEEMED PANEL

JAMES RODGERS MJ PAGE ANDREW PORTENER MONIQUE NADEAU

RAY JACOBS SASHA ANDRENKOV ARLENE NADEAU DYLAN MOELLER

QUESTION: How do you think the economy could be fixed?

ANSWERS:

JAMES RODGERS: Apocalypse.

MJ PAGE: The economy has to take it course, however big business like auto in-
dustry need to respond to changing market demands, and demographics faster.
There is no need for gov't to support/ bail out failing industries. Governments
need to investment more in education and incentives for creative, adaptive and
responsive, environmentally friendly business, and provide social services and
support to retrain those who are unemployed. Our poor economy is a long term
adjustments to international markets too many people overspending and hoping
that the get rich quick ride will last forever.

ANDREW PORTENER: People need to have confidence in the economy and start spend-
ing rather than saving.

MONIQUE NADEAU: With less fraudulent tactics, no more «paradises» but corrup-
tion will always exist unfortunately, so will the underworld who know all the
loopholes. Communication is so fast and so easy, it makes cheating so avail-
able...
It will take a lot of good will from the people who KNOW they caused or helped
the situation. Good luck to you children for a cleaner future....
RAY JACOBS: Slowly. Get the banks back into good shape. Get them lending money
again, to people who can afford to pay it back. Stabilize the housing market.
Get out of Iraq, and concentrate our efforts into Afghanistan. Defeat the
Taliban. Create electric cars that are affordable and perform well. Utilize
solar, wind and water power. Establish an overview system to watchdog Wall
Street.

SASHA ANDRENKOV: By people pumping cash into the system, and by removing com-
panies such as the American Car giants away from privatization.

ARLENE NADEAU: Balancing of the classes. A government that is truly concerned

about the working class, not big business.

DYLAN MOELLER: Stop wasting money trying to support corporations that have
gotten too large and consequently collapsed in on themselves. Let innovation
become what's important instead of brand name.

How Banks Create Money Out Of

Thin Air

By Kalinda Rose Stevenson, PhD

Bankers know how to create money out of thin air. In fact, banks are
money factories. Banks exist to make money. You might think that banks
are in business to provide services such as banking accounts and loans to
their customers. It's true that banks provide essential financial ser-
vices. However, the reason that the banks provide such services is that
banks need money to use as raw material to create more money. Where does
this money come from? It comes from customer deposits. In other words, it
comes from the money you and I deposit into the bank.

Notice very carefully, banks "create" money. It's not simply that banks
"earn" profits when they provide bank services and loans. Banks actually
"create" new money that did not exist before.

Here is an example of how banks create money. You deposit $100,000 into a
one-year Certificate of Deposit at 5% interest. The bank now can use your
money to create loans.

The Federal Reserve sets the reserve rate for the bank from 3-10%. A 3%
reserve rate means that the bank must keep 3% of the $100,000 on reserve
and can loan the remaining 97%. A 10% reserve rate means that the bank
must keep 10% of the $100,000 on reserve and can loan the remaining 90%.
For our example, let's assume that the reserve rate is 10%. This allows
the bank to loan $90,000 of your $100,000 deposit.

So, the bank makes Loan #1 of $90,000 and keeps $10,000 on reserve. This
is the critical point where the bank creates money. According to the
bank's balance sheet, the $90,000 loan to the borrower is also a $90,000
asset for the bank. By its own brand of money magic, the bank has created
$90,000 out of thin air.
But the process does not stop here. Since the bank now has an asset of
$90,000, it can make another loan based on this asset. Since the same
Federal Reserve rules apply, the bank must keep 10% of this asset on re-
serve. This means it can loan only 90% of the $90,000. This means that
Loan #2 is $81,000. By creating another loan, the bank has created an-
other asset. The $81,000 loan to the borrower becomes an $81,000 asset
for the bank. Once again the bank creates money out of thin air.

And since the bank now has an additional $81,000 asset, it can make an-
other loan. Once again, the bank must keep 10% of this asset on reserve.
This means it can loan only 90% of the $81,000 asset. Loan #3 is
$72,900.

Federal Reserve rules allow the bank to make five to six loans based on
the original $100,000 deposit. Each loan creates an additional asset.
We'll stop at three loans, review the process, and add up how much money
the bank has created.

You deposit $100,000 into a CD. The bank creates three loans based on
the original $100,000 deposit. Loan /Asset #1 = $90,000 Loan/Asset #2 =
$81,000. Loan/Asset #3 = $72,900. The total = $243,900 in assets for the
bank. This is $243,900 in new money.

When you cash out your CD, you get your $100,000 deposit back, in addi-
tion to the $5,000 interest. Meanwhile, the bank has created $243,900 of
new money. After it pays you 5% interest, the bank has made a tidy
profit of $238,900. ($243,900 - $5,000 = $238,900.) If the numbers are
confusing, go over them again until you see how magical this process is.
This is how banks create money.

To make this point, I have oversimplified the process. A bank doesn't

really make a series of separate loans based on a single deposit. Your
deposits become part of a pool of money the bank can use to make loans.
But this oversimplified example demonstrates how banks create money out
of thin air. A bank manufactures money by using the deposits of custom-
ers to make loans. The loans become assets and the assets turn into
money.

What difference does it make to see how banks use money to create money?
You and I can't do what banks do, by loaning on the same money more than
once. The real point of this example is to take some of the mystery out
of money.

The process a bank uses to create money demonstrates that money is not a
commodity in limited supply, where there is only so much to go around.
Money is not equivalent to currency. Money is created in money-making
transactions, which means there is no potential limit to money.

So, if you want more money, think the way bankers think. Ask how you can
use money to create more money. If you really think the way bankers
think, you will use someone else's money to create more money. The cru-
cial idea behind all of this is: The greatest limit to money is the be-
lief that money is limited.