Financial Engineering: If You Don't Like The Free Market, Change The Rules

Tyler Durden's picture

Submitted by Ralph Dillon of Global Financial Data,

If you don’t like how things work in a free market, just change the rules and financial engineer whatever the results of which you like to achieve. And so, since 1995 we have been going from boom to bust from one bubble to the next as we try to navigate the financial markets that have been turned into a circus act.
You want to securitize home loans and dump them on the public? Package Collateralized Mortgage Obligations with AAA ratings. The masses cant afford a mortgage? No worries, have the Federal Government back and guarantee loans from Freddie and Fannie and simply change the underwriting rules so they can. Want to move the equity markets considerably higher? Start cutting interest rates to as close to zero as you can and force investors into equities.
In order to fully grasp what has been done here, you have to take a look at what is currently going on.
Last year in 2013, it is estimated that 60% of the homes purchased were purchased with cash. In contrast, since 1988 only 6% of the homes purchased were purchased with cash. Additionally, studies have shown that historically US homeowners typically finance 50-60% of the purchase price of a home. At the peak of the real estate bubble in 2008, some folks were purchasing homes with no money down and financing 100% of the purchase price. Even more staggering, are all the diffent types of loans that have been created to accommodate the appetite of Wall Street and the securitization of them. And finally, 75% of the loans written since 1988 have been conventional loans. That too has been re-engineered, at the peak in 2008, we had more flavors of loans than there are ice creams. Adjustable Loans, Interest Rate Only Loans and Jumbo Loans to name a few that can and did accommodate anyone who wanted to purchase a new home regardless of income and credit rating. It didn’t matter if you couldn’t afford it.
But why was this all done? Politicians will argue equality, Wall Street would argue modern global financialization and I would argue a way to get and stay elected.

All of this creative financial engineering started in 1995 when the rules governing underwriting mortgages for home ownership were changed. The idea being, that everyone should be able to own a home and share in the American dream.  With declining mortgage rates and very accomodative underwriting standards, home ownership exploded over 10 years. An expansion that has never been seen before as the chart below depicts. Look at the declining mortgage rates and what happened to home ownership in 1995 courtesy of these new underwriting standards.

And what does the financial engineering that was being done on Wall Street look like on home ownership when you overlay it with the S&P 500? As you can see by the chart below, the financial engineers had accomplished what they sought. To create a wealth effect and economic expansion that we too have never experienced before. Exactly in 1995.

And finally, what effect did the financial engineering to the US 10yr Bond have on the equity markets? Here is a look back to 1791. But look what was done again in 1995 to the 10yr and the S&P 500. The financial engineers drove interest rates to historic lows with perpetual easing in order to move the equity market. Results are where we are today. Historic low yields and an equity market at all time highs. Exactly what the financial engineers sought out to do. 

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Pig Circus's picture

from one bubble to the next as we try to navigate the financial markets that have been turned into a circus act.


Hense my name

AldousHuxley's picture

free market is when casinos with deep pockets let you play one of their games of chance until you run out of money.

big money always wins in free market competition. That's why wars are always waged by empires versus small tiny countries. they play to validate their superior position not to contest it. Free market is the same way.

Thought Processor's picture



Something that can't go on forever, won't.



AldousHuxley's picture

as long as stupids get to procreate, stupid stuff will go on forever

Racer's picture

Gordon Brown AKA 'an end to boom and bust'

UK biggest liar after Bliar and sold UK's gold at the lows Brown Bummer

buzzsaw99's picture

I'll live to see them eat that stock market, but I hope they leave enough room for my fist because I'm going to ram it into their stomach and break their god-damn spines! [/ben richards]

John McCloy's picture

This is a great and concise article. Move the goals posts, lie and a smudge of propaganda..all we have done for the past 20 years.

All pipers get paid eventually however.

TammanyBrawl's picture

Been thinking a lot lately of the big re-set and talk of the neo-feudalism that will replace the current system. Keeps bringing to mind bad (or good depending on your perspective I guess) 70's movies like Logan's Run and Soylent Green.
Not something I ever considered as a realistic possibility, but I see stuff like the above and it sort of clicks. The current system is intentionally being manipulated into...I don't even know what. Seems more like they're just trying to crash it.
Sorry for the aimless rambling. Feeling a bit philosphical today.

marathonman's picture

The current system is intentionally being crashed to be replaced by an IMF administered currency issued by the global central bank with no national accountability and power to control everything and skim profits on a world wide scale.  That's the NWO, Agenda 21, neo-feudalism, whatever you want to call it.

Atomizer's picture

Snicker any dumb fuck investor into a black pooled disaster. Those HFT fuckers will find ways to repay their monthly debt obligations. Grab me a tissue on all the SEC cases hinging.

intric8's picture

We are not in a free market. That notion is as much of a facade as the idea of freedom is under our current statist government. We are subjects of a command economy, always have, always will be

Anusocracy's picture

We live in government orchestrated and run societies and everything about .gov runs counter to what freedom is.

q99x2's picture

Its a FED software driven rally.

Bloody Muppet's picture

Socialism: You have 2 cows and you give one to your neighbour.

Communism: You have 2 cows; the Government takes both and gives you some milk.

Fascism: You have 2 cows; the Government takes both and sells you some milk.

Nazism: You have 2 cows; the Government takes both and shoots you.


An Australian Corporation: You have 2 cows. Business seems pretty good. You close the office and go down the pub to celebrate.

Bureaucratism: You have 2 cows; the Government takes both, shoots one, milks the other and throws the milk away..

Traditional Capitalism: You have 2 cows. You sell one and buy a bull. You herd multiplies, and the economy grows. You sell them and retire on the income.

An American Corporation: You have 2 cows. You sell one, and force the other to produce the milk of four cows. Later, you hire a consultant to analyse why the cow dropped dead.

A French Corporation: You have 2 cows. You go on strike because you want three cows.

Japanese Corporation: You have 2 cows. You redesign them so they are one-tenth the size of an ordinary cow and produce twenty times the milk. You then create a clever cow cartoon image called Cowkimon and market them Worldwide.

A German Corporation: You have 2 cows. You reengineer them so they live for 100 years, eat once a month, and milk themselves.

A British Corporation: You have 2 cows. Both are mad.

An Italian Corporation: You have 2 cows, but you don't know where they are. You break for lunch.

A Russian Corporation: You have 2 cows. You count them and learn you have five cows. You count them again and learn you have 42 cows. You count them again and learn you have 2 cows. You stop counting cows and open another bottle of vodka.

A Swiss Corporation: You have 5000 cows. None of which belong to you. You charge others for storing them.

Chinese Corporation: You have 2 cows. You have 300 people milking them. You claim full employment, high bovine productivity, and arrest the newsman who reported the numbers.

An Iraqi Corporation: Everyone thinks you have lots of cows. You tell them that you have none. No one believes you and they bomb your ass. You still have no cows, but at least now you are part of a Democracy.......

Counter Culture: 'Wow, dig it, like there's these 2 cows, man, grazing in the hemp field. You gotta have some of this milk!'

Surrealism: You have two giraffes. The government requires you to take harmonica lessons.

Fatalist: You have 2 doomed cows...

Hong Kong Capitalism: You have 2 cows. You sell 3 of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all 4 cows back, with a tax deduction for keeping 5 cows. The milk rights of 6 cows are transferred via a Panamanian intermediary to a Cayman Islands company secretly owned by the majority shareholder, who sells the rights to all 7 cows' milk back to the listed company and proceeds from the sale are deferred. The annual report says that the company owns 8 cows, with an option on one more. Meanwhile, you kill the 2 cows because the feng shui is bad.

An Arkansas Corporation: You have 2 cows. That one on the left is kinda cute.

An Indian Corporation: You have 2 cows. You worship them.

old naughty's picture

All that suggests: you like HK. I like it too, except the wind ((feng) and water (shui) is bad now.


RaceToTheBottom's picture

Excellent, I would have liked to see an Icelandic one, too.

AdvancingTime's picture

Few people ready understand the economy. The study of economics is often baffling and confusing. Many economic theories exist but many are full of holes and conundrums. Much of how people react to a policy may have to do with timing and perception instead of reality. Economics is full of loops that feed back upon themselves and unexpected pitfalls based on expectations.

All this can become quite abstract. Economist predict events that never tend to unfold as expected or planned. Many of the "modern monetary theories" in use today have not been proven over time, but reflect an attitude that we can control  economic cycles better than in the past. We shall soon see if that is indeed true. More on this subject in the article below.

iocane's picture

How are you strtching this data out until 1791?