There's a room where the lights won't find you
Holding hands while the wall come tumbling down
When they do
I'll be right behind you.
--Tears for Fears
Nice overview of the Corzine/MF Global dynamic. As the author points out, the borrowing and levering of client assets is at the heart of this problem. And it is nothing new. Banks do it every day.
The leverage in a fractional reserve system means that the system is fragile. Fragile to small downward moves in price. Fragile to declines in confidence.
He's right. MF Global seems a chirping canary.
position in SPX
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I set up a Rothbard Bank, and invest $1,000 of cash. Then I "lend out" $10,000 to someone, either for consumer spending or to invest in his business. How can I "lend out" far more than I have? Ahh, that's the magic of the "fraction" in the fractional reserve. I simply open up a checking account of $10,000 which I am happy to lend to Mr. Jones. Why does Jones borrow from me? Well, for one thing, I can charge a lower rate of interest than savers would. I don't have to save up the money myself, but simply can counterfeit it out of thin air. Since demand deposits at the Rothbard Bank function as equivalent to cash, the nation's money supply has just, by magic, increased by $10,000. The inflationary, counterfeiting process is under way.
~Murray Rothbard
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