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Financial Sector Induced Systemic Instability, 2012

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[Oct 08, 2012] What Really Happened

Economist's View

This is from David Warsh (note that, despite Dodd-Frank and other regulatory measures instituted since the financial crises, we are still susceptible to the shadow bank run problems described below):

What Really Happened - Economic Principals: ...the best economics book on the fall calendar ... (to be published next month) is a slender account about the circumstances that led to that near meltdown in September 2008, and an explanation of why they were not apparent until the last moment. Misunderstanding Financial Crises: Why We Don’t See Them Coming (Oxford University Press), by Gary Gorton, of Yale University’s School of Management ... can be viewed as an answer to the question famously posed to their advisers, in slightly different ways, by both George W. Bush and Queen Elizabeth: why was there no warning of a calamity that was warded off only at such great expense? The answer is that, lulled by nearly 75 years without one, economists had become convinced that banking panics had become a thing of the past. The book is probably better understood as the successor to Charles P. Kindleberger’s 1977 classic, since updated many times, Manias, Panics, and Crashes: A History of Financial Crises. This time, I think, the message won’t be brushed aside.

Not that building the near-certainty of periodic crises back into economics’ analytic framework will be easy. Gorton is an economic historian by training, and the economists with whom he collaborates mostly have monetary, financial or organizational backgrounds. This means they are up against macroeconomics, one of the most powerful guilds in ... virtually all of macro, from Edward Prescott on the right to Olivier Blanchard on the left, in the form of models of that describe economies in terms of dynamic stochastic general equilibrium (DSGE). More on that in a moment.

But Gorton, 61, possesses several advantages that Kindleberger (1910-2003) did not. He is an expert on banking, for one thing. (Kindleberger specialized in the international monetary system.) He’s mathematically adroit, for another, a quant. Most significantly, he is an insider, the economist whose models and product concepts were at the heart of insurance giant AIG’s Financial Products unit, whose undoing amid a stampede of competing claims was one of the central events of the crisis. As such, he had a front row seat.

Gorton’s case is ostensibly simple. Where there are banking systems, he says, there will be periodic runs on them, episodes in which everyone tries to turn his claim into cash at the same time. He sets out the pattern this way:

The problem is that, starting in the 1970s, many economists convinced themselves that bank runs were something they no longer had to worry about, or even think about. They thought because the measures implemented during the Great Depression – deposit insurance, careful segregation of banks by line of business, and close supervision – had ushered in what Gorton calls “the quiet period.” Between 1934 and 2007 there were no financial crises in the United States. (Expensive as it was, the savings and loan debacle of the late 1980s and early ’90s, doesn’t meet the definition of a crisis. Some 750 of around 3,200 institutions failed, in slow motion, over a period of several years, but there was no run on any of them, because depositors expected that the government would make them whole.)

It was in these years that new models began taking over macroeconomics. These new models are said to be dynamic, because in them things change over time; stochastic, because the system is seen to respond to periodic shocks, factors whose origins economists don’t try to explain as part of their system, at least not yet; and general equilibrium, because everything in them is interdependent: a change in one thing causes changes in everything else. Best of all, such models are set to rest on supposedly secure microfoundations, meaning the unit of analysis is the individual or firm. One trouble was that no one had succeeded in building banking or transactions technology into such a model (though some economists had begun to try). Another was that the behavioral aspects of those microfoundations were anything but secure.

It turns out the villain in the DSGE approach is the S term, for stochastic processes, meaning a view of the economy as probabilistic system ... as opposed to a deterministic one... It is ... when economists begin to speak of shocks that matters become hazy. Shocks of various sorts have been familiar to economists ever since the 1930s, when the Ukrainian statistician Eugen Slutsky introduced the idea of sudden and unexpected concatenations of random events as perhaps a better way of thinking about the sources of business cycles than the prevailing view of too-good-a-time-at-the punch-bowl as the underlying mechanism.

But it was only after 1983, when Edward Prescott and Finn Kydland introduced a stylized model with which shocks of various sorts might be employed to explain business fluctuations, that the stochastic approach took over macroeconomics. The pair subsequently won a Nobel Prize, for this and other work. (All this is explained with a reasonable degree of clarity in an article the two wrote for the Federal Reserve Bank of Minneapolis in 1990, Business Cycles: Real Facts and a Monetary Myth). Where there had been only supply shocks and demand shocks before, now there were various real shocks, unexpected and unpredictable changes in technologies, say, or preferences for work and leisure, that might explain different economic outcomes that were observed. Before long, there were even “rare economic disaster” shocks that could explain the equity premium and other perennial mysteries.

That the world economy received a “shock” when US government policy reversed itself in September 2008 and permitted Lehman Brothers to fail: what kind of an explanation is that? Meanwhile, the shadow banking industry, a vast collection of financial intermediaries that included money market funds, investment banks, insurance companies and hedge funds, had grown to cycle and recycle (at some sort of rate of interest) the enormous sums of money that accrued as the world globalized. Finally, there was uncertainty, doubt, fear, and then panic. These institutions began running on each other. No depositors standing on sidewalks – only traders staring dumbfounded at comport screens.

Only a theory beats another theory, of course. And the theory of financial crises has a long, long way to go before it is expressed in carefully-reasoned models and mapped into the rest of what we think we know about the behavior of the world economy. Gorton’s book is full of intriguing insights, including a critique of President’s Obama response to the crisis, and glimpses of a pair of reforms that might have put the banking system back on its feet much more quickly had they been widely briefed and better understood: federally charter a new kind of narrowly-funded bank required to purchase any and all securitized assets; and regulate repo (the interest-bearing repurchase agreements through which financial giants created the shadow banking system), to the extent that there would be limits on how much non-banks could issue (a proposal recently defeated at the Securities and Exchange Commission after massive lobbying by the money-market funds).

There is going to be a long slow reception to Misunderstanding Financial Crises. Let’s see how it rolls out. I’ll return to the topic frequently in the coming months.



{GG: why was there no warning of a calamity that was warded off only at such great expense? The answer is that, lulled by nearly 75 years without one, economists had become convinced that banking panics had become a thing of the past. }

What the above does not say and is not further considered in the post is that America had (and still has) a highly consolidated banking system.

In our rush for "bigger is better", our attitude towards Banking Regulation became lax. It was willful because banking oversight policy presumed that markets could not fail since supposedly "smart bankers" would not allow that to happen.

Not "smart", rather "smart-ass".

The banking industry, starting with Summers and Rubin who convinced Clinton to put an end to the Glass-Steagall Act, saw full well the glorious fortunes to be made in banking.

If only they could get their hands on the funds to collateralize bank-borrowing in order to invest in market ventures - many of which were of a highly dubious nature.

The whole edifice came down like a house of cards as, sensing the Toxic Waste, debt-owners scrambled feverishly to cash-out by invoking their insurance-policies.

Which were also worthless. The retribution for their folly was swift and unforgiving. The edifice came down like a house of cards. And TARP was rushed in to save some sorry asses.

Maybe we should have let it all crumble and, like a Phoenix, build a new one upon its ashes?


Who says it cannot happen again? One day, when the Recession is behind us and a younger group of Golden Boys ‘n Girls (with "the sky's the limit!" in their hearts) takes control of the financial levers? Who's to stop them? What is to stop them?

My answer: The sort of Tax Code that prevents any incentive for quick and immense riches. Nip the hallucinatory greed in its bud.


I just found out about this working paper which reports favorably on the Chicago Plan. One feature of the plan is that there are no bank runs. :)


"the assets of the banking system cannot be sold en masse without their prices plummeting."

In 2006 "assets" of the "banks" were highly inflated (bubble), the run was caused by the marks recognizing this.

The "assets" of the banks, store front and shadow, remain highly inflated, and the austerians want deflation to crush the banks.

But the fed........


It seems to me that the building of a model starts with a few prerequisites, like "The model must permit the rich to accumulate ever more money". Okay, this requires everyone else have access to debt to borrow that money into existence. Okay, what government agencies and systems do we need in place to assure that the masses have access and ability to go ever further into debt, to create the money needed to allow the rich to accumulate ever more money....

And then we seem shocked that eventually the debt hits a maximum carrying capacity and begins to collapse under its own weight.

Reply Monday, October 08, 2012 at 05:59 AM


[Jul 01, 2012] Mitt Romney and the New Gilded Age the GOP could put up someone for president who so brazenly epitomizes the excesses of casino capitalism that have nearly destroyed the economy and overwhelmed our democracy.
June 30, 2012 | Robert Reich                                                         I

The election of 2012 raises two perplexing questions. The first is how the GOP could put up someone for president who so brazenly epitomizes the excesses of casino capitalism that have nearly destroyed the economy and overwhelmed our democracy. The second is why the Democrats have failed to point this out.

The White House has criticized Mitt Romney for his years at the helm of Bain Capital, pointing to a deal that led to the bankruptcy of GS Technologies, a Bain investment in Kansas City that went belly up in 2001 at the cost of 750 jobs. But the White House hasn’t connected Romney’s Bain to the larger scourge of casino capitalism. Not surprisingly, its criticism has quickly degenerated into a “he said, she said” feud over what proportion of the companies that Bain bought and loaded up with debt subsequently went broke (it’s about 20 percent), and how many people lost their jobs relative to how many jobs were added because of Bain’s financial maneuvers (that depends on when you start and stop the clock). And it has invited a Republican countercharge that the administration gambled away taxpayer money on its own bad bet, the Solyndra solar panel company.

But the real issue here isn’t Bain’s betting record. It’s that Romney’s Bain is part of the same system as Jamie Dimon’s JPMorgan Chase, Jon Corzine’s MF Global and Lloyd Blankfein’s Goldman Sachs—a system that has turned much of the economy into a betting parlor that nearly imploded in 2008, destroying millions of jobs and devastating household incomes. The winners in this system are top Wall Street executives and traders, private-equity managers and hedge-fund moguls, and the losers are most of the rest of us. The system is largely responsible for the greatest concentration of the nation’s income and wealth at the very top since the Gilded Age of the nineteenth century, with the richest 400 Americans owning as much as the bottom 150 million put together. And these multimillionaires and billionaires are now actively belection—and with it, American democracy.

The biggest players in this system have, like Romney, made their profits placing big bets with other people’s money. If the bets go well, the players make out like bandits. If they go badly, the burden land taxpayers. The 750 people at GS Technologies who lost their jobs thanks to a bad deal engineered by Romney’s Bain were a small foreshadowing of the 15 million who lost jobs after the cumulative dealmaking of the entire financial sector pushed the whole economy off a cliff. And relative to the cost to taxpayers of bailing out Wall Street, Solyndra is a rounding error.

Connect the dots of casino capitalism, and you get Mitt Romney. The fortunes raked in by financial dealmakers depend on special goodies baked into the tax code such as “carried interest,” which allows Romney and other partners in private-equity firms (as well as in many venture-capital and hedge funds) to treat their incomes as capital gains taxed at a maximum of 15 percent. This is how Romney managed to pay an average of 14 percent on more than $42 million of combined income in 2010 and 2011. But the carried-interest loophole makes no economic sense. Conservatives try to justify the tax code’s generous preference for capital gains as a reward to risk-takers—but Romney and other private-equity partners risk little, if any, of their personal wealth. They mostly bet with other investors’ money, including the pension savings of average working people.

Another goodie allows private-equity partners to sock away almost any amount of their earnings into a tax-deferred IRA, while the rest of us are limited to a few thousand dollars a year. The partners can merely low-ball the value of whatever portion of their investment partnership they put away—even valuing it at zero—because the tax code considers a partnership interest to have value only in the future. This explains how Romney’s IRA is worth as much as $101 million. The tax code further subsidizes private equity and much of the rest of the financial sector by making interest on debt tax-deductible, while taxing profits and dividends. This creates huge incentives for financiers to find ways of substituting debt for equity and is a major reason America’s biggest banks have leveraged America to the hilt. It’s also why Romney’s Bain and other private-equity partnerships have done the same to the companies they buy.

These maneuvers shift all the economic risk to debtors, who sometimes can’t repay what they owe. That’s rarely a problem for the financiers who engineer the deals; they’re sufficiently diversified to withstand some losses, or they’ve already taken their profits and moved on. But piles of debt play havoc with the lives of real people in the real economy when the companies they work for can’t meet their payments, or the banks they rely on stop lending money, or the contractors they depend on go broke—often with the result that they can’t meet their own debt payments and lose their homes, cars and savings.

It took more than a decade for America to recover from the Great Crash of 1929 after the financial sector had gorged itself on debt, and it’s taking years to recover from the more limited but still terrible crash of 2008. The same kinds of convulsions have occurred on a smaller scale at a host of companies since the go-go years of the 1980s, when private-equity firms like Bain began doing leveraged buyouts—taking over a target company, loading it up with debt, using the tax deduction that comes with the debt to boost the target company’s profits, cutting payrolls and then reselling the company at a higher price.

Sometimes these maneuvers work, sometimes they end in disaster; but they always generate giant rewards for the dealmakers while shifting the risk to workers and taxpayers. In 1988 drugstore chain Revco went under when it couldn’t meet its debt payments on a $1.6 billion leveraged buyout engineered by Salomon Brothers. In 1989 the private-equity firm of Kohlberg, Kravis, Roberts completed the notorious and ultimately disastrous buyout of RJR Nabisco for $31 billion, much of it in high-yield (“junk”) bonds. In 1993 Bain Capital became a majority shareholder in GS Technologies and loaded it with debt. In 2001 it went down when it couldn’t meet payments on that debt load. But even as these firms sank, Bain and the other dealmakers continued to collect lucrative fees—transaction fees, advisory fees, management fees—sucking the companies dry until the bitter end. According to a review by the New York Times of firms that went bankrupt on Romney’s watch, Bain structured the deals so that its executives would always win, even if employees, creditors and Bain’s own investors lost out. That’s been Big Finance’s MO.

By the time Romney co-founded Bain Capital in 1984, financial wheeling and dealing was the most lucrative part of the economy, sucking into its Gordon Gekko–like maw the brightest and most ambitious MBAs, who wanted nothing more than to make huge amounts of money as quickly as possible. Between the mid-1980s and 2007, financial-sector earnings made up two-thirds of all the growth in incomes. At the same time, wages for most Americans stagnated as employers, under mounting pressure from Wall Street and private-equity firms like Bain, slashed payrolls and shipped jobs overseas.

The 2008 crash only briefly interrupted the bonanza. Last year, according to a recent Bloomberg Markets analysis, America’s top fifty financial CEOs got a 20.4 percent pay hike, even as the wages of most Americans continued to drop. Topping the Bloomberg list were two of the same private-equity barons who did the RJR Nabisco deal a quarter-century ago—Henry Kravis and George Roberts, who took home $30 million each. According to the 2011 tax records he released, Romney was not far behind.


We’ve entered a new Gilded Age, of which Mitt Romney is the perfect reflection. The original Gilded Age was a time of buoyant rich men with flashy white teeth, raging wealth and a measured disdain for anyone lacking those attributes, which was just about everyone else. Romney looks and acts the part perfectly, offhandedly challenging a GOP primary opponent to a $10,000 bet and referring to his wife’s several Cadillacs. Four years ago he paid $12 million for his fourth home, a 3,000-square-foot villa in La Jolla, California, with vaulted ceilings, five bathrooms, a pool, a Jacuzzi and unobstructed views of the Pacific. Romney has filed plans to tear it down and replace it with a home four times bigger.

We’ve had wealthy presidents before, but they have been traitors to their class—Teddy Roosevelt storming against the “malefactors of great wealth” and busting up the trusts, Franklin Roosevelt railing against the “economic royalists” and raising their taxes, John F. Kennedy appealing to the conscience of the nation to conquer poverty. Romney is the opposite: he wants to do everything he can to make the superwealthy even wealthier and the poor even poorer, and he justifies it all with a thinly veiled social Darwinism.

Not incidentally, social Darwinism was also the reigning philosophy of the original Gilded Age, propounded in America more than a century ago by William Graham Sumner, a professor of political and social science at Yale, who twisted Charles Darwin’s insights into a theory to justify the brazen inequality of that era: survival of the fittest. Romney uses the same logic when he accuses President Obama of creating an “entitlement society” simply because millions of desperate Americans have been forced to accept food stamps and unemployment insurance, or when he opines that government should not help distressed homeowners but instead let the market “hit the bottom,” or enthuses over a House Republican budget that would cut $3.3 trillion from low-income programs over the next decade. It’s survival of the fittest all over again. Sumner, too, warned against handouts to people he termed “negligent, shiftless, inefficient, silly, and imprudent.”

When Romney simultaneously proposes to cut the taxes of households earning over $1 million by an average of $295,874 a year (according to an analysis of his proposals by the nonpartisan Tax Policy Center) because the rich are, allegedly, “job creators,” he mimics Sumner’s view that “millionaires are a product of natural selection, acting on the whole body of men to pick out those who can meet the requirement of certain work to be done.” In truth, the whole of Republican trickle-down economics is nothing but repotted social Darwinism.

The Gilded Age was also the last time America came close to becoming a plutocracy—a system of government of, by and for the wealthy. It was an era when the lackeys of the very rich literally put sacks of money on the desks of pliant legislators, senators bore the nicknames of the giant companies whose interests they served (“the senator from Standard Oil”), and the kings of finance decided how the American economy would function.

The potential of great wealth in the hands of a relative few to undermine democratic institutions was a continuing concern in the nineteenth century as railroad, oil and financial magnates accumulated power. “Wealth, like suffrage, must be considerably distributed, to support a democratick republic,” wrote Virginia Congressman John Taylor as early as 1814, “and hence, whatever draws a considerable proportion of either into a few hands, will destroy it. As power follows wealth, the majority must have wealth or lose power.” Decades later, progressives like Louis Brandeis saw the choice starkly: “We may have democracy, or we may have wealth concentrated in the hands of a few, but we can’t have both.”

The reforms of the Progressive Era at the turn of the twentieth century saved American democracy from the robber barons, but the political power of great wealth has now resurfaced with a vengeance. And here again, Romney is the poster boy. Congress has so far failed to close the absurd carried-interest tax loophole, for example, because of generous donations by Bain Capital and other private-equity partners to both parties.


In the 2012 election, Romney wants everything Wall Street has to offer, and Wall Street seems quite happy to give it to him. Not only is he promising lower taxes in return for its money; he also vows that, if elected, he’ll repeal what’s left of the Dodd-Frank financial reform bill, Washington’s frail attempt to prevent the Street from repeating its 2008 pump- and-dump. Unlike previous elections, in which the Street hedged its bets by donating to both parties, it’s now putting most of its money behind Romney. And courtesy of a Supreme Court majority that seems intent on magnifying the political power of today’s robber barons, that’s a lot of dough. As of May, thirty-one billionaires had contributed between $50,000 and $2 million each to Romney’s super-PAC, and in June another—appropriately enough, a casino magnate—gave $10 million, with a promise of $90 million more. Among those who have contributed at least $1 million are former associates from Romney’s days at Bain Capital and prominent hedge-fund managers.

To be sure, Romney is no worse than any other casino capitalist of this new Gilded Age. All have been making big bets—collecting large sums when they pay off and imposing the risks and costs on the rest of us when they don’t. Many have justified their growing wealth, along with the growing impoverishment of much of the rest of the nation, with beliefs strikingly similar to social Darwinism. And a significant number have transformed their winnings into the clout needed to protect the unrestrained betting and tax preferences that have fueled their fortunes, and to lower their tax rates even further. Wall Street has already all but eviscerated the Dodd-Frank Act, and it has even turned the so-called Volcker Rule—a watered-down version of the old Glass-Steagall Act, which established a firewall between commercial and investment banking—into a Swiss cheese of loopholes and exemptions.

But Romney is the only casino capitalist who is running for president, at the very time in our nation’s history when these views and practices are a clear and present danger to the well-being of the rest of us—just as they were more than a century ago. Romney says he’s a job-creating businessman, but in truth he’s just another financial dealmaker in the age of the financial deal, a fat cat in an era of excessively corpulent felines, a plutocrat in this new epoch of plutocrats. That the GOP has made him its standard-bearer at this point in American history is astonishing.

So why don’t Democrats connect these dots? It’s not as if Americans harbor great admiration for financial dealmakers. According to the newly released twenty-fifth annual Pew Research Center poll on core values, nearly three-quarters of Americans believe “Wall Street only cares about making money for itself.” That’s not surprising, given that many are still bearing the scars of 2008. Nor are they pleased with the concentration of income and wealth at the top. Polls show a majority of Americans want taxes raised on the very rich, and a majority are opposed to the bailouts, subsidies and special tax breaks with which the wealthy have padded their nests.

Part of the answer, surely, is that elected Democrats are still almost as beholden to the wealthy for campaign funds as the Republicans, and don’t want to bite the hand that feeds them. Wall Street can give most of its largesse to Romney this year and still have enough left over to tame many influential Democrats (look at the outcry from some of them when the White House took on Bain Capital).

But I suspect a deeper reason for their reticence is that if they connect the dots and reveal Romney for what he is—the epitome of what’s fundamentally wrong with our economy—they’ll be admitting how serious our economic problems really are. They would have to acknowledge that the economic catastrophe that continues to cause us so much suffering is, at its root, a product of the gross inequality of income, wealth and political power in America’s new Gilded Age, as well as the perverse incentives of casino capitalism.

Yet this admission would require that they propose ways of reversing these trends—proposals large and bold enough to do the job. Time will tell whether today’s Democratic Party and this White House have the courage and imagination to do it. If they do not, that in itself poses almost as great a challenge to the future of the nation as does Mitt Romney and all he represents.

(I wrote this for this week’s “The Nation” Magazine.)

[Jun 25, 2012] Predator Nation


When Charles Ferguson accepted the Academy Award in 2010 for his documentary film Inside Job, he told 30 million people viewing the award ceremony that “three years after a horrific financial crisis caused by massive fraud, not a single senior financial executive has been prosecuted and that’s wrong.”

Two years later, still no prosecution.

So, now Ferguson is out with a book – Predator Nation: Corporate Criminals, Political Corruption, and the Hijacking of America (Random House, 2012.)

It reads like an indictment. Check that. It reads like a number of indictments. And Ferguson is hoping that federal prosecutors will pick up the book and get some ideas.

And why exactly have there been no prosecutions of high level Wall Street investment bank executives? Politics? “Not exactly,” Ferguson says.

“It’s important to bear in mind the direct personal incentive structures of many of the people involved,” Ferguson told Corporate Crime Reporter last week. “The revolving door phenomenon now effects the Justice Department and federal prosecutors to a very substantial extent.”

“The previous federal prosecutor for the southern district of New York, Mary Jo White, now does white collar criminal defense and makes a great deal more money than she did as a federal prosecutor. I think that phenomenon is very well entrenched, very thoroughly entrenched.”

“Indeed Lanny Breuer, the Assistant Attorney General for the Criminal Division was head of the white collar criminal defense practice at Covington & Burling. They represent most of the major banks and investment banks in the United States.”

And his boss, Eric Holder, the Attorney General, came from the same firm.

“Exactly,” Ferguson said. “So, when you say politics, you sort of think of Republicans, Democrats, ideology, large scale political and policy debates. I don’t think that’s the only thing going on here. I think you have to consider incentives – individual, personal, financial and professional.”

When Rudy Giuliani was U.S. Attorney, he had no qualms about prosecuting Michael Milken. What has changed?

“One thing that has changed is that the amount of wealth and political power held by the financial sector has gone up by at least an order of magnitude,” Ferguson said.

“Another thing that’s changed is the amount of money that the financial sector spends on politics and acquiring political power and influence has also gone up by at least an order of magnitude.”

“And thirdly, the divergence, the difference between public sector salaries and incomes and private sector salaries and incomes has widened enormously.”

“So again, for those at the level of large scale political behavior and at the level of individual incentive, things have changed dramatically since the 1980s.”

As an undergrad, Ferguson studied mathematics at the University of California Berkeley and went on to study political science at MIT.

He then went on to organize an early software company – Vermeer Technologies – which was sold in 1996 to Microsoft for a reported $133 million.

He was an early fan of President Obama.

“I donated my legal maximum to his campaign in 2008,” Ferguson says.

But at a press conference in October 2011, Obama addressed the question of why no high level Wall Street executive has been prosecuted.

“So, you know, without commenting on particular prosecutions– obviously, that’s not my job, that’s the attorney general’s job – you know, I think part of people’s frustrations, part of my frustration, was a lot of practices that should not have been allowed weren’t necessarily against the law, but they had a huge destructive impact,” Obama said.

Here is how the banker's game works

Here is how the banker's game works:

  1. Get the government to issue some currency (cash -- paper or reserves at the central bank -- reserves are government issued cash central bank deposits).  Government issued cash is around 5% of the currency (money) supply.  The government issued currency is put into circulation by the government simply spending it
  2. The rest (95%) of the currency is issued by the private banks.  Each customer loan is a new bank deposit (i.e., new currency) and increases the currency (money) supply of the economy.  Note that this newly created money (currency) is put into circulation by the borrower spending it.  Most currency (about 95% America's currency supply) has been borrowed into existence and when bank customer pays the loan back that amount of currency is removed from circulation.   The banking system cannot go backwards (fewer net loans) as time moves on because fewer net loans means less currency in circulation in the economy.

    Accumulation of interest charges on outstanding loans means that the currency supply must constantly increase even if it means giving out lower quality loans.  Think of it like a plane flying it must fly at some minimum speed or else the plane (the banking system) will crash (i.e., banking system collapse).

  3. The bankers make dam sure that the common public does not understand how the monetary system works meaning that the private banks issue 95% of the currency. This is whole another topic how they do this.
  4. The system works until real economic capacity of the economy grows and debts can be serviced and interest charges paid.  Most of the time the economy oscillates between boom (growth) and bust (recession) because bust is needed to clear debts and start a new lending cycle.
  5. Eventually, one of these cycles goes so deep that currency supply (and demand) falls so low that too many debts become un-serviceable.  The recession becomes a depression now.
  6. The bankers then have to decide how to "reset" the system.  One way to reset the system is to let the depression takes its course.  But of course this path is very chaotic because people lose jobs and may become violent.  Once most debts are cleared lending can start again and the currency supply is replenished.   Wars are a good way to get initial money (currency) into an economy after a depression to get demand going again.  This is the great depression scenario.
  7. Another way to "reset" the system is to get the government to print too much money and spend and destroy the currency and blame it on the government.  This justifies issuance of a totally new currency (note that hyperinflation clears debts) and the lending cycle can start again.  For example, the Argentine economic crises with hyperinflation (1999 - 2002).
  8. The banking system (as is) is setup to maximize the power and influence of the global bankers and NOT for the maximum general well being of people.  By the way this is a global game.  This is the only system around no matter what country you are in.   The global banking cartel makes sure that no competing systems are allowed to exist (so they might be copied and global bankers will lose power).
  9. We need a currency system where money is spent into existence and does not need to be lent into existence so the economy is never starved of currency in circulation.

For more details on this stuff please read the following articles in order listed below:

Mansoor H. Khan

greg said...
This is a nice summary. The power of finance is really naked now, and it is ripe with the stink of fraud. Also, finance is overextended, and its institutions no longer able to support themselves without the fraud, and other help. Thus the necessary co-opting of the government. See:
Will the people open their eyes, or more correctly admit to seeing what has been before them the whole time?

For a nice video exposition of the problems with the current system, see:

Money as Debt:


Money as Debt II:

(Meant to publish this here the first time!)

November 8, 2011 1:23 AM  
George May said...
Excellent summary. The matrix is real. You are only a battery to them. They own the media. They put the population to sleep through media monopoly. For them, the meaning of your life is to be born and then to borrow for mortgage, borrow for consumption, borrow for business and pay them interest for a lifetime for money that they create out of nothing when you borrow. It is financial slavery! You work for them your entire life. The taxes you pay mostly goes to pay interest!

Any government that does not let them do this to their people is the enemy! Economic sanctions will be applied and when their economy fails because of isolation, they will be pointed out as a failure. If they don't crumble economically, then it is war that topples them.

Google for "How do banks create money" to understand the world wide slavery.

Entire money supply is debt. It is the principal we borrowed. But banks demand that it is paid with interest. It is not possible for every borrower to be employed at levels that enables them to earn principal + interest. Because the interest portion is not created yet. It is only created with more borrowing. The inflation created by money creation of banks punishes savers and forces more people to borrow. New money is used to pay old debt. When we run out of borrowers, it crashes.

New money that is created in a society should belong to the society. It should not belong to private bankers. Thus, if any interest is to be paid, it should be paid to the people, not to the private bankers. A solution is to require 100% fractional reserve. Let treasury print principal + interest when a loan is made. Principal is loaned out to the borrower. Interest portion is spent in place of taxes. principal + interest is available to earn. When interest is paid back, destroy it.

Current system requires perpetual debt since existing debt cannot be paid without further borrowing. Banks can at will withold loans and create a depression. Then they will make loans to their friends and withold loans from competitors. When competitors who cannot access loans go bankrupt, they are bought by the friends pennies on the dollar. This way the banking cartel gains control of the media and other industries. This is a ponzi scheme but when it goes bust, they get bailed out at tax payer expense because they have the congress and the government in their pocket.

Last but not least, if banks did not create money out of nothing when they made loans, then home prices would be lower and savers would afford them cash down. This is because when 30% of the population works in financial services, the other 70% has to work harder to feed the 30%. If financial services is reduced to 1% just like farming, then they will be employed at more productive tasks (building homes?) and the burden on the 70% will be reduced.

This usury scheme is the reason why we want democracy when a dictator goes out of line. What we have is the dictatorship of the rich. Using their media monopoly they ensure that all presidential candidates are on their boat. Without their blessing, nobody can get elected to the public office!

Those of you who are defending this system really are defending your own slavery.

No one is more of a slave than he who thinks himself free without being so. - Goethe

Google for "How do banks create money" if you don't know about money mechanics.

November 14, 2011 6:47 PM  
George May said...
Here is how banks create money:

November 14, 2011 6:50 PM  
Martin Gercsak said...
Resetting the system is not that easy and the bankers don't have that much control over it as stated. Japan is a good example how money printing and stimulus with bridges to nowhere doesn't help.

The credit system is based on a willing borrower and a willing lender. The trick is to exploit the general population while they willingly participate. But when people become pessimistic about the future and don't want to take loans this breaks down.

Hyperinflation has nothing to do with a credit bubble. In all the hyperinflation events in the past the government just printed money to pay its bills. In a credit based system it's not a solution because central banks create new money by buying IOUs and not literal printing. There is a tipping point where central banks buy too much worthless IOUs and the bond market panics. This results in everybody dumping their bonds which means very high interest rates and money supply contraction. There is no solution other than the depression running its course. Either by a crash (1933) or by a thousand cuts (Japan since 1989).

The bankers just do what seems to be their best short term interest. But they are just as clueless as the general population. Most Lehman executives lost everything they had (by taking loans against their Lehman stock holdings). Now how stupid is that from a risk management perspective?

November 16, 2011 5:53 AM  
Mansoor H. Khan said...
I left the following comment on Martin Gercsak blog in response to the above comment:


thanks for commenting on my blog.

did you read about an alternative financial system I proposed that is NOT based on lending?

We do not have to live this way where our currency supply is "borrowed" into existence where we must continually pay rent on it (interest charges). We can simply have our government spend currency (not lend) into the economy. We don't need to suffer deflation (reduction of circulating currency) to "reset" and have a disaster.

Banker's want us to live in this matrix where we must borrow our own currency into existence. We can and (god willing) one day we will break out of this matrix.

Mansoor Khan

November 16, 2011 6:40 AM  
Mansoor H. Khan said...
I made the following comment Rodger Malcolm Mitchell's recent very relevant blog post:

Mansoor H. Khan says:
November 16, 2011 at 3:53 pm
You should think of yourself as doing what Martin Luther (1483 – 1546) did to the Church (reformation). The global banking cartel is just as powerful. Prominent orthodox economists are priests on their payroll or at least too scared to speak up.
This stuff is not that hard to get. Keynesian Economics + MMT + MS are all very clear and consistent. I find it very hard to accept that prominent economists and president’s advisers are that stupid.

Mansoor H. Khan

November 16, 2011 7:16 PM  
Mansoor H. Khan said...
I made the following comment on Naked Capitalism today:

mansoor h. khan says:
November 16, 2011 at 6:37 pm

glass steagall and low quality lending is part of the game:

read how the game works:

Mansoor H. Khan

November 16, 2011 8:25 PM  
Mansoor H. Khan said...
F. Beard made the following comment and I responded to it today:

F. Beard says:

November 16, 2011 at 7:58 pm

Yes, inter-bank lending creates a banking system. So eliminating a government provided lender of last resort and government deposit insurance is essential to crushing the counterfeiting cartel. As for the need for the public to store its fiat safely that should be provided by the government itself since it creates fiat and is thus a risk-free place to store it.

mansoor h. khan says:

November 16, 2011 at 8:43 pm

F. Beard,


I can feel the countdown to cartel’s day of judgement.

Mansoor H. Khan

Additionally (I would like to add):

Ravand (the evil banking cartel which has stolen from the common man for centuries) is about to get an arrow in its heart (the arrow is modern monetary theory, MMT, knowledge spreading through the internet).

Just like the power of the church was destroyed by the Gutenberg printing press. The power of this evil global cartel will be destroyed by the internet (god willing).

Mansoor H. KHan

November 16, 2011 10:24 PM  
Mansoor H. Khan said...
On November 14 I made the following comment on the New Arthurian Blog:

Mansoor H. Khan said...

you are correct but only partially. Fewer net loans cannot continue for too long unless the government continues to deficit spend which it will not as much if the tea party republicans get their way.
The bankers will reset the system soon since the whole idea for them is to not let the gov issue much currency so they can issue as much as they can and get interest income on it.

[Apr 01, 2012] How a Financial Products Agency Could Protect Investors By

March 31, 2012  |

THE Food and Drug Administration vets new drugs before they reach the market. But imagine if there were a Wall Street version of the F.D.A. — an agency that examined new financial instruments and ensured that they were safe and benefited society, not just bankers.

How different our economy might look today, given the damage done by complex instruments during the financial crisis.

And yet, four years after the collapse of Bear Stearns, regulation of these products remains a battleground. As federal officials struggle to write rules required by the Dodd-Frank law, some in Congress are trying to circumvent them. Last week, for instance, the House Financial Services Committee approved a bill that would let big financial institutions with foreign subsidiaries conduct trades that evade rules intended to make the vast market in derivatives more transparent.

Which brings us back to the F.D.A. Against the discouraging backdrop in financial oversight, two professors at the University of Chicago have raised an intriguing idea. In a paper published in February, Eric A. Posner, a law professor, and E. Glen Weyl, an assistant professor in economics, argue that regulators should approach financial products the way the F.D.A. approaches new drugs.

The potential dangers of financial instruments, they argue, “seem at least as extreme as the dangers of medicines.”

They contend that new instruments should be approved by a “financial products agency” that would test them for social utility. Ideally, products deemed too costly to society over all — those that serve only to increase speculation, for example — would be rejected, the two professors say.

“It is not the main purpose of our proposal to protect consumers and other unsophisticated investors from shady practices or their own ignorance,” they wrote. “Our goal is rather to deter financial speculation because it is welfare-reducing and contributes to systemic risk.”

It is a refreshing rejoinder to the mantra on Wall Street — and in some circles in Washington — that financial innovation is always good and regulation is always bad. Bankers often argue that complex financial products are among America’s great inventions.

But given that exotic instruments played a central role in the credit crisis, it is worth questioning the costs and benefits of such financial innovations. The paper by Mr. Posner and Mr. Weyl provides a basis for what could be a productive dialogue.

“We tried an experiment with a very radical form of deregulation that has very little basis in sound economic science,” Mr. Weyl said in an interview last week. “What we’re advocating is to do the best we can to put the genie back in the bottle.”

FIRST, their paper says, we should distinguish between financial markets — where institutions lend money, trade securities and make investments — and the real economy, where people trade goods and services.

“It is tempting to think that if the real economy should be largely unregulated (as it is), then the financial markets should be as well,” the professors wrote. But that view, they went on, is wrong.

Instead, they advocate testing new financial products for social benefits. For example, financial instruments could be judged by whether they help people hedge risks — which is generally beneficial — or whether they simply allow gambling, which can be costly.

The instruments could also be measured for how they affect capital allocation, and whether they might add useful information to the marketplace.

The professors note certain instruments that they say have added little to society. Among them are credit default swaps, which were devised in the 1990s and became enormously popular.

The paper concludes that credit default swaps have considerable drawbacks. Those who use swaps to hedge their debt holdings, for example, assume the risks of dealing with counterparties. Swaps also contribute little to the appropriate allocation of capital, the professors say, because investors use them to take positions on debt that is already outstanding. And the paper dismisses the notion that such swaps provide significant information to the market about the safety of underlying debt.

Imagining a credit default swap being brought before a financial protection agency, Mr. Posner and Mr. Weyl wrote: “We would expect the F.P.A. to treat it skeptically.”

Alternatively, the professors point to a type of derivative that lets homeowners hedge exposures to real estate. These derivatives are potentially good for society because they can offset losses if housing prices fall, Mr. Posner and Mr. Weyl say, reckoning that the instruments have had a positive effect for those who have used them. But unlike credit default swaps, they have gained little traction in the market.

The professors also question the central tenet of the nation’s financial regulatory framework — that full disclosure provides enough protection for investors.

“My major concern about Dodd-Frank is that the basic philosophy behind it is to improve disclosure, the traditional way of addressing market failures in a way that is thought to be helpful but not too intrusive,” Mr. Posner said last week.

But disclosure alone isn’t enough in the pharmaceutical industry, he said, and the same view should be applied to finance.

“In pharmaceuticals, we could allow a company to sell whatever it wants as long as it tells people the product might work but also might cause your head to fall off,” Mr. Posner said. “We don’t do that because people will ignore the information, so we draw the line and say, ‘You can’t buy that product.’ ”

Mr. Posner and Mr. Weyl say they know full well that their proposal will upset the wizards of Wall Street and their fans, which include many in the regulatory arena. The professors also recognize that their proposal, if enacted, would encourage financial activity to move overseas in order to evade oversight.

But this challenge faces any type of financial regulation, and the professors suggest that it could be solved by coordination with other countries having large financial centers.

THE proposal by Mr. Posner and Mr. Weyl is unlikely to get off the ground anytime soon. But if their ideas open a discussion about measuring the social costs of our financial products, that alone would be a step forward.

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