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Asset Price Bubbles: Stock Market with buybacks as a Ponzi scheme

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Stock market has both features of Ponzi scheme and pyramid scheme. It is highly dependent on positive economic growth and growing population. If either conditions is not met crashes are inevitable and wipe out investor returns not unlike classic Ponzi scheme.

The term that is used as a politically correct substitution of more hash "Stock Market as a Ponzi scheme" is  asset price bubbles.

An important characteristic of asset price bubbles is some development line a new technology (dot-com bubble) or central government desire to preserve illusion of growth at all costs (house price bubble) creates uncertainty about fundamental valuations.

Asset price bubble -- crash cycle and Ponzi schemes do share several important traits. From Wikipedia

A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation. The Ponzi scheme usually entices new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. Perpetuation of the high returns requires an ever-increasing flow of money from new investors to keep the scheme going.[1]

The system is destined to collapse because the earnings, if any, are less than the payments to investors. Usually, the scheme is interrupted by legal authorities before it collapses because a Ponzi scheme is suspected or because the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to the attention of authorities increases.[1]

The scheme is named after Charles Ponzi,[2] who became notorious for using the technique in 1920.[3] Ponzi did not invent the scheme (for example, Charles Dickens' 1844 novel Martin Chuzzlewitt and 1857 novel Little Dorrit each described such a scheme),[4] but his operation took in so much money that it was the first to become known throughout the United States. Ponzi's original scheme was based on the arbitrage of international reply coupons for postage stamps; however, he soon diverted investors' money to make payments to earlier investors and himself

Typically extraordinary returns are promised on the investment, and vague verbal constructions such as "hedge futures trading," "high-yield investment programs", "offshore investment" might be used. The promoter sells shares to investors by taking advantage of a lack of investor knowledge or competence, or using claims of a proprietary investment strategy which must be kept secret to ensure a competitive edge.

Ponzi schemes sometimes commence operations as legitimate investment vehicles, such as hedge funds. For example, a hedge fund can degenerate into a Ponzi scheme if it unexpectedly loses money (or simply fails to legitimately earn the returns promised and/or thought to be expected) and the promoters, instead of admitting their failure to meet expectations, fabricate false returns and, if necessary, produce fraudulent audit reports.

A wide variety of investment vehicles or strategies, typically legitimate, have become the basis of Ponzi schemes. For instance, Allen Stanford used bank certificates of deposit to defraud tens of thousands of people. Certificates of deposit are usually low-risk and insured instruments, but the Stanford CDs were fraudulent.

Initially the promoter will pay out high returns to attract more investors, and to lure current investors into putting in additional money. Other investors begin to participate, leading to a cascade effect. The "return" to the initial investors is paid out of the investments of new entrants, and not out of profits.

Often the high returns lead investors to leave their money in the scheme, leading the promoter not to have to pay out very much to investors; they simply have to send statements to investors showing them how much they earned. This maintains the deception that the scheme is a fund with high returns.

Promoters also try to minimize withdrawals by offering new plans to investors, often where money is frozen for a longer period of time, in exchange for higher returns. The promoter sees new cash flows as investors are told they could not transfer money from the first plan to the second. If a few investors do wish to withdraw their money in accordance with the terms allowed, the requests are usually promptly processed, which gives the illusion to all other investors that the fund is solvent.

Unraveling of a Ponzi scheme

When a Ponzi scheme is not stopped by the authorities, it sooner or later falls apart for one of the following reasons:

1. The promoter vanishes, taking all the remaining investment money (minus payouts to investors already made).

2. Since the scheme requires a continual stream of investments to fund higher returns, once investment slows down, the scheme collapses as the promoter starts having problems paying the promised returns (the higher the returns, the greater the risk of the Ponzi scheme collapsing). Such liquidity crises often trigger panics, as more people start asking for their money, similar to a bank run.

3. External market forces, such as a sharp decline in the economy (for example, the Madoff investment scandal during the market downturn of 2008), cause many investors to withdraw part or all of their funds. [edit]

Similar schemes

A pyramid scheme is a form of fraud similar in some ways to a Ponzi scheme, relying as it does on a mistaken belief in a nonexistent financial reality, including the hope of an extremely high rate of return. However, several characteristics distinguish these schemes from Ponzi schemes:[1] In a Ponzi scheme, the schemer acts as a "hub" for the victims, interacting with all of them directly. In a pyramid scheme, those who recruit additional participants benefit directly. (In fact, failure to recruit typically means no investment return.) A Ponzi scheme claims to rely on some esoteric investment approach and often attracts well-to-do investors; whereas pyramid schemes explicitly claim that new money will be the source of payout for the initial investments. A pyramid scheme typically collapses much faster because it requires exponential increases in participants to sustain it. By contrast, Ponzi schemes can survive simply by persuading most existing participants to reinvest their money, with a relatively small number of new participants. An economic bubble: A bubble is similar to a Ponzi scheme in that one participant gets paid by contributions from a subsequent participant (until inevitable collapse). A bubble involves ever-rising prices in an open market (for example stock, housing, or tulip bulbs) where prices rise because buyers bid more because prices are rising. Bubbles are often said to be based on the "greater fool" theory. As with the Ponzi scheme, the price exceeds the intrinsic value of the item, but unlike the Ponzi scheme, there is no single person misrepresenting the intrinsic value.


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[Dec 08, 2013] "Profitless" Stocks, Underinvestment, the Cannibalization of Labor, and Levitating Stock Prices by Yves Smith

I'd argued in 2005 that companies were like neurotic bodybuilders, creating perfect-looking outsides while ruining their health.
Aug 12, 2013 | nakedcapitalism.com
Your humble blogger generally refrains from writing about stocks for a host of reasons. First, there are tons of sites that cover equities actively, sometimes frenetically, with the authors typically money managers (raising the question of whether the stock or idea that they are pushing is talking their book, and worst, not because it's a position they've taken and are keen about but one they are in the process of exiting). Second is that one can make the same comment about stock forecasting that one makes about forecasting generally: if you must do it, do it often (as in hope your new wisdom blots out the memory of the inevitable bad calls).

But for me, maybe the biggest reason for my lack of a strong interest in the stock market is the direct result of first real job in stock and bond underwriting. You may recall the famous saying by Bismark, if you like law and sausages, you should never watch either one being made. Well, for me, having watched how securities are made has reduced my appetite for them. I'm of the Amar Bhide school, that equities have so little in the way of rights (you get a dividend when management has the dough and is in teh mood to pay one, and you have a vote than can be diluted pretty much any time) that they aren't suitable to be traded on an arm's length, anonymous basis (his argument, and I concur, is that an equity investor should have a VC-like relationship with management, he should know management personally and have access to competitively-sensitive information, such as the company's strategies and plans).*

However, the US equity markets have come to play an outsized role in the US from a policy and practical level. It's never a good idea to try to assess complex phenomena with a single metric, yet for much of the public and the officialdom, the level and trend of the stock market is a proxy for the health of the economy (this view seems to have become even more entrenched over time, with the dot-com era allowing for intra-day dissemination of prices and Greenspan's personal obsession with stock prices as contributors). So as the Greenspan and Bernanke puts attest, policymakers now have a vested interest in keeping the stock market up, both to boost confidence and out of personal vanity (if the stock market were to fall, that would mean they've done a bad job. Can't have that!).

Another factor is that the stock market has played a significant, and all and all, not healthy, role in the restructuring of the economy. Without going into a longer form history (which would go back into the 1970s), a key development was the rise of share-price linked pay (a vogue that came out of a Michael Jensen paper in the early 1990s which he has since repudiated). That intensified and institutionalized a trend towards short-termism and underinvestment (any investment also has associated up front-expenses, which will affect earnings before the investment pays off. See this paper for a longer discussion). When I was briefly in the business of playing a bit part in creating securities to be sold to the public in the early 1980s, it would have been seen as an extreme view to contend that companies should be run to suit shareholders over everybody else. Equity is a residual claim: payments to shareholders come after paying suppliers and employees, bondholders, leases and licenses, legal claims, and taxes. But our new ideology is that the last should come first. And to achieve that, companies in the US have abandoned the model of sharing the benefits of productivity gains with workers:

As this trend has accelerated, we've also seen falling levels of corporate investment. As I noted in a 2005 article, companies were net savers, which was unheard of at any time other than in a recession (the corporate sector is normally a net borrower in order to help fund expansion), as well as the rise in profit share of GDP relative to the amount of GDP growth paid to workers. It turns out those two developments were not unrelated. Not sharing wage gains with workers makes it less attractive to invest, leading to lower GDP levels. I'd argued in 2005 that companies were like neurotic bodybuilders, creating perfect-looking outsides while ruining their health. In an important Angry Bear post, Edward Lambert modeled that these two behaviors are intrinsically linked: lower labor share lowers investment returns. And at lower investment return levels, companies will indeed invest less (even before you get to the fact that short-termism also leads them to seek inappropriately high return levels).

And it's even worse than this bloodless analysis suggests. Readers know all too well of the have and have-not world of work in America. People who are employed at reasonable to good income levels for the most part think the economy is fine. But people who are out of work or have unstable employment know how bad conditions are. Cohorts that traditionally held up well in bad times, such as new college grads, are having a particularly rough time.

And that recognition that we have a two-tier economy is finally reaching the consciousness of our generally oblivious elites. Admittedly, Larry Summers is on his best behavior these days as a result of campaigning to become the next Fed chair (I saw Summers speak when he was similarly pumping to become head the World Bank, and the contrast with his off-the-charts arrogance at an INET conference was remarkable). Summers, yes the same Summers who as Stephanie Kelton reminds us at DE Shaw had no compunctions about coming up with trading strategies that would rip off pension funds warned participants at a recent conference that he thought corporations had pushed profits at the expense of labor as far as they could go. More would be socially destabilizing. And I gather he didn't mean "socially destabilizing" as in more homelessness, but in class-based violence.

This backdrop helps explain puzzled sightings by astute commentators, such at John Authers at the Financial Times, who provides an important piece on what he calls "profitless stocks":

According to Bloomberg data, trailing 12-month earnings per share for the S&P 500 are 16 per cent above their level of October 2007 (when both earnings and share prices peaked before the financial crisis). On the same basis, earnings for the MSCI EAFE index, covering the rest of the developed world, are down 37 per cent. Those for the FTSE-Eurofirst 300 are down 42 per cent.

Earnings for the MSCI emerging markets index are up since October 2007 – but by only 13 per cent, having peaked and started to decline two years ago.

Look closely at the raw numbers for the US (with thanks to the regular Equity Market Arithmetic research produced by Société Générale's Andrew Lapthorne), and they turn out to be less inspiring. S&P 500 companies are on course to increase earnings by 3.6 per cent year on year for the second quarter. But they have declined by 1.3 per cent once financials are excluded. During those 12 months, bear in mind, the S&P gained 18 per cent, and its financials index gained 33 per cent.

Other factors to consider:

That 16% trailing EPS gain is nominal. Inflation, as measure by the CPI since 2007 is a smidge under 13%. Even in a world of ZIRP, that's hardly much return for equity risk.

We've had a couple of good quarters of S&P earnings. Is this really a recovery or just a bit of an outlier?

Authers points out that companies are guiding earnings expectations lower, while managing to produce the "aha" of upside surprises relative to that. And here is his zinger:

US companies are not generating that much in revenues but, over the past 12 months, they returned a record amount of it to investors, according to JPMorgan. This is an admission that they see few opportunities to invest for growth. But, in an environment where investors take little on trust and are desperate for a yield from anywhere, it has helped the rally keep going. This is not a strategy that can last forever. At some point, companies must start generating more revenues and profits with which to make these payouts.

Now of course, this behavior can continue until it doesn't. Large companies are sitting on boatloads of cash, so many can continue to buy back stock for quite some time.

While economists in the US are becoming more positive about the outlook here, Warren Mosler by e-mail says that he thinks they've misread the impact of deficit cutting in combination with no growth in private sector borrowing. Bridgwater Associates argues in a new report that the developed world will be the driver of growth (meaning the US can't look to it as much as in the past to help lift global growth) and Europe, which is hardly robust, faces further headwinds as a result of the Basel III requirement that Eurobanks shrink their balance sheets by €3.2 trillion by 2018. Of course, if you are fundamentally oriented, as I am, it's hard to wrap your mind around a market where the authorities have aggressively and deliberately been manipulating the dials and now are saying they'll do that less going forward.

Keynes warned of the American's susceptibility to overly speculative capital markets:

Even outside the field of finance, Americans are apt to be unduly interested in discovering what average opinion believes average opinion to be; and this national weakness finds its nemesis in the stock market. It is rare, one is told, for an American to invest, as many Englishmen still do, "for income"; and he will not readily purchase an investment except in the hope of capital appreciation. This is only another way of saying that, when he purchases an investment, the American is attaching his hopes, not so much to its prospective yield, as to a favourable change in the conventional basis of valuation, i.e. that he is, in the above sense, a speculator. Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.

And I've never liked the idea of going to a casino. Why play when I know the house always wins?
Read more at http://www.nakedcapitalism.com/2013/08/profitless-stocks-underinvestment-the-cannibalization-of-labor-and-levitating-stock-prices.html#fMt2k1BztlOZqQRC.99

Clive says:
August 12, 2013 at 5:00 am

This kind of crazy thinking ruins perfectly good businesses. I'm personally involved in the restructuring of two companies which started off in 2000′s as solid, well regarded and generally well managed enterprises. They operate in mature sectors so while there is some limited organic growth (which is also susceptible to cyclical variances) there's never going to be any magic formula to achieving significantly above trend growth when compared to the underlying economies which support these corporations.

So, any fool could see that promising "to increase shareholder value by 10% per year" and "double digit returns to shareholders annually" could not be delivered for more than a few years at best.

Even the most inefficient business practices have upper limits to the efficiencies which can be introduced e.g. new technology gives you an improvement, but it's a one-time-only. Sweating assets can only be sweated so much (and often shorten asset life or asset quality). Grabbing market share through "suicide" pricing can be done if you're head and shoulders above the other market players, but if they've got similarly deep pockets (and there's more than one or two of them) they can outlast you in a game of chicken.

Unless sanity dawns, these business can (and did) end up taking more and more risks. Dubious suppliers were used which caused major embarrassment product recalls - and compensation. Capital expenditure was so curtailed that it wasn't only in the back office where premises upkeep was obviously not being performed - the customer space showed it too. And then there was labor - shafted, basically.

I must confess though, although I could extrapolate the inevitable results of this obsession with producing quarterly results which "delighted" investors but hid all manner of nasties, the fall from grace took 10 years for one of the businesses, 7 years for the other. I'd reckoned 5 tops. So the problems can be hidden by management for a long time.

But only for so long. Now you have two retail type operations which operate from shabby often falling-apart stores with a backlog of infrastructure spending as long as your arm, poorly skilled (the skilled ones chucked out or walked long ago) staff who largely don't give a toss and, worse, actively pick up on the pretty much corrupt management values which have been inculturalated (if that's a word) for so long that they've become part of the furniture and, given half a chance will perpetrate petty thefts and frauds and divert a lot of their energies to playing the system - the management hired a lot of consultants who brought in a lot of systems, many eminently "playable" with a little thought by the employees to their own advantage.

Enticing customers into these depressing and bleak outlets takes rock bottom pricing policies. Meanwhile, competitors who weren't quite so brazen and slavish in following this crazy trend pick away at the edges and error the market share a percent or two a year. I can't tell yet whether the corporations so devoted to shareholder returns are in an irrevocable death spiral - they are very big players and unlikely to encounter an extinction level event because it would have to be absolutely huge. But a lingering, slow decline into oblivion isn't out the question.

I won't even go into the financial engineering which is corrupting the balance sheets, let's just say an accountant could spend a happy career trying to unpick the convoluted and opaque leaseback deals, CapEx depreciation shenanigans, strained capitalisation rules, weird accruals, hedges, repos and derivatives skeletons which are buried there. Oh, and auditors which are in the pockets of the management make any oversight meaningless too.

The main problem is though that it take so-ooo long to see the damage. A generation or two of top management can get away with it (and the looting) and be off before its apparent.

[Aug 20, 2013] Introducing Government Finance Quasi-Capitalism by Doug Noland

Aug 17, 2013 | Safehaven.com

The Fed has been talking about bubbles for 20 years. I've been diligently studying bubbles and Money & Credit for longer. I'm here with a sense of humility. After all, I'm again relegated to wearing the proverbial "dunce cap," as I persevere through my third major bull market, "new era" and "new paradigm."

The great American economist Hyman Minsky is best known for "stability is destabilizing" and the "Financial Instability Hypothesis" - the evolution of finance from "hedge finance" to "speculative finance" and finally to highly unstable "Ponzi finance."

Minsky delineated the "Stages of Development of Capitalist Finance": "In both Keynes and Schumpeter the in-place financial structure is a central determinant of the behaviour of a capitalist economy. But among the players in financial markets are entrepreneurial profit-seekers who innovate. As a result these markets evolve in response to profit opportunities which emerge as the productive apparatus changes. The evolutionary properties of market economies are evident in the changing structure of financial institutions as well as in the productive structure... To understand the short-term dynamics of business cycles and the longer-term evolution of economies it is necessary to understand the financing relations that rule, and how the profit-seeking activities of businessmen, bankers and portfolio managers lead to the evolution of financial structures."

Minsky saw the evolution Capitalist finance as having developed in four stages: Commercial Capitalism, Finance Capitalism, Managerial Capitalism and Money Manager Capitalism. "These stages are related to what is financed and who does the proximate financing - the structure of relations among businesses, households, the government and finance."

Commercial Capitalism: "The essence of commercial capitalism was bankers providing merchant finance for goods trading and manufacturing. Financing of inventories but not capital investment."

Early economic thinkers focused on seasonal monetary phenomenon. Credit and economic cycles were prominent, although relatively short in duration.

Finance Capitalism: "Industrial Revolution and the huge capital requirements for durable long-term capital investment... The capital development of these economies mainly depended upon market financing. Flotations of stocks and bonds - securities markets, investment bankers and the Rothchilds, JP Morgan and the other money barons... The great crash of 1929-1933 marked the end of the era in which investment bankers dominated financial markets."

Managerial Capitalism: "During the great depression, the Second World War and the peace that followed government became and remained a much larger part of the economy... Government deficits led to profits - the government took over responsibility for the adequacy of profits and aggregate demand. The flaw in managerial capitalism is the assumption that enterprise divorced from banker and owner pressure and control would remain efficient... As the era progressed, individual wealth holdings increasingly took the form of ownership of the liabilities of managed funds..."

Money Manager Capitalism: "The emergence of return and capital-gains-oriented block of managed money resulted in financial markets once again being a major influence in determining the performance of the economy... Unlike the earlier epoch of finance capitalism, the emphasis was not upon the capital development of the economy but rather upon the quick turn of the speculator, upon trading profits... A peculiar regime emerged in which the main business in the financial markets became far removed from the financing of the capital development of the country. Furthermore, the main purpose of those who controlled corporations was no longer making profits from production and trade but rather to assure that the liabilities of the corporations were fully priced in the financial market..."

Late in life Minsky wrote "Today's financial structure is more akin to Keynes' characterization of the financial arrangements of advanced capitalism as a casino."

The above quotes were from a Minsky paper published in 1993. That year was notable for the inflation of a major bond market speculative Bubble. This Bubble began to burst on February 4, 1994 when Fed raised rates 25bps.

I still view 1994 as a seminal year in finance. The highly leveraged hedge funds were caught in a bond Bubble; there were serious derivative problems; and speculative deleveraging was having significant global effects, most notably the financial and economic collapse in Mexico.

[Oct 17, 2012] Baccala investors testify about losses in alleged Ponzi scheme By PAUL PAYNE

Many elderly investors have lost a combined $20 million
October 12, 2012 | THE PRESS DEMOCRAT

The first of many elderly investors who claim to have lost a combined $20 million in what Sonoma County prosecutors are calling a vast Ponzi scheme testified Friday they gambled their life savings on word-of-mouth recommendations and the promise of 12 percent returns.

Some, like Hyam Liebling, 86, of Oakmont in Santa Rosa, testified they plunked down their money with Aldo Baccala, 71, of Petaluma, despite being unclear about who he was and how the money was secured.

"I just trusted the guy," said Liebling, who walked to the witness stand with the help of a cane. "And I trusted the information I got from a friend who invested in him for many years."

After a brief meeting with Baccala in 2008, Liebling said he wrote him a check for $30,000, eager to begin collecting generous monthly interest payments. A few weeks later, he shelled out $25,000 more, increasing his total investment to $55,000, he said.

The money was going into mobile homes owned by Baccala's Petaluma real estate company and later, assisted living centers, he said.

But in November 2008, Liebling testified the monthly payments stopped. He received a letter from Baccala telling him he'd run out of money.

Liebling and other investors sued Baccala in civil court but have since received nothing, despite a settlement promising repayment.

Asked about the impact on his life, the elderly man said, "Well, we're retired."

Liebling was the first to testify in a preliminary hearing expected to continue next week. Prosecutors said there are 55 victims, many of them elderly, who were cheated out of their money.

Bill Gross Wants You to Know That the Stock Market Has Been a Ponzi Scheme

Bond market guru Bill Gross thinks that investors are going to be disappointed by stocks in the years ahead. In fact, Bill Gross thinks that investors have fallen under the spell of a "cult of equity" and the returns from stocks over the past century are akin to a Ponzi scheme.

In his most recent investing outlook, Gross writes (emphasis original):

Yet the 6.6% real return belied a commonsensical flaw much like that of a chain letter or yes – a Ponzi scheme. If wealth or real GDP was only being created at an annual rate of 3.5% over the same period of time, then somehow stockholders must be skimming 3% off the top each and every year. If an economy's GDP could only provide 3.5% more goods and services per year, then how could one segment (stockholders) so consistently profit at the expense of the others (lenders, laborers and government)? The commonsensical "illogic" of such an arrangement when carried forward another century to 2112 seems obvious as well. If stocks continue to appreciate at a 3% higher rate than the economy itself, then stockholders will command not only a disproportionate share of wealth but nearly all of the money in the world!

Now before you jump to conclusions, I should note that Gross isn't using this view as a way to hype bonds as an alternative. He has a similarly dour outlook on the returns from bonds. The only thing that Gross seems truly bullish on is the potential for central banks to attempt to revive the economy through inflation-creating loose monetary policy. And Gross is definitely bearish on that.

Gross is a brilliant investor and when he speaks, the market listens. But when it comes to his view on stocks, Gross has it dead wrong.

Starting from the top
One of Gross' primary concerns is his view that the rate of return investors are expecting is vastly out of whack with what the U.S. is capable of producing in terms of GDP growth. And Gross emphasizes that, over the long term, the total return of stocks should be consistent with U.S. GDP growth (that's wrong too, but we'll get to that later).

A quick look at the companies in the Dow Jones (INDEX: ^DJI ) index, however, shows how wrong-headed this is. Here are the four largest Dow companies and the percentage of revenue that they get from outside of the U.S.

Company Market Cap Percentage of Non-U.S. Revenue
ExxonMobil (NYSE: XOM ) $402 billion 68%
Wal-Mart (NYSE: WMT ) $251 billion 28%
Microsoft (Nasdaq: MSFT ) $245 billion 47%
IBM (NYSE: IBM ) $222 billion 65%*

Source: S&P Capital IQ.
*Non-U.S. revenue excludes non-U.S. Americas.

As you can see, these companies do a significant amount of business outside of the U.S. And while that may allow them to take advantage of higher GDP growth rates in other countries, to the extent that they're expanding their presence in other countries, their growth can easily outpace the overall economic growth of the countries they're entering.

When lower margins attack
Like many others before him, Gross points out that recent years have been kind to corporate profits as taxes have fallen and a proportionately lower amount has gone to U.S. workers. He even provides a nice chart from Haver Analytics showing that the ratio of wages to GDP has been falling since 1960(!).

There are two issues with this. First, and I'm hardly the first to point this out, while more money going to labor and taxes would have an obvious detrimental impact on corporate bottom lines, what happens to that money? Well, it ends up in the hands of workers and the government -- both of which are likely to turn around and spend it. So while profitability may get hit, that could be counteracted by more flowing to the topline.

More importantly, though, Gross implies that the lower payments to labor and resulting increased corporate profitability was a key contributor to the great stock returns in recent decades. What he overlooks is that for the first couple of decades that wages were falling -- 1960 to 1980 -- were actually pretty lackluster for stocks. The S&P 500 appreciated a mere 3.1% per year -- in nominal terms -- over that stretch.

Further, if we believe Gross' assertion that a falling ratio of wages to GDP is good for stocks, then we could reasonably assume that a rising ratio would be bad for stocks. But if we look at the decade prior to when the slide began -- 1950 to 1960 -- that was a fantastic decade for stocks, with the S&P 500 notching an average annual gain of close to 14%.

Those tricky dividends
Perhaps the key mistake that Gross makes, however, is focusing his attack on stocks on the contention that they've appreciated far more than GDP growth over the past 100 years. The problem with that stance is that stocks haven't actually done that -- they've returned appreciably more than GDP growth. The total return that he shows in his investment outlook represents both stocks' appreciation and the dividends they've paid out.

Stock market cheerleader Jeremy Siegel, who Gross called out by name in his note, pointed out the same, as did Business Insider's Henry Blodget -- in the cheekily titled post "DEAR PIMCO: Would Bill Gross Maybe Like to Update That Analysis of Stocks He Published Yesterday." Economist Brad DeLong wrote a blog post, "Bill Gross Makes a Distressingly Common Error."

Rather than managing to make a savvy point about stocks, Gross really only managed to make himself look silly and underscore for investors exactly why they need dividend-paying stocks.

The punchy postscript
After Gross' analysis hit the wires, he and Siegel exchanged some barbs in separate TV appearances. Then, in a Wednesday appearance on CNBC, Gross backpedaled a bit, noting that stocks will most likely outperform bonds over the long term and that his personal portfolio contains more stocks than bonds. What he stuck to, however, was his view that his "Siegel constant" of 6.6% annual real return for stocks (which equates to a nominal return of more than 9%), is unlikely for years to come. I haven't seen him address the issue of total returns versus stock appreciation.

Gross' bottom line may indeed be correct -- I'm certainly not budgeting on a 9%-10% return. But as Blodget points out, if he does end up being proven right, he'll be right for the wrong reasons. And in a profession where your process means everything to your long-term performance, that's a very big deal

THE STOCK MARKET AS PONZI SCHEME (Warning: some financial math ahead.)

A Ponzi scheme, named after its early 20th century inventor Carlo Ponzi, is a form of pyramid scheme. Basically it involves selling a nearly worthless security to a small group of investors, with the promise of great returns if they promote the security to more investors, and so on, ideally, forever. Like any pyramid scheme or chain letter, of course, it eventually collapses when it runs out of suckers. The first ones in get rich, and the last ones in (much greater in number) get shafted.

As we all know, the stock market is focused on the short term, and fluctuates wildly in response to a single quarter's earnings, external economic events, even rumour. If you look at it holistically and long-term, however, it has all the markings of a century-long Ponzi scheme, the most lucrative, and potentially most devastating, in history.

Let's take a look at the US S&P 500 as a surrogate for the entire stock market, the entire market for equity securities of listed public corporations. The index goes back to 1917, but was revamped in the 1940s and recalibrated so that the index for the average of 1941-43 was 10. It slowly rose to 100 over the next 50 years, and then to 1000 over the next 12 years.

This broad index earned, in 2003, about $55 per average share of the component securities, using GAAP (generally accepted accounting principles). So at its current level of about 1100, it has a P/E (price-to-earnings) ratio of about 20. That means investors are willing to pay $1100 now for a share that will theoretically 'pay back' $55 next year, and hopefully successively more in future years, to justify the 'present value' of $1100. To think of in another way, it's like a bank charging you $55 this year, $65, say, next year, and so on for at least 50 years, as 'interest' on a loan of $1100. The 5% interest in the first year isn't very attractive for such a risky 'loan', but since future 'interest' will be dependent on (hopefully rising) earnings, there is the prospect of a very lucrative return eventually.

So the S&P 500, like all equities, is said to 'discount expected future cash flows'. A general rule of thumb says that the P/E ratio approximates the annual expected growth in earnings, so that means the investor in the market is expecting earnings to grow by close to 20% each year, essentially forever. How is that possible? Well, it isn't. Earnings grow because (a) prices increase, (b) costs decrease, and/or (c) volume increases. In a 'free' market economy, prices are determined (theoretically, now) by competition -- new competitors will enter the market, and/or existing competitors will adjust their prices, to the point that their return on invested capital is just high enough to justify the investment risk. That level, in a low-inflation economy where the alternative 'risk-free' investment in GICs and bonds is only 2%, is roughly a modest 7%, with the extra 5% compensating the investor for the risk implicit in equities. And, in the long run, volume can't increase -- there's only so much market for anything, and once it's saturated, earnings should therefore level off at a flat rate.

Let's suppose we've more or less reached that state now. Let's also set aside the fact that the $55 earned last year by the average share is likely considerably inflated -- there are undoubtedly some more undetected Enron-type exaggerations out there in some of these 500 companies, and GAAP allows capitalization of stock options and other near-fraudulent practices that significantly overstate 'true' earnings. Is the $55 a fair return on investment in these companies? To answer that question we need to calculate what the investment is. According to the S&P, this $55 represents a 17% return on investment. In other words, the net assets or 'book' value of the average share is $55/17% or about $325. We already indicated that a reasonable return, given the risk, was 7%, which on $325 would be about $22 per share.

Why are stocks earnings $55 per share when in a 'free' market they should only be earning $22? To answer this we need to look at the three components that make up ROI (or more correctly, return on equity -- ROE). These three components are: Margin (profit/sales), Turnover (sales/assets), and Leverage (assets/equity).

Leverage can be inflated by excessive borrowing, which companies can get away with in times of low interest, but which boomerang when interest rates spike. Leverage can also be inflated by stock buy-backs, where the company essentially uses excess cash flow to buy back its own stock and hence increase the value per share of the remaining stock -- but this is a form of cannibalization, and leads to the same imbalance between debt and equity. Neither is sustainable. Turnover can be increased by lowering inventories, factoring and off-balance-sheet financing, but ultimately tops out -- you need to have a certain amount of money tied up one way or another in assets to be able to run an effective business. So you're left with Margin, which ultimately is the only explanation for the enormous ROE of $55/share, when in a free competitive market someone should be willing to accept $22/share.

The truth is that the market, and big corporations, are far from efficient. Many industries are heavily subsidized by governments to the tune of billions of dollars in kickbacks -- er, I mean, support payments -- per year. Big corporations also work as oligopolies to prevent smaller companies from entering their markets and charging more reasonable prices for their products. We, the consumers, are in fact paying $55 for goods and services that could be sold for $22 and would still provide the corporations with a very reasonable return. If and when government subsidies end, oligopolies are broken up, and the market for goods and services truly becomes free and open, the S&P 500 should then generate $22/share each year, a 7% ROE, still an attractive return in a low-inflation economy.

So we have a number of factors at work, conspiring to drive up stock prices in the unsustainable illusion that double-digit growth can and will continue forever, or at least until we're dead and it isn't our problem anymore. We have big corporations earning exorbitant returns, two and one half times a reasonable level given the risk, paid for by the taxpayer and consumer (the same people who then take what's left of their meagre paychecks and invest it, with insane trust in the brokers' unsustainable recommendations, in the stock market). And we have a P/E ratio that is already assuming that these wildly inflated, taxpayer subsidized, price-gouging levels of profit will continue to rise even further, at close to 20% per year, forever. Voilà, Ponzi scheme, par excellence.

Let's do the math. Take the $22 per share that big corporations should be earning per share in a properly regulated and open market. Acknowledge that the assumption that these earnings are going to grow in the future, when markets are saturated, consumers, corporations and governments are already buckling under grotesque and unprecedented debt loads and cannot afford to buy or pay more than they already are. Discount that annual stream of $22 of earnings for 50 years at a reasonable 7% discount rate. Know what you get for the fair value of the S&P 500 with these calculations? About 300. That is what, when you strip out the growth hype, the subsidies, the price-gouging, and the unsupportable P/E valuation, the S&P 500 should be trading at. Not 1100.

Eventually the Ponzi scheme will collapse. There may yet be time to con yet more foolish investors into believing that it will rise from 1100 to 1500 to 2000 or 5000 or higher, and if investors can be duped into believing that's what shares are worth, that's what they'll trade at. This scheme has been running for a century, and made many people millionnaires. But eventually we, or our children or grandchildren, will realize that the S&P 500 should be at 300, and since stocks always trade at what people think they're worth, that's where the S&P 500 will end up. The millions left holding the bag will lose most of their life savings, their pensions, everything.

(Oh, and if you change the assumptions about inflation and interest rates, the above valuation doesn't change. Future values and discount rates both go up proportionally, so the inflation-adjusted present value stays the same.)

Even the brokers can see the writing on the wall. They will now try to convince you that by wise investing you can 'outperform the market' by buying low and selling high, even if the market is ultimately doomed to do no better than go sideways. This is another great variant on a Ponzi scheme. It's the stuff that has hooked the new breed of gambling addicts called 'day traders'. For every investor whose holdings 'outperform the market' there will be, of course, at least one loser. But the magic of Ponzi is that it's always the other guy, the next guy, the not smart enough guy, who will get burned. You'd be better to play slot machines or buy lottery tickets -- at least the potential payout isn't overstated by 250%.

In addition to the perpetual-growth Ponzi scheme, and the 'outperform the market' con, brokers also make scads of money from IPOs -- initial public offerings. As James Surowiecki has elegantly pointed out, the IPO is a scam by which an aptly-named 'syndicate' of investment firms ('underwriters') buy a mass of shares from the company 'going public', at about half the price per share they know they can flog them to gullible investors, many of whom rely on these very brokers for investment advice. They then dump their shares on these investors, knowing that the price will promptly drop back close to the IPO price. The underwriting brokers get rich, and the unsuspecting customers get burned.

That's the reason Surowiecki and others, most recently Lawrence Fisher in yesterday's excellent analysis over at our mother ship Salon.com, have urged Google, potentially the most lucrative IPO of all time, to screw the brokers and either sell all the shares directly to the public by auction, or, even better, not to go public at all, and save the delirious investors the grief they will suffer when they find out Google has no direct line to God, and hence isn't worth a million dollars a share.

Eventually we, or our descendents, will learn (or have no choice but) to 'just say no' to dysfunctional stock markets and all the evils they breed. Until then, we'll continue to be addicted to short-term thinking, the illusion of perpetual growth, paying too much for everything we buy, subsidizing public companies with our taxpayer dollars, downsizing and outsourcing and offshoring as 'productivity enhancement', and putting up with the atrocious greed, corruption and devastation of insatiable global corporations that pull the strings of politicians like puppeteers, all in the name of 'maximizing shareholder value'.

It's addictive gambling with a staggering cost, it's insane, and it's fraud.

Financial crisis It's a pyramid, stupid. The Largest Heist in History

If you are new to this blog, you are invited to read first "The Largest Heist in History" which was accepted as evidence and published by the British Parliament Treasury Select Committee.

"It is typically characterised by strong, compelling, logic. I loosely use the term 'pyramid selling' to describe the activities of the City but you explain in crystal clear terms why this is so." commented Dr Vincent Cable MP to the author.

"Building the Great Pyramid: The Global Financial Crisis Explained is an excellent article – I really enjoyed reading it." Mr Rajat Bhatia, author of "Financial Chernobyl or Manageable Risk?", The Hedgefund Journal, September 2007

"I agree with you 100% that it was a Ponzi scheme. The reasons it went on for so long and got so large were the complete corruption of all stop-gaps and regulating mechanisms we had counted on to keep money inflation and leverage in sustainable bands." - Mr Stephan Olajide-Huesler author of "The Eye of the Storm: How Modern Finance, Monetary Policy and Reaganomics created the largest Financial Crisis in history."

Monday, 13 April 2009

The Largest Heist in History

October - December 2008


Building the Great Pyramid: The Global Financial Crisis Explained

This article was accepted as evidence and published by the British Parliament Treasury Select Committee, page 90.

When the financial crisis erupted at the end of September 2008, there was an unusual sense of incredible panic among banking executives and government officials. These two establishment groups are known for their conservative, understated approach and, above all, their stiff upper lip. Yet at the time they appeared to the public running about like headless chickens. It was chaos. A state of complete chaos. Within a few weeks, however, decisions were made and everything seemed to returned to normal and back under control. The British Prime Minister Gordon Brown even famously remarked that the government "saved the world."

But what really caused such an incredible panic in the establishment well known for its resilience? Maybe there are root causes that were not examined publicly and the government actions are nothing more than a temporary reprieve and a cover-up? Throwing good money after bad money, maybe?

Money Making Machine

In order to answer these questions we have to examine the basic principles on which the banking system operates and the mechanisms that caused the current crisis. Students at the A-level are taught about "multiple deposit creation," It is the most rudimentary money creation mechanism for banks, which if administered properly serves the economy and public at-large very well. In the deposit creation process a bank accepts deposits and lends them out. But almost every lending returns soon to the bank as a deposit and is lent again. In essence, when people borrow money they do not keep it at home as cash, but spend it, so this money finds its way back to a bank quite quickly. It is not necessarily the same bank, but as the number of banks is limited (indeed very small) and there is - or was - a very active interbank lending. In terms of deposit creation the system works like one large bank.

Therefore, the same money is re-lent over and over again. If all depositors of all banks turned up at the same time there would not be enough cash to pay them out. However, such a situation is highly unlikely. Every borrower repays his loan and pays interest on it. In principle, the difference between a loan and a deposit interest rate is a source of the banks' profit. Naturally, banks have to account for some creditors that will default and reflect it in the lending interest rate, or all the creditors who repay cover the costs of defaults. On top of it, the banks possess their own capital to provide security.

Fundamental to this deposit creation principle is the percentage of deposits that a bank lends out. The description above used a 100% loan-deposit ratio, meaning that all deposits are lent out. In traditional banking this ratio was always below 100%. For example, years ago, Westminster Bank (before it merged into National Westminster Bank), intended to lend out 86.5% of every deposit. For every £100 deposited, the bank lent out £86.5, while the remaining £13.50 was retained in the banks reserve with a small portion of it kept in the Bank of England. In practice, this ratio was the bank's control tool on deposit creation process, ensuring that the amount of money supplied to the market was limited. According to this principle, for every £1 deposited, a bank lends out £0.865. After only 5 cycles the amount is reduced to below £0.50 and after 32 cycles it is below 1 penny. If this process continued forever the total amount of money lent out of a pound would be less than £6.41. With every cycle of deposit creation, a bank built up its reserves, ultimately collecting almost entire £1 for every £1 initial deposit. Added to capital repayments, interest payments on loans and the bank's own capital base this system ensured that that there was always enough money in the bank for every depositor. For years banks worked as a confidence trick – the notional value of deposits and liabilities to be paid by the bank exceeded the value of money on the market. Since only a very small number of depositors demand cash withdrawals at the same time and almost all these paid-out deposits are deposited in a bank again quickly the banks ensured that every depositor got his money while circulating money in the economy and stimulating growth. The loan-deposit ratio was a self-regulating tool. As with every cycle it multiplies, the reduction of amounts created decreases exponentially and quickly. The faster the deposit creation cycles occur the faster the reduction progresses, thus accelerating with every cycle. The total "created" from the original £1 deposited in a bank is a finite, not more than £6.41 at the 86.5% loan-deposit ratio, backed by nearly £1 reserve. It is an inverted pyramid scheme starting from a fixed initial deposit base and quickly reducing through deposit creation cycle to zero.

Building a Pyramid

In a City bar back in 1998, an academic was discussing modern banking with his City colleagues from university. He was encouraged to invest in shares as their growth was well above inflation. He pointed out, however, that the inflation index does not take into account the growth of share price and as a consequence the market will run out of cash to pay for shares at some point. The only way would be down-a shares price crash. His City colleagues argued that there would be additional money coming in from different economies preventing a crash (a pretty thin argument in the world of global banking as foreign investors were already market players.) They also argued that the modern financial instruments allowed "securitisation", "hedging" the risk and "leveraging" the original investment. Indeed it was a killer argument.

The deposit creation process is at the heart of the banking system servicing the public and stimulating economic growth. The modern banking instruments of securitisation, hedging, leveraging, derivatives and so on turned this process on its head. They enabled banks to lend more out than they took in deposits. According to Morgan Stanley Research, in 2007 UK banks loan-deposit ratio was 137%. In other words the banks were lending out on average £137.00 for every £100 paid in as a deposit. Another conservative estimate shows that this indicator for major UK banks was at least 174%. For others like Northern Rock it was a massive 322%. [For more details, refer to Table A.] Banks were "borrowing on the international markets" and lending money they did not have but assuming to have in the future. Likewise, "international markets" were doing exactly the same. At first sight it might not seem so much different than deposit creation. Deposit creation is lending money by the banks they do not have on the assumption that they will get enough back in sufficient time in the future from borrowers.

On closer examination there is a remarkable difference. With every cycle of the 86.5% loan-deposit ratio every £1 deposited is reduced becoming less than £0.50 after 5 cycles and less than 1 penny after 32. With a loan-deposit ratio of 137% - lending £137 for every £100 - not to mention 174% or indeed 322%, the story is drastically the opposite. Imagine a banker gets the first £1 deposit in the first week of a new year and lends it out. Imagine that twice every week in that year the amount lent out comes back to him as a deposit and he sustains such deposit creation process with a ratio of 137% twice every week for the year. This is a perfectly plausible scenario on the current electronic financial markets. By the following New Year's Eve, the final amount he finally lends out from the original £1 is over £165 trillion (165 with 12 zeros, or over 16 times the amount governments have so far injected into economy). The total amount lent out in a year by a banker is over £447 trillion. Significantly with a loan-deposit ratio 100% or above no reserve is created.

It is an acknowledged monetary principle that the lending interest rate cannot be below 0%. This would allow borrowers to borrow money and banks would keep paying them for doing so. Indeed, there would be no incentive to lend and borrowing would have become a source of income for a borrower. Ultimately, lending would have stopped completely. It is a very similar principle that the loan-deposit ratio cannot be 100% or above, as in such circumstances, an amount of money coming from economic activities into deposit creation cycle would be multiplied very rapidly to infinity. Economic growth and inflation would not be able to catch up with it, which happens if loan-deposit ratio is below 100%.

The loan-deposit ratio below 100% that traditionally served as a very strict self-regulating mechanism of money supply stimulating the economy becomes a killer above 100%. The banking system becomes a classic example of a massive pyramid scheme. But as with every pyramid scheme, as long as people and institutions are happy not to demand cash withdrawals from the banks it is sustainable. Any bank can always print an impressive account statement or issue a new deposit certificate. The problem is whether the cash is there.

The qualitative and quantitative difference between loan-deposit ratio of 0% and 99% is infinitely smaller than between 99% and 100% or 101%. With ratios between 0% and 99%, we always end up with a money-making machine that creates a finite amount of money out of the initial deposit with a reserve nearly equal to the original deposit. If a ratio climbs to 100% or above the amount of money created spirals to infinity, if above 100% with exponential speed and no reserve is generated in this process. It is little wonder that Northern Rock which used the ratio of not less 322% collapsed first well ahead of others, HBOS with a ratio of around 175% ended up in a meltdown scenario later, while HSBC that used the ratio of not more than 91% was relatively safe (being a part of the global banking system, however, it has been at a risk stemming from the actions of other banks). [For more details, refer to Table A.]

Facing the Inevitable

For years the impressive-looking banks results brought a lot of confidence and the City was hailed as a beacon of the British economy. Bank executives, traders and financiers collected huge bonuses - not surprisingly, a lot of it in cash, rather than financial instruments. Influential economists and politicians alike justified stratospheric bonuses and hailed the City as the workhorse of the economy. Government strategic decisions were quite often subordinate to the objective of keeping the City strong. Irrational exuberance triumphed. Ultimately, City executives, traders and financiers proved to be pyramid purveyors not any more sophisticated (although perhaps better mannered) than their Albanian gangster counterparts who carried out a similar scheme 1996-97.

As with any pyramid scheme (and as long as there is still cash in the scheme) the beneficiaries are the operators of the scheme and "customers" who know when to get out of it. During the hectic dawn of the current financial crisis it is very likely that bank executives realised that it was the time that their pyramid started collapsing. This easily explains why banks stopped trusting one another and interbank lending collapsed. It was impossible to predict which node (financial institution) of a pyramid scheme would collapse next. There was a very distinct risk that if a bank lent money to another, the next day the bank-borrower may be bust and the money would be gone.

The collapse process, always an instant one, is accelerated by a dramatic loss of confidence amongst the pyramid customers. Once a single customer cannot withdraw his deposit, a great number of others start demanding payouts. City executives must have known this mechanism and explained to the government officials that unless the state shifts its weight injecting cash, guaranteeing deposits and lending, the system was bound to collapse. The Northern Rock case was a good dry run that pyramid purveyors gave government officials in September 2007. Facing a complete meltdown and an "Albanian scenario" the government acquiesced to the bankers' demands by injecting cash on an unprecedented scale and giving wide guarantees.

The Route to Recovery

This is only the beginning of the story. According to some estimates there are around $2 quadrillion worth of financial instruments (like securities) that cannot be redeemed due to the lack of cash in the system - so-called toxic waste. These instruments are in the financial system and there are prospective beneficiaries of these instruments when they are redeemed, however. Furthermore they appreciate in value and attract interest so their notional value continues increasing over time. Governments around the world injected cash into the global banking system to a tune of around $10 trillion, or 200 times less than $2 quadrillion. At the same time they allowed bank executives and financiers who organised this pyramid scheme to remain at their posts to manage the injected money. Governments became the ultimate customers of pyramid purveyors with the hope that when they offer their custom it would somehow stop the giant pyramid scheme from collapsing. This is extremely naïve and very dangerous. The incredibly fast growth to infinity of pyramid schemes, which is only accelerating, will ensure that the government will not stand a chance to sustain it, unless this massive pyramid scheme is brought to a halt and liquidated. But there is no sign of governments contemplating doing that yet.

If governments do not liquidate the global pyramid scheme, the money they injected will be, in time, converted into toxic instruments (e.g. securities) and cashed in by organisers and privileged customers of these schemes (or in the case of Albania, gangsters and their customer friends). As the amount injected is around 200 times less than the notional value of toxic instruments, the economy will not even see a difference. It will be a step back to September 2008, only now with trillions of dollars of taxpayers' money spent to sustain the pyramid scheme. It will be merely throwing good money after bad. But can governments afford to come up again with the same amount money and do it 200 times over or more? This is based on a very optimistic assumption that the notional value of toxic instruments is not increasing. If governments take the route of continuing to inject money, they will make taxpayers dependant on the financial system in the same way that criminal loan sharks control their customers - their debt is ever increasing and customers keep on paying forever as much as it is possible to extract from them.

In a normal free market economy a business that fails should be allowed to collapse. If a business is a giant pyramid scheme, like the current financial system, it must be allowed to collapse and its executives and operators should face prosecution. After all running pyramid schemes is illegal. Letting the banks collapse would have been a far more commercially sound solution than the current approach, provided the governments would have secured and guaranteed socially vital interests directly. For example, individual deposits would be guaranteed if a bank collapsed. Deposit accounts records, along with mortgage and genuine business accounts, would be moved to a specially created agency of the Bank of England which would honour them with government help. If a pension fund collapsed due to a bank collapse, individual pensioners would continue receiving their unchanged pensions from the social security system. This would guarantee social stability and a normal flow of cash into the economy.

The hard part would be to liquidate financial institutions while sifting through their toxic waste and to distinguish genuine non-toxic instruments and the results of pyramid scheme operation. Deposits, mortgages and business accounts are clearly non-toxic in principle. However, in the modern banking they were mixed with potentially toxic assets. This would be a gargantuan task.

The current "quantitative easing" (printing cash) is an attempt to convert more toxic instruments, like securities, into cash, albeit at some inflationary costs, and make them state-guaranteed, as cash is guaranteed by the state. It is just another trick of the financial pyramid purveyors to extract even more cash from taxpayers through the governments on the back of the scheme. Looking back to the 1990s, Albanian gangsters must feel really crossed considering that they were not offered such a "rescue" package first by Albanian government, and then by the World Bank and International Monetary Fund.

Unless and until the governments identify, isolate and write off toxic instruments held by financial institutions every pound put into "rescue" is very likely to end up being good money thrown after bad. (The governments, as ultimate customers of the global pyramid scheme, are supplying the pyramid purveyors and beneficiaries with tax payers' cash and the largest heist in history continues.) Alongside the liquidation process, but after the toxic waste has been isolated and fenced off in failed financial institutions, governments must launch a fiscal stimulus package and go after the pyramid purveyors and beneficiaries to recover any cash and assets from them and bring them to justice. As the financial pyramid scheme is global, any action - including the recovery cash and assets - must be global, too. It is intriguing that banks in traditional offshore financial centres like Belize, US Virgin Islands, Bermuda, do not appear to suffer from liquidity problems. They do not require rescue packages even though a lot of them are subsidiaries of much larger banks which are affected by the current crisis. Is it a sheer coincidence that, for example, the loan-deposit ratio at US Virgin Islands banks is at a very prudent 42%? Little doubt there is a lot of cash there not created in those little economies. Mr John McDonnell MP [Member of Parliament in the UK] wrote in The Guardian on 20 February 2008:

"One series of offshore trusts associated with Northern Rock were called Granite (presumably a witty pun on the Rock bank). Granite holds approximately 40% of Northern Rock's assets, around £40bn. Yesterday, the Treasury minister told the house that "Granite is and has always been a separate legal entity".

Let's look at that: Northern Rock does not own Granite, that's true. It is however, wholly responsible for it: it's officially "on" its balance sheet in its accounts. But it is legally "off" its balance sheet when it comes to getting hold of its assets as the basis for the security of the sums owed the Treasury.

Granite is based in Jersey, an offshore tax haven where Northern Rock's best assets sit outside the reach of taxpayers. So the bill to nationalise Northern Rock will, in fact, be nationalising only dodgy debt, which will increase the burden on the taxpayer and put at risk the jobs of Northern Rock workers. The sad truth is that by failing to regulate the financial sector adequately, the government has been hoist by its own neoliberal petard. The participants in this tax dodge will be allowed to walk away with millions, when workers may lose their jobs and the taxpayer risk billions."

Epilogue

Some economists see overvaluation of financial instruments as the root cause of the current financial crisis. Overvaluation was not a necessary factor, but only a contributory and accelerating factor that worsened the crisis. The crux of the matter is that financial institutions have considered financial instruments, like securities, as good as cash and added them as cash in the deposit creation cycles at a rate that brought the loan-deposit ratio to 100% or above. Without non-cash financial instruments considered as cash it is impossible to go above 100% in a deposit creation cycle. And it does not matter if these instruments were given proper risk characteristics individually discounting their notional, face value. As long as with any residual value, they have been added in deposit creation process to an extent that its ratio was 100% or above, the disaster was only a matter of time. Because of exponential character of the creation it was a matter of a short time.

Loan-deposit ratio above 100% is like (untreated) AIDS. As it progresses it weakens the immune system of economy that safeguards against adverse events: natural disasters, wars, etc or sometimes unpredictable mood swings of market players. The current crisis was triggered by the collapse of subprime mortgage market (effectively overvaluation of assets). This time the system, for years having had been weakened by loan-deposit ratio above 100%, also collapsed altogether. It was a giant pyramid and it was bound to crumble anyway (for whatever direct cause). It was like a human suffering from AIDS whose death was not caused by AIDS directly, but by pneumonia, flu, infection, etc. However it is AIDS that made the curable illnesses lethal.

Until recently the world enjoyed a sustained period of high growth and low inflation and the fact that it came to such an abrupt end does not come as a surprise. It was in the very nature of the pyramid scheme mechanism. The deposit creation process with a ratio above 100% guaranteed impressive-looking economic growth figures. At the same time there were no extra cash hitting Main Street, as there was no extra cash printed. In this context, the high growth of property prices is no surprise. In their huge majority and extent, these are, in practice, cashless interbank transactions. The world stayed oblivious in this economic miracle like customers of a pyramid scheme being happy with the figures on their statements until they wanted to withdraw money. But like with any pyramid scheme, the financial system ran out of cash, with the outcome of a lack of liquidity, not high inflation.


TABLE A

UK BANKS
[source: httpnews.bbc.co.uk/today/hi/today/newsid_7648000/7648508.stm, httpwww.timesonline.co.uk/tol/money/property_and_mortgages/article5106455.ece]

BANK LOAN/DEPOSIT RATIOS MARKET SHARE
HSBC 90% 2.8%
RBS 112.3% 6.2%
Barclays 123.45% 6.3%
Lloyds TSB 140.84% 8.1%
Alliance & Leicester 172.41% 3.6%
Bradford & Bingley 172.41% 3.9%
HBOS 175.43% 20.1%
Northern Rock 322.58% 8.1%

Weighted average LOAN/DEPOSIT RATIO = 174.26%

Additional information:

- the RBS position includes ABN AMRO – without it RBS position was around 135% [source: MS Research/Howard Davies Presentation - httpwww.lse.ac.uk/collections/meetthedirector/pdf/Banking%20and%20the%20State%2002.10.08.pdf]

- Abbey position after acquisition of Bradford & Bingley was 75% [source: httpwww.santander.com/csgs/StaticBS?blobcol=urldata&blobheader=application%2Fpdf&blobkey=id&blobtable=MungoBlobs&blobwhere=1205449310144&cachecontrol=immediate&ssbinary=true&maxage=36000]

TABLE B

[source: MS Research/Howard Davies Presentation - httpwww.lse.ac.uk/collections/meetthedirector/pdf/Banking%20and%20the%20State%2002.10.08.pdf]

COUNTRIES/REGIONS LOAN/DEPOSIT RATIOS
UK 137%
Germany 121%
USA 105%
France + Benelux 103%
UK + Asia 89%

TABLE C

[source: Asian Banks? Is Credit Crunching Asia. - httpwww.fidelity.com.sg/pdf/volatility/FD%20-%20Asian%20Banks.pdf

Singapore, Taiwan, Philippines, Malaysia, India, India, Indonesia Thailand, China. Hong Kong had loan/deposit ratio between 80% - 60%, whilst South Korea had nearly 130%.

APPENDIX A

MECHANICS OF THE FINANCIAL CRISIS 2008 – 2009: WHY CAPITAL REQUIREMENTS DID NOT WORK

Below is a draft of explanation (in a rigorous way) why financial institutions, technically, complied with Basel 1 and/or Basel 2 of capital requirements (8%), yet they collapsed.

1. Definitions: CR(T) – total capital held (requirements by Basel @ minimum 8%); CR(I) – capital held in financial instruments (taking into account risk, i.e. discounting for it); CR(C) – capital held in cash; L/D – loan to deposit ratio.

2. CR(T) = CR(I) + CR(C); when L/D is above 100% then CR(C) portion of CR(T) tends to 0; this means that a ratio of cash reserves to balance sheets also goes to 0. It happens with exponential speed (i.e. this process constitutes a pyramid scheme). In practice, this means that in banks balance sheets growing at exponential rate (base above 1), there is less and less cash, i.e. cash reserve to balance sheet ratio also goes to 0 at exponential speed.

3. Initially in the first phase, this process sucks the cash out of reserves, CR(C), and replaces them with instruments (so-called assets) CR(I) as CR(T) has to be maintained. The initial gains and increase in values of assets CR(I) is achieved with additional liquidity on the market (at the costs of CR(C) depletion). This drives the price of assets that constitute CR(I) high.

4. The assets of CR(I) are valued using price-to-market method. This creates a lethal cycle: the higher assets of CR(I) go up, the more cash of CR(C) is sucked from bank reserves, which results in even higher assets of CR(I) valuation (in price-to-market model). This cycle has exponential growth of cash, CR(C), being sucked out of the banking system, therefore, by definition, it is a pyramid. This constitutes a period of exuberant growth. However it is a bogus growth: statistics are induced by incredibly fast growing balance sheets and consumer confidence is induced by temporary massive availability of cash (being sucked out from cash reserves, CR(C)).

5. Like in any pyramid, as long as there is still enough cash in the banking system to sustain high price to market CR(I), it allows financial institution to maintain the right level of capital requirement of CR(T), technically complying with Basel 1 and Basel 2. However the element of CR(C) of CR(T) becomes smaller and of CR(I) becomes larger. A ratio of cash to balance sheets gets smaller at exponential speed, i.e. it is a pyramid scheme.

6. Any pyramid scheme collapses when due to an exponential speed of growth of balance sheets, availability of cash becomes inadequate. This creates the second lethal cycle: due to shortage of cash confidence goes down, value of assets CR(I) valued at price to market goes down, this creates a necessity for bank to start withholding cash supply to make up for the fall of CR(I) with CR(C) to comply with CR(T), which leads to even greater lack of cash and further loss of confidence and so on. And the cycle becomes a meltdown.

7. With L/D ratio below 100% such cycles look completely different. For example if CR(T) is 8%, L/D ratio of 92%. Using financial instruments as part of capital requirement does not lead to an exponential growth of balance sheets but it is always limited by a final amount of money. In case of CR(T) 8% and L/D 92% the total money put in circulation from $1 is $12.5. (Unlike when L/D ratio is above 100% this becomes massive. Technically it can even go to infinity.) Therefore price to market method works as valuation method when L/D is below 100% as it reflects cash in circulation at all times, rather than inflated and continuously growing balance sheets when L/D ratio is above 100% (see paragraph 4 above). Interestingly HSBC kept L/D ratio at 90%, thereby assuring 10% CR(T) but importantly with L/D below 100%.

8. When L/D ratio is below 100% an economic crisis is a readjustment sometimes even caused by consumers' confidence. That is why in such situations consumers are encouraged to spend as the cash they hold rebalances back cash to balance sheets and CR(T) ratios to correct level.

9. When L/D ratio is above 100%, at a point of collapse consumers are very short of cash to spend and big debts, banks do not have money anymore to lend as any cash put in as deposits by the consumers (or injected by government) has to rebalance the balance sheets to get CR(T) to a right level. Due to a huge disparity this rebalancing process is ineffective and it is unrealistic to expect it to be effective. (Over $2 quadrillion of unbalanced balance sheets was thus far met to around 1%.)

10. Example: when L/D ratio is below 100%, price to market valuation of companies reflects their fair value. Normally if an investor wants to take over a company he has to pay a premium (as control has a value to an investor). When L/D ratio is above 100% after a point of collapse, even depressed price to market valuation of companies overall does not reflect a market value, but actually overvalues them. If an investor wants to take over a company for cash he is likely to negotiate a good discount (as the market is cash hungry).

11. One can generalise: when L/D is below 100% price-to-market valuation method reflects market liquidity with an element of confidence factored in it; when L/D is above 100% (or equal) price-to-market valuation method reflects misguided confidence in banks balance sheets until a collapse of this pyramid.

Summary:

1. The analysis above is not made with benefit of hindsight: anyone who understands basics of computational complexity (issues around Cobham's Thesis) would have done it 10 years ago. Therefore avoiding the exiting crisis was extremely trivial.

2. This analysis is deterministic and events are predictable. The exact point of collapse is not easily predictable, but since it is a pyramid scheme it is inevitable in short time. (I.e. it was as predictable as Albanian pyramid scheme collapse.) It appears to be a reason why lawmakers made it illegal.

3. It is clear that there was no failure in terms of law and regulations: Basel 1 and Basel 2 stipulate CR(T) at 8% and pyramid schemes, i.e. L/D ratios above 100%, are outlawed. The failure came from non-enforcement of existing law and regulations.

4. The rigorous mathematical proofs and quantitative analysis is available on request. You may also wish to look into a basic example how it all works.

Posted by Greg Pytel at 13:07

Labels: , ,

18 comments:

alex@tomorrowam said...
In essence you are right, but there's more to it. There are at least six factors that, in combination, explain where we are today:

1) Financial engineering created mechanisms to multiply money through pyramid lending, with all risk 'securitised'.

2) Trade imbalance between the US and China led to seemingly indefinite rises in Western asset prices, so providing a sustained atmosphere of confidence.

3) Reckless monetary policy kept interest rates too low throughout the decade so sustaining the trade imbalance and promoting further financial engineering as the only way to turn a profit.

4) There was inadequate financial regulation - Basel 1 and 2 may cover this in theory, but no-one was covering it in practice. So the regulators were blind.

5) A sharp correction pushed up defaults and so triggered the loss of confidence. This was probably the spike in oil and commodity prices.

6) The interconnectedness of the entire global financial system meant that when the wheels come off it was simply not possible to 'let it fail'.

A sorry tale.

17 April 2009 17:20
Greg Pytel said...
Alex, thanks. Please pass my blog address.

Spot on: I completely agree. But it is only as much as one can put on the blog. I will be addressing some of your points in the next few posts, but with regards to: "there's more to it", I encourage you to consider my assessment in my article:

"Loan-deposit ratio above 100% is like (untreated) AIDS. As it progresses it weakens the immune system of economy that safeguards against adverse events: natural disasters, wars, etc or sometimes unpredictable mood swings of market players. The current crisis was triggered by the collapse of subprime mortgage market (effectively overvaluation of assets). This time the system, for years having had been weakened by loan-deposit ratio above 100%, also collapsed altogether. It was a giant pyramid and it was bound to crumble anyway (for whatever direct cause). It was like a human suffering from AIDS whose death was not caused by AIDS directly, but by pneumonia, flu, infection, etc. However it is AIDS that made the curable illnesses lethal."

Well, when one dies of AIDS, "there's more to it": pneumonia, infection, flu, etc. The point I am making is that loan to deposit ratio above 100% turn the financial system into a pyramid scheme. By its very nature (an exponential growth of spread between banks' balance sheets and cash available) it is bound to collapse. The factors you listed are valid and important, but as my analysis showed they were contributory. In my view, in the presence of loan to deposit ratio above 100% they could have accelerated or delayed the collapse of the pyramid. But there was no way of preventing it. If not for the factors you listed, something else would have been an immediate trigger or exacerbating factor of the collapse process. It is like someone started riding the bike with constant acceleration (theoretically reaching infinite speed). When the rider falls of the bike you might look for immediate causes: oil spill, punctured tyre, debris on the track, etc. But the fact is that with a speed going possibly to infinity, the rider was also bound to fail anyway. It was only a matter of time. Such is the effect of loan to deposit ratio above 100% in the banking system.

Many thanks: your comment will keep me going with my work and help me greatly addressing details of the current mess.

17 April 2009 18:02
Pyramidswelling said...
Automaticaly Induced Debt Sindrome is the inevitable outcome of filling AAA's holes with seminal Strategicaly Hyped Investment Tranches

The Banking system perfectly mirrors the sexual practices condoned by populist pollytitians trying to make complete tutts out of themselves at unborn taxipayers expence

is_the_stock_market_a_ponzi_scheme

Dave Pollard has just made an excellent case explaining why the stock market is a Ponzi scheme. I agree with his thesis, but until the masses come to the same conclusion (which may already be happening) the scheme will be alive and well. I won't worry too much about the market falling apart though - when the trend turns down, I'll be long gone from the market. (That's what moving averages and other trend identification tools are for.) The folks who believe in 'buy and hold' are the ones who will be in the most trouble, not the (good) traders.

US economics One big Ponzi scheme - Opinion - Al Jazeera English

Thank you, Bernie, for breaking your silence - even if you are still clinging to that cover-up mode you adopted since you took the entirety of the blame for your crimes.

What is clear is that ripping off the rich is punished far more severely than ripping off the poor. The lengthy sentence you were given spared countless other greedsters and goniffs from facing the music - what music there is.

In an interview - with a reporter from The New York Times who is writing a book to cash in on a man who has already cashed out - we learn, in the vaguest terms, that Mr M believes the banks he did his crooked business with "should have known" his figures did not figure. Keeping with the deceit that has served him well over the years, he names no names.

That said, how right he may be. There were many who should have known and done something about it. The Securities and Exchange Commission (SEC) and other regulators for one. Perhaps The New York Times for another. Remember, it was Madoff's confession to his sons that started him on his way to his new 12' x 12' home from home - in a federal correctional institute, where he may dream of his seized penthouse, homes and yachts - rather than any press expose.

For years, he went undetected by business journalists, who knew - or should have known - what he was up to. There are even questions about the speed with which he was sentenced, preventing him from being tried - a process which, through diligent cross-examination, would have brought us more information on the details of his dirty deals.

Do not believe all you read

Even The New York Times interview is being disputed, reports the New York Post: "The trustee representing thousands of Bernard Madoff's victims disputed a report that he personally grilled the Ponzi monster in prison."

"There has been no direct communication between them," said David Sheehan, the chief counsel for the court-appointed trustee, Irving Picard, after The New York Times reported that Picard and Madoff had met over the summer.

"The Times later changed a quote from Madoff and altered some text online that had implied Picard personally visited Bernie in the Butner, NC, lockup where he is serving a 150-year sentence. Picard did not dispute that his legal team met with Madoff."

Madoff is also still not coming clean about the web of alliances he had internationally, as well as in New York. We live in a global economy after all. We now know of Swiss and Austrian connections - but what about Israel, where this ingratiating handler was well known for his connections with Jewish philanthropists and institutions? So far, that story has yet to be told.

At the same time, the people investigating Madoff are making a small fortune. According to the Financial Times: "The army of lawyers and consultants helping to recover funds from Bernard Madoff's $19.6bn fraud stand to earn more than $1.3bn in fees, according to new figures that detail the cost of liquidating the huge Ponzi scheme."

The comments of readers to The Times appear to be more insightful than the paper's own reports. Here is one from Texas: "I actually, sort of, feel sorry for this man. He was just doing what many investment firms were doing at the same time. He has been imprisoned as a scapegoat - yet many people since then - and to this day - are doing the same thing. Where are the indictments against the thousands of other people who did the same thing - and knowingly led this country into financial disaster?"

Banks close ranks

The best reporting on this subject is not in the mainstream press but in a music magazine, Rolling Stone, where Matt Taibbi investigates why the whole of Wall Street is not in jail: "Financial crooks brought down the world's economy - but the feds are doing more to protect them than to prosecute them," he charges.

Madoff also believes the banks who serviced him did not want to know about his Ponzi scheme which, unfortunately, is probably true - and an attitude coming not just from the banks.

The Times report added: "He spoke with great intensity and fluency about his dealings with various banks and hedge funds, pointing to their 'willful blindness' and their failure to examine discrepancies between his regulatory filings and other information available to them.

"'They had to know,' Mr Madoff said. 'But the attitude was sort of: "If you're doing something wrong, we don't want to know."'"

Yves Smith of NakedCapitalism.com quips: "This sounds credible - but it also seems more than a tad self-serving."

Andrew Leonard asks in Salon: "Should we trust him? After all, if there is one thing we know about Bernie Madoff, it is that he is one hell of a liar. But as evidence emerges that bank executives were exchanging emails wondering about Madoff's amazing investment record, the possibility that the banks were purposefully looking the other way is not inconceivable."

The truth is that many of us still do not really want to know - because, if we did, we would have to do something about it.

By their actions, both Democrats and Republicans clearly appear to prefer the most simplistic understandings - or misunderstandings.

The Financial Crisis Inquiry Commission (FCIC), like the 9/11 and Warren Commissions before it, avoided key issues. The FCIC inquiry did not call for a criminal indictment of wrongdoers. While informative, its report was ultimately a dud - telling us mostly what we knew, although there were some disclosures that our tepid press still missed.

Now the Republicans want to water down the regulations on derivatives in the Dodd-Frank financial 'reform' legislation, claiming they will lead to a loss of jobs. This is predictable: Every effort to defend big business is always couched in terms of helping the public.

The New York Times reported: "Representative Stephen Lynch, Democrat of Massachusetts, warned: 'You think regulation is costly? How about the $7trillion we just lost from not regulating the derivatives markets?'"

There was no response from his colleagues.

So who will do anything about it?

The political right prefers to change the subject, while the left does not seem to have the time or energy to make economic justice its principal concern - even as polls show the economy is the number one problem for most in the US.

Progressives should hang their heads in shame at the minimal amount of activism taking place against the banks and the escalating numbers of foreclosures. Homes and hope are being stolen from people for whom the term "depression" now has a personal, as well as economic, meaning.

The other day, economist Jeff Sachs - who has a lot of atoning to do for his own misguided, destructive economic advice to Russia after the fall of the Soviet Union - warned that little is being done about economic inequity and the growing ranks of the poor in the US. He asks if people who run things in the US want "another Egypt". He is a policy wonk, not an activist - and likely fears the idea.

Many activists say they want to emulate the Egyptians, but who will organise anything as effective - even in a land that used to be known for people's movements - to raise hell? In Egypt, young people used the internet to organise and mobilise for change. In the US, the internet seems to function more as an escape valve, consuming hours of our time and giving us another way to talk to each other - and ventilate against the government. Social media here seems to be more for socialising.

The government supports internet freedom abroad - but restricts it and spies on it at home. Obama has already supported a law allowing him to shut it down here in a national emergency.

The passivity of the public is one result of the inundation by middle-of-the-road media and effective information deprivation.

As Noam Chomsky puts it:

"The population in the United States is angry, frustrated and full of fear and irrational hatreds. And the folks not far from you on Wall Street are just doing fine. They're the ones who created the current crisis. They're the ones who were called upon to deal with it. They're coming out stronger and richer than ever. But everything's fine - as long as the population is passive."

That is our problem, Bernie. Even if the people want to know, it is not that easy to find out. Let us thank the media and our government for that.

News dissector Danny Schechter edits Mediachannel.org. His new film, Plunder: The Crime of Our Time, tells the story of the financial crisis as a criminal tale. He can be reached at: dissector@mediachannel.org

The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera's editorial policy.

Guest Post The Age of Mammon zero hedge

The Age of Mammon

Submitted by Jim Quinn of The Burning Platform

"Financiers – like bank robbers – do not create wealth. They merely distribute it. While the mob may idolize holdup men in good times, in the bad times it lynches them. What they will do to the new money men when their blood is up, we wait eagerly to find out." - Mobs, Messiahs and Markets

As our economy hurtles towards its meeting with destiny, the political class seeks to assign blame on their enemies for this Greater Depression. The Republicans would like you to believe that Bill Clinton, Robert Rubin, Chris Dodd, and Barney Frank and their Community Reinvest Act caused the collapse of our financial system. Democrats want you to believe that George Bush and his band of unregulated free market capitalists created a financial disaster of epic proportions. The truth is that America has been captured by a financial class that makes no distinction between parties. These barbarians have sucked the life out of a once productive nation by raping and pillaging with impunity while enriching only them. They live in 20,000 square foot $10 million mansions in Greenwich, CT and in $3 million dollar penthouses on Central Park West.

These are the robber barons that represent the Age of Mammon. The greed, avarice, gluttony and acute materialism of these American traitors has not been seen in this country since the 1920′s. The hedge fund managers and Wall Street bank executives that occupy the mansions and penthouses evidently don't find much time to read the bible in their downtime from raping and pillaging the wealth of the middle class. There are cocktail parties and $5,000 a plate political "fundraisers" to attend. You can't be cheap when buying off your protection in Washington DC.

Lay not up for yourselves treasures upon earth, where moth and rust doth corrupt, and where thieves break through and steal: But lay up for yourselves treasures in heaven, where neither moth nor rust doth corrupt, and where thieves do not break through nor steal: For where your treasure is, there will your heart be also. No one can serve two masters, for either he will hate the one and love the other; or else he will be devoted to one and despise the other. You cannot serve both God and Mammon. – Matthew 6:19-21,24

It seems that Lloyd Blankfein, the CEO of Goldman Sachs, may have been overstating the case in saying his firm doing God's work. With his $67.9 million compensation in 2007 and payment of $20.2 billion to his co-conspirators, Blankfein appears to be a proverbial camel trying to pass through the eye of a needle. This compensation was paid in the year before the financial collapse brought on by the criminal actions of Lloyd and his fellow henchmen. After having his firm bailed out by the American middle class taxpayer at the behest of his fellow Goldman alumni Hank Paulson, Lloyd practiced his version of austerity by cutting compensation for his flock to only $16.2 billion ($500,000 per employee) in 2009. I'm all for people making as much money as they can for doing a good job. But, I ask you – What benefits have Goldman Sachs, the other Wall Street banks, and hedge funds provided for America?

Never have so few, done so little, and made so much, while screwing so many.

In 2005, the top 25 hedge fund managers "earned" $9 billion, or an average of $360 million. One year after a financial collapse caused by the financial innovations peddled by Wall Street, the top 25 hedge fund managers paid themselves $25 billion, or an average of $1 billion a piece. For some perspective, there were 7 million unemployed Americans in 2006. Today there are 14.6 million unemployed Americans. While the country plunges deeper into Depression, the barbarians pick up the pace of their plundering and looting of the remaining wealth of the nation. Bill Bonner and Lila Rajiva pointed out a basic truth in 2007, before the financial collapse.

"On the Forbes list of rich people, you will find hedge fund managers in droves, but no one who made his money as a hedge fund client." - Mobs, Messiahs and Markets

Ask the clients of Bernie Madoff how they are doing.

1920′s Redux The parallels between the period leading up to the Great Depression and our current situation leading to a Greater Depression are revealing. When you examine the facts without looking through the prism of party politics it becomes clear that when the wealth and power of the country are overly concentrated in the clutches of the top 1% wealthiest Americans, financial collapse and depression follow. This concentration of income and wealth did not cause the Stock Market Crash of 1929 or the financial system implosion in 2008, but they were a symptom of a sick system of warped incentives. The top 1% of income earners were raking in 24% of all the income in America in 1928. After World War II until 1980, the top 1% of income earners consistently took home between 9% and 11% of all income in the country. During the 1950′s and 1960′s when Americans made tremendous strides in their standard of living, the top 1% were earning 10% of all income. A hard working high school graduate could rise into the middle class, owning a home and a car.

From 1980 onward, the top 1% wealthiest Americans have progressively taken home a greater and greater percentage of all income. It peaked at 22% in 1999 at the height of the internet scam. Wall Street peddled IPOs of worthless companies to delusional investors and siphoned off billions in fees and profits. The rich cut back on their embezzling of our national wealth for a year and then resumed despoiling our economic system by taking advantage of the Federal Reserve created housing boom. By 2007, the top 1% again was taking home 24% of the national income, just as they did in 1928. When the wealth of the country is captured by a small group of ruling elite through fraudulent means, collapse and crisis becomes imminent. We have experienced the collapse, while the crisis deepens.

It's Good To Be the King The Wall Street oligarchs were able to accumulate an ever increasing portion of corporate profits by inventing securitization, interest-rate swaps, and credit-default swaps which swelled the volume of transactions that bankers could make money on. These products were originally introduced as a means for corporations to hedge their risks. Wall Street shysters chose to use their "creative" financial products to build the biggest gambling casino in the history of the world. They functioned as the house, siphoning off billions in profits, but then got caught up in the hysteria and placed billions of bets themselves. This resulted in the financial industry generating 41% of all business profits in 2007. From World War II through 1980, financial industry profits ranged between 10% and 15%. Simon Johnson explains the despicable hijacking that has taken place since then.

From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

The original robber barons amassed huge personal fortunes, typically through the use of anti-competitive business practices. These well known titans of industry included Henry Ford, Andrew Carnage, John D. Rockefeller, and JP Morgan. They may have practiced questionable business ethics, but they did create wealth while benefitting the country as a whole. They introduced the automobile, provided the nation with steel, produced the oil that powered our economy, and brought order to industrial chaos of the day. It seems their fortunes were built by creating rather than destroying.

The disgustingly rich Wall Street wheeler dealers who live in Greenwich CT and NYC and summer in the Hamptons have created nothing. Their immense wealth has been created through draining the economic system of its lifeblood. Their financial innovations have created no lasting benefit for our society. Wall Street knowingly created no documentation (liar loans) mortgage loans, Option ARM loans, and subprime loans. You do not create products that beg for fraud unless you want fraud. The packaging of these fraudulent mortgages into CDOs and CDSs by Wall Street's crime machine benefitted Wall Street only. Those who got the loans defaulted, lost the homes, and had their credit ruined. Wall Street financiers have lured the American public into debt with easy credit and a marketing machine geared to convince the average Joe that he could live just like the rich. Simon Johnson explained the phenomena in a recent article.

"Excessive consumer debt is an outcome of prolonged inequality – in trying to remain middle class, too many people borrowed too much, while unscrupulous lenders were only too willing to take advantage of such people."

You Call This Capitalism? Capitalism is supposed to be an economic system in which the means of production and distribution are privately owned and operated for profit; decisions regarding supply, demand, price, distribution, and investments are not made by the government; Profit is distributed to owners who invest in businesses, and wages are paid to workers employed by businesses. The American economy is in no way a free market capitalistic system. It has become a oligarchic consumer capitalist society that is manipulated, in a deliberate and coordinated way, on a very large scale, through mass-marketing techniques, to the advantage of Wall Street and mega-corporations.

When you hear the Wall Street class on CNBC argue against tax increases for the rich, they hark to the fact that small businesses would be hurt most by the expiration of the Bush tax cuts. There are 6 million small businesses in the US, with 90% of them employing less than 20 employees. These are not the rich. The vast majority of these businesses earn less than $1 million per year. There are only about 134,000 people in America who make on average $2.5 million per year. There are another 600,000 people who make on average $760,000 per year. Out of a workforce of 150 million, less than 1 million rake in over $750,000 per year. These are not small businesses. They are the Wall Street elite, corporate CEOs and the privileged classes that control the power in NYC and Washington DC.

The following charts clearly show that perverse incentives in the US financial system have allowed corporate executives to reap ungodly pay packages, while the middle class workers who do the day after day heavy lifting in corporations have been treated like dogs. Considering the S&P 500, which measures the stock returns of the 500 largest companies in the U.S., has returned 0% for the last 12 years, the CEOs of these companies would slightly embarrassed paying themselves 300 times as much as their average workers. Not in the age of mammon. Big time CEOs are rock stars. Outrageous pay packages are a medal of honor in a world where humility and honor don't exist.

The Depression that currently is engulfing the nation was 30 years in the making. The criminal Wall Street financiers are the modern day John Dilingers. They have mastered the art of stealing from the masses while convincing these same people that they should admire them because they are rich. This is the oddity about Americans as pointed out by Bill Bonner and Lila Rajiva.

"The poor genuinely believe the rich are better than they are. They are smarter and better educated. The poor even support low tax rates for the rich, as long as they have a lurking chance of joining them." - Mobs, Messiahs and Markets

The truth is that the poor have no chance of joining the the rich. The game is rigged. The poor have admired the rich for decades. But, hard times have arrived. And they are about to get harder. The rich have armed guards to keep the poor at bay. They will need an army of guards before this crisis subsides.

Leonard Cohen sums it up perfectly in his song Everybody Knows:

Everybody knows that the dice are loaded Everybody rolls with their fingers crossed Everybody knows that the war is over Everybody knows the good guys lost Everybody knows the fight was fixed The poor stay poor, the rich get rich That's how it goes Everybody knows Everybody knows that the boat is leaking Everybody knows that the captain lied Everybody got this broken feeling Like their father or their dog just died

Selected Comments
Tom a taxpayer

We need Shock and Awe RICO prosecutions of the robber barons...mass trials in style of the Maxiprocesso (Maxi Trial) of the Mafia in Sicily during the mid-1980s that resulted in hundreds of defendants convicted.

Rampant criminal activity of the robber barons must be attacked head on. We need coast-to-coast arrests from California Countrywide to Greenwich, CT to New York Goldman Sachs and every other part of the overlapping criminal enterprises, including the mortgage industry, the appraisers, Freddie and Fannie, Citi and the big banksters, the ratings agencies, the Wall Street investment banks, AIG, the federal co-conspirators at U.S. Treasury, SEC, OTS, and the Federal Reserve, especially FRBNY, and the members of Congress who aided and abetted the greatest financial crimes in U.S. history.

These overlapping criminal enterprises raped and pillaged the mortgage industry, ruined the housing market, destroyed the credit system, endangered federal/state/municipal financing, pension funds, and the banking system, caused massive unemployment, sent the economy into a downward spiral, endangered the world financial system, extorted the U.S. and the world to pay them billions in ransom or face the destruction of the world financial system and economy, and now are costing taxpayers hundreds of billions, even trillions of $.

The only thing that has any hope of stopping the continual rape and pillage of investors, pensioners, city and state funds, and taxpayers is to see the entire Wall Street RICO crime syndicate along with co-conspirators in the mortgage industry, the Fed, Treasury, SEC, and Congress arrested and perp walked in handcuffs to federal and state jails. Now. Not 2 years from now.

We need RICO confiscations of the hundreds of billions in illegal "profits" from the criminal enterprises of the banks, mortgage industry, and Wall Street Mafia. We need 20 years-to-life hard time prison sentences.

It takes only one prosecutor to investigate just one crime, and follow the money and the connected crimes, and bring down the overlapping criminal enterprises using Racketeer Influenced and Corrupt Organizations Act (RICO) prosecutions.

The prosecutor who leads the charge against the robber barons will become a national hero.

For a recap of the rampant criminality that begs for prosecution, see William Black's "Great American Bank Robbery":

http://hammer.ucla.edu/watchlisten/watchlisten/show_id/129363

William Black is author of "The Best Way to Rob a Bank is to Own One".

http://www.utexas.edu/utpress/books/blabes.html

http://www.pbs.org/moyers/journal/04032009/profile.html

Bill Black's Top Ten Ways to Crack Down on Corporate Financial Crime

http://www.corporatecrimereporter.com/billblack030510.htm

IBelieveInMagic

Now that the game is breaking down, honor among thieves is breaking out! As long as the global financial system with the USD as reserve currency was enabling the US economy scarf down the world's commodities, goods and services at throw away price and enabled folks at all strata to over consume thanks to phony jobs and easy credit, no one complained. But, the societal costs are now manifesting itself in the form of lost middle and low cost jobs while the creamy layers are continuing to benefit from keeping this financial game going.

Let us accept the fact that these distortions are a result of the reserve currency status of the USD -- as long as we have the reserve status, our economy will continue to bleed jobs.

FEDbuster

Just like the mobsters, the banksters have bought and paid for politicians, judges, police (SEC) to continue their criminal acts without fear of prosecution.

"When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes... Money has no motherland; financiers are without patriotism and without decency; their sole object is gain."

- Napoleon Bonaparte, 1815

The rape and plunder will continue until the victims band together to stop it. This will be the decade of "Project Mayhem".

grunion

The elitists have only their own interests at heart. They will not rush to the rescue of their bretheren, weakened and falling under the force of angry "sheeple" (your moniker). They will scheme to abscond with everything they can during the collapse. They will not protect each other, just the status quo.

We can and will have a "come to Jesus" event with these guys and they will be humbled (if they are lucky).

FEDbuster
Let the French Revolution be our guide. I am looking forward to see some heads roll down Wall St.
Cistercian

That would be great, but the prosecutor who begins will find photos of himself having sex with a 15 year old on the front page of the New York Daily news. It does not matter if the official is clean or not...they will invent a story to destroy him. Which is why things are as bad as they are.

They either install stooges or destroy the ethical in a relentless, vicious way.

Once things really crater and the mobs begin to form the lackeys will betray their current masters to save themselves. This of course entails things really getting bad and does nothing to stop the robbery continuing right now. The criminals we have now are the most well connected powerful maniacs the world has ever seen. They own the government, and the government has means of coercion up to nuclear weapons.

Underestimating how far these sociopaths will go to maintain their stranglehold is unwise.

It is going to get ugly...very fast.

Homeland Security

"... the prosecutor who begins will find photos of himself having sex with a 15 year old on the front page of the New York Daily news" You mean like Elliott Sptizer? He went after the banks and the banks used the NSA/CIA/FBI financial tracking software to see where his money went. It prolly took some intern one microsecond to see that Spitz was bundeling his payments to Ms. Hotpants. The bundeling of payments to stay below the $10K reporting level is a crime. In fact, with "bundeling" there is no reporting threshold, they look at the series of transactions.

drwells

Great, isn't it? Doing X is a crime. Not doing X is also a crime.

fiftybagger

Or like Blago? Everything was fine until he threatened BOA. Next morning, Arrested. Didn't see the media connect those dots did ya?

http://www.youtube.com/watch?v=52Pl_maYkQQ

jeff montanye

as through this life you travel, you meet some funny men. some rob you with a six gun and some with a fountain pen. (pretty boy floyd, woody guthrie)

B9K9

Denninger, glad to see you on board @ ZH. Too bad you brought your myopic and painfully naive viewpoints here as well. Here's a simple heads-up that will hopefully serve to clarify the situation: The state is the criminal.

What you don't seem to realize, and continually kick people off your boards for saying, is that the chief enabler, organizer & beneficiary is the US government itself. They are the ringleader, the mastermind.

To paraphrase Voltaire, if banksters didn't exist, governments would have to invent them. They are simply a means to an end. The end is all encompassing government control, fueled by a global reserve currency backed by the muscle of the US military.

MachoMan

Bingo. Everyone thinks campaign contributions are to get favorable laws passed and to buy regulators, but why would you need to buy them when they would be forthcoming anyway? They're really just tribute payments to mobsters more or less and/or direct tax (rather than tax that goes first into the general piggybank).

Further, they operate under the control and jurisdiction of the government, not the other way around. Literally, instantly, the whole thing would turn around if the government desired. Mass prosecutions... etc. Maybe even some treason charges. But make no mistake about it, when the government decides to crack the whip, banksters cower and cringe. Not the other way around.

Commander Cody

Agreed. Government enables, banksters implement.

VWbug

ditto

B9K9
- 08:16 #552672

duplicate

aint no fortuna...

You nailed it tom... nice comment.

TimmyM

To really understand how out of control the financial services industry is, sometimes it is good to step back and look at the big picture. While the free market profit motive is the only system that works, many of us individually are caught up in an irrational materialism. Perhaps you do not recognize this in yourself, and this blinds you to the author's point.

Uncle Remus

Faith has no place in discussions of markets, law, economics, or finance

Uuuhhhhh - fiat. Hello...

jeff montanye

well played.

Oquities

religion is an attempt to codify morality, from a specific point of view. it is not faith. religion is like trying to carve a sculpture from a morning fog. faith is knowing the fog is there even after the sun has caused it to dissipate.

ATTILA THE WIMP

The Truth About Religion

http://www.youtube.com/watch?v=TjGkRFFBd0A

Homeland Security

"Faith has no place in discussions of markets, law, economics, or finance."

Agreed - leave faith out.

merehuman

the dollar is worth....bumkis...faith keeps it going. I giggle every time a shopkeeper takes my green papers and gives me real valuable shit.

Infuckencredible yahoo, more green papers, roll another one

Homeland Security

" as Nietzche said, 'if there is not God, everything is permitted" If we are to develop into a sophisticated society that lives in peace and harmony then we need to learn to respect each other as fellow human beings with out religion or with the acceptance of many religions. Population is increasing exponentially and its getting crowded and with out mature, rationale thought and actions I can see tough times ahead.

Was it not the great Rodney King that said "Can't we all just get along?"

pitz

Why do producers and creators (the people who make all the real wealth) continue to work under such a regime?

Why does a young engineer accept a starting salary of $60k/year, to generate millions of dollars worth of output to the economy every year, and doesn't rebel?

Have we become a nation of pussies? The finance men aren't exactly holding guns at our heads (yet), forcing our labour. Why don't people just start doing the minimum required to keep themselves alive, and not anything more until this nonsense ends?

Mad Max

Real producers are rapidly opting out, as you say. It's about the only realistic option left.

BTW, I know some young engineers and most would have been thrilled to be offered $60k. Whatever schools may claim, $40-45k is a more realistic starting salary, IF you can even get a job offer in this economy. And a lot of that is because many US businesses are crying crocodile tears when they claim there's a shortage of engineers - they really just want the foreign engineers on H1-B visas who they will pay $20-25k for a couple years and then tell to go pound sand, to be replaced with the next guy off the plane from Mumbai. Both the US and Indian engineers get exploited this way, although the Indian engineer briefly gets a good job relative to what's available in India. There would be plenty of $60k jobs for US engineers, and enough US engineering grads to fill them, if it weren't for the racket of foreign visa workers that major US companies hiring engineers (and computer scientists, etc.) have developed. This is not based on theory - this is based on talking to people in the industry. I know someone who emigrated to the US from India at age 7, got his Ph.D. in computer science from one of the best US universities for that field, and then complained that he might have to move back to India to get a job. Irony.

pitz

Yup, I know engineering and computer science grads from 2001, 2002, 2003, who still aren't employed and have never been employed, graduating from some of the top universities up here in Canada.

Why are they unemployed? Because they won't lower their standards to the levels that the H1-B slave traders want in terms of salary, or in terms of professional behaviour and conduct.

Many have decided that having no job is better than being in a job that is completely exploitive.

AssFire

I hope they rot. There are plenty of high paying engineering jobs. They are malingering pussies. Jobs don't meet their self-worth?? I wouldn't hire anyone who did nothing for 6 months aftering graduating- fricken flakes, it is not gonna get easier.

pitz

There most certainly are not lots of 'high paying engineering jobs'. Not by a long shot, and certainly not at the entry level. Are you just trolling tonight, or what? No point in ruining one's health for a job that, after paying for expenses associated with working, doesn't leave any money left over for savings.

Malingering, hardly. Get a clue. Most would beat your ass to a bloody pulp if you dared spew such bullshit ("malingering") to their faces.

AssFire

Look, Ethopians don't fare well in the desert. Go to where the jobs are- Texas. Engineering jobs are plentiful and the cost of living is less. But come sans the self pity manchild.

pitz

Certain kinds of engineering perhaps, but not typially Electrical and/or Computer. And employers are very reluctant to hire Electricals and put them into PM roles, unfortunately, believing that the tech industry will sweep them up when it recovers.

AssFire

Bullshit, Austin is filled with those jobs. If you are trying to convince yourself that things are going to get better; you had better think again. Hell, the commercial mortgage problem won't even be shit here because of the new arrivals. I'm just saying for the forseeable future, Texas looks good and just about everywhere else is in the crapper. Want to increase your luck? Go where the odds are good.

If you need to get into a job- forget PM (what makes you entitled to that position?), take what you can get and do something where you can learn another field.

pitz

Austin filled with those jobs? Lol. The big companies in Austin have been slowly packing up and shipping as much as they can overseas, not hiring engineers. I'm talking Dell, TI, Freescale, etc. And it was like that even pre-2008 downturn.

Dingleberry Jones

And while those jobs are going overseas, the city, full of energetic, enterprising engineers, has increased employment via small businesses. Instead of whining about there being no jobs, create your own.

The mentality of the entitled is digusting.

AssFire

A nation of defeatists. It is clear they are still on their 99 week vacations.

Jewelsnorth

PMs? Don't even get me started. That's part of the problem. More and more employees these days want to be a PM to attend meetings all day but not actually do productive work.

It's about time that a large segment of the Western population wisens up that they're aren't too important to do manual labor. You can't complain about illegal immigration taking jobs but not be willing to work in fields or slaughterhouses, even with that expensive degree in Art History.

pitz

Well, an Electrical/Computer Engineer who can't find a job because the H1-B's have taken them all (in software and in hardware engineering) can't exactly easily swing over to civil or mechanical design work. So the PM roles, if they can get them, are often good fits.

We're not talking about random construction day labour here, we're talking about engineering professionals who have spend hundreds of thousands on their education.

As for manual labour, there's a lot of progress we can make towards minimizing the amount of it required, but your average man on the street freaks out at the prospect of using a Wal-Mart self-checkout line, or buying stuff from vending machines.

HungrySeagull

I don't freak out. What I see is 50 Cashier Lines and maybe 6 express lines. 5 of the 50 cashier line and one special line with tobacco products are open. 4 express lines are open filled with people shoving cartfuls beyond the 20 item limits.

What I see is a Store filled with employees unable to sit for any length of time. The break room is empty. Yes there is a coffee pot there, but no one may touch or drink out of it.

And the whole box is a rotting monument to buy buy buy!

They do one thing well. Grocery and Perishables. Local Grocery Stores die when a Wal Pox shows up locally.

I have to sit down, think for a minute and reach back 45 years or more and hit a Delicessian where everything is there for you a few blocks from home with 7 employees working day and night. Sweepers come up the street and Arrabers (Baltimore Produce brought up by horse from downtown) come up with grocerys and produce on carts. Milk is hand delivered each morning to your door. Your empty containers are taken away.

All the powerful have to concern themselves with at that time is making sure that the entire factory is running on all 8 clynders with no misfire or problems anywhere.

Now the factory sits silent. The workers gone elsewhere or dead. The Materials made over seas and imported while handled by a few people with phones and shipping papers constantly seeking a 3rd world nation to make the stuff cheap, cheaper and even without things that are considered an expense.

The whole area round the factory has been empty for decades now and nothing moves on the street except brass shell casings and police cars. Anything anyone sees worth doing dont live in the city anymore. They live away, out of sight so that they may still raise children in safety... possibly even entirely off the grid itself. The Children grow up unaware of the sexual, materalistic and vices of society itself until they come out of the woods seeking a life.

Thier innocents is signed away for college and they come out of there stripped of any humanity left. It is all about money or nothing. Jobs? You dont have a job unless said job involves making decisions that impact other people's lives. And you are expendible.

Want some humor? Watch a old movie called the "Hudsucker Proxy" which refers to business in a funny light. We have much to learn. Watch Wall Street from the late 80's where we learned greed is good.

Many times I have heard of powerful people owning very large mansions requiring utilitiy billing large enough to heat and cool a small southern town each month. With square footage so large it must be a millstone on thier necks.

I say that the Rich and Powerful are lost to the everlasting and enternal grasping of the next big pot, the next big thrill and the eye is never filled.

If this walmart proceeds down the path of automatic machines for everything, no one will have a job anywhere unless said machine breaks down and a tech support call comes in. That is ok, a few broken down out of order machines waiting a visit from Calcutta India tech out of a line of 50 or so still functioning is not too big of a loss.

Yea I think one day we will have to settle accounts and make things right, but not by looting, pillaging or killing off those who will die anyway of excessive gluttony, excessive exertions in the bedroom and excessive greed that will choke them in the vault anyway.

What we do need to do is remember who we are and take care of those who we can while making ready for when the rich finally run out of the very waters that keep them hydrated and come for you and yours.

Almost Solvent

Perishables are not done right by Walmart.

The "fresh" produce from Chili and China look like $hit compared to what's down the street at Wegmans.

Wilted greens, soft onions, etc.

I would not buy produce from Walmart under any conditions.

economicmorphine
-Assfire, the absolute last thing we need in Texas is more unemployed Yankee malcontents looking for work. The unemployment rate in Texas is creeping up. We have an $18B budget shortfall. We get to choose between the Houston Mafia and Mr. Aggie Goodhair for governor. Things (as we say here) is a fixin to get a whole lot worse. Stay away, Yankee malcontents. If the threats don't work, consider this.......the place you wanna live in Texas is Monterrey. Don't let that little tollbooth on the bridge in Laredo discourage you. Wanna come south? Welcome. Just keep goin til the sign says Bienvenidos!
defender

What he says is actually very true. Take Rockstar Games for an example. They expect their employees to work more than 60 hours per week. Of course, they don't say this, they just hint that "Jim wasn't a team player so we had to let him go. Make sure you get all of those objectives done by Monday." Imagine doing calculus homework for 60 hours a week, every week, and you will get the picture. Some further info for you:

http://www.google.com/#hl=en&q=rockstar+employees&aq=f&aqi=g1&aql=&oq=&g...

pitz

Yup. The H1-B's do extremely well in this environment because a) being fired = deportation, b) usually single Indian men, c) very limited access to the US legal system because of a).

Probably the most problematic thing with the guys I know is that they are top-notch talent, but, because of H1-B's, they simply get lost in the noise. Google, Microsoft, Oracle, etc., only consider less than 1% of applicants for their job openings. So even if you're Linus Torvalds himself, your chances aren't very good of even getting an interview with those firms simply because only a very small percentage of applications are even subjected to human review. That's why its not that uncommon to see people with 5 year resume gaps, or sometimes even longer out there.

Ricky Bobby

+1 This is the flat out fucking truth have seen it all first hand. H1's are indentured servants. Corporate Hierarchy is no different then the court of some feudal king, designed to make those at the top Masters of all. Screw the serfs and slaves its all about being a celebrity.

HungrySeagull

We had a job running concrete that required about 30 of us to sleep in the plant and pull a 80 hour workweek to get things done that week. Of all the working I have seen, done and accomplished, I will never forget that week while everyone slept stacked like cordwood waiting for the hot summer heat to go down and run concrete in the night to satisfy those who bought, paid for and hired us to get it done before sunrise.

We got it done that week. Never in my wildest dreams would I see half the places we poured rot in foreclosure today. And that was about 14 years ago.

VWbug

I hope they rot. There are plenty of high paying engineering jobs. They are malingering pussies. Jobs don't meet their self-worth?? I wouldn't hire anyone who did nothing for 6 months aftering graduating- fricken flakes, it is not gonna get easier.

couldn't agree more.

I have 2 engineers in my immediate family, and 3 or 4 more friends in every field including electrical, mechanical, civil, computer etc.

All well employed (in canada).

It's no wonder pitz is unemployed if you ask me. No one wants a depressed, whiny complainer on board.

If anyone does ever hire you, I am sure they'll regret it fast. You'll poison the atmosphere with your depressing marxist drivel.

ElvisDog

I think the 14 junks are unfair, because AssFire does have a point in that workers in the U.S. need to lower their expectations. I know that in the Golden Age of 1980-2008, that workers in the U.S. could expect to make 2-3 times what people made in other countries for doing the same work, but in this age of Globalization and the Internet that situation will no longer be true. You may not like it, it may be disappointing, but there is no avoiding that reality.

ChopChop

Agreed. H1B are a good thing but companies don't use them in the right way. There should be a restriction where you are obligated to pay the guy a minimum wage of the average salary for that field in that specific city/region.

Then there won't be any advantage to take a foreigner unless if he is more talented than an American... or there are no Americans for that job that could fit.

SWRichmond

Why do producers and creators (the people who make all the real wealth) continue to work under such a regime?

Why does a young engineer accept a starting salary of $60k/year, to generate millions of dollars worth of output to the economy every year, and doesn't rebel?

I did, and for exactly that reason. I made changes to projects under my responsibility that saved /made the company millions, and was rewarded with...more of the same. That is why I am now self-employed, and much much happier.

Always Positive

Yes Pitz. Half of you are a Nation of pussies. More than half

Caviar Emptor

In the 30 years leading up to the great crash of 2008, American values reached an all time low. Cynicism, apathy and greed were worshiped at the altar of "the new man/woman". But along with the moral compass, we also lost the American ethic that taught generations not to always take the easy way out, cut corners and sacrifice quality for quantity.

cossack55

What the hell is wrong with cynicism? A number of great cynics have become famous and maybe wealthy throwing in a little gallows humour...i.e. Mark Twain and Ambrose Bierce come to mind immediately. Will Rogers? Add your own favs. I enjoy being both a cynic and iconoclast and if you twist in some humor people will generally laugh while still getting the point. Try it, its fun.

The Rock

This breakdown of this moral compass is brought to you in part by the PTB (Rockefellers, Murdoch, et al.). It's all by design.

Btw, I think I read somewhere that in the year 2000, there were 18 million manufacturing jobs in the U.S. Now, ten years later, there is less than 11 million manufacturing jobs left... nice.

Speaking of mammon, here's a nice little bit of info regarding the media:

MEDIA BLACKS OUT THE FACTS

Here's one terrific example. John Swinton, the former Chief of Staff for the New York Times, was one of New York's best loved newspapermen. Called by his peers "The Dean of his Profession", John was asked in 1953 to give a toast before the New York Press Club, and in so doing, made a monumentally important and revealing statement. He is quoted as follows:

"There is no such thing, at this date of the world's history, in America, as an independent press. You know it and I know it. There is not one of you who dares to write your honest opinions, and if you did, you know beforehand that it would never appear in print. I am paid weekly for keeping my honest opinion out of the paper I am connected with. Others of you are paid similar weekly salaries for similar things, and any of you who would be so foolish as to write honest opinions would be out on the streets looking for another job. If I allowed my honest opinions to appear in one issue of my paper, before twenty-four hours my occupation would be gone. The business of the journalists is to destroy the truth; to lie outright; to pervert; to vilify; to fawn at the feet of mammon, and to sell his country and his race for his daily bread. You know it and I know it, and what folly is this toasting an independent press? We are the tools and vassals of rich men behind the scenes. We are the jumping jacks, they pull the strings and we dance. Our talents, our possibilities, and our lives are all the property of other men. We are intellectual prostitutes."

1953, 2010. SSDD (same shit, different decade...).

drheywood
- 05:00 #552509

Good morning!

I think this is closer to the root of the problem, than the article's idea that people are too greedy and that we need to read the bible more. (Although the author never says that latter part explicitly, you can sense it, can't you?)

This crisis isn't about finance, or banks, or taxes or the government. We've seen all this before. And we made the same false claims then as we do know; it's all because of greed, or because of too little regulation, or too much. Nonsense. It's about one thing, and one thing only. The one thing that all sociopolitical battles has ever been about, the one thing that has decided the form of all societies through all times: the production, distribution and control of information.

We wouldn't have democracy if it wasn't for the printing press, and we wouldn't have the feudal system and organised religion if it wasn't for papyrus. And in a sense, the current financial system is a beautiful manifestation of the flow of information in the US for the last 100 years. A small group of people create the information, and the masses consume it.

One thing that's different with this crisis is that we have a new medium. A new way of distributing information. For the first time in human history, we have medium that allows anyone to reach everyone. A medium that works both ways, so to speak. This is why websites like ZH is so exciting. *All tingly*

Ciao!

ExistentialSkeptic

we wouldn't have the feudal system and organised religion if it wasn't for papyrus

That's just silly and prima facie untrue, while if I remember right the Athenians did pretty darn well inventing democracy close to two thousand years before the invention of the printing press.

Pull the other one, its' got bells on. ;-)

Always Positive

In a way, I admire the elites, the movers & shakers, the oligarchs, the rapers & pillagers, the robber barons, the shysters - I mean THEY'RE JUST GOING FOR IT!!! No restraint, no morals, no compassion, no regrets!! Just full-on, full throttle, totally & completely selfish with only ME! as a reference point!

Isn't that just a reflection of much, even most, of society in general, even YOUR little corner of the world, writ small?

We get what we deserve and don't have long to wait. Maybe Blankfein is doing God's work, showing us ourselves.

merehuman

not me, i share and always have. But never deal with crooks and never took advantage of anyone. I take a small pride in remaining a good guy in honor of my honor. I am an honest soul. And there is many another like I.

Always Positive

I respect you merehuman; sadly, you're in a diminishing minority. But would you take a serious offer (say, 6 billion for your honour)? Most sell out for much, much less.

HungrySeagull

No need to sell out. When one is free of debt and house, family and everything is in good order along with needful things ready for a time then.. the rest are sent on thier way. It is far better to feed someone who is hungry in secret than to wear golden robes and broadcast in the tall towers what millions they have fed.

You wont believe how much we were able to do these last few years on so little. If memory serves we cut trees and kept people warm during the winter. We did not take any money and we did keep some wood for ourselves. There is more for next winter that is coming and two households will come to get it when it cools off sufficently for the labor to make it done.

These "Poor" have very good memories, and loyal are they to those who help them without requiring anything of it. We are poor yes, but we have no need of anything at the moment. So we do share a little bit.

If you picked up a rich person worth millions per month and hold him upside down, the loose change from his pockets will make 10,000 people in our area be able to stay warm and cool for at least the next 10 years with warrantry and service to maintain these machines.

But no, the rich will not share. They never do. And when they do give, they have the other hand out with either a knife for your pound of flesh or ready to choke you on something else.

So. Let the Rich rage. But yet thier anger only lasts a hour or life time. We have as a Human Race on this Planet been here for millions of years with or without instructions or need of money and riches made do with what little we were able to earn by our daily bread and the sweat and labors.

Blankman

You may be free of debt and house, but you are never free of taxes. When the taxman comes to collect you better have you cash or off to the place where yes you are relatively free - 3 squares and a cot. Good luck in your commune.

frosty zoom
- 23:58 #552347

communism becomes (de facto) capitalism...

capitalism becomes (de facto) communism...

and both in their worst forms.

it's not new york, 1932; it's moscow 1989.

laughing_swordfish

CULTURAL REVOLUTION BITCHEZ --

guidoamm

A good rant as far as it goes. However, as is often the case, blame is laid at the feet of proximate causes like hedge fund managers.

Upstream of fund managers and bankers there is the monetary system. In the particular case of a fiat monetary system, the logical evolution of the system leads inevitably to concentration of profits in the finance industry simply because banks and the corollary of financial institutions that operate around them are first in line to make use of newly printed money.

As fiat money conforms to the law of diminishing returns, each unit of currency is progressively devalued from the instant it is created as it is handed down to the treasury, then to the primary dealers, then to other banks till it finally reaches the pockets of the great unwashed - this is the point at which the currency has been devalued most (i.e. the point at which it has least purchasing power).

As the fiat monetary logic progresses over time, eventually the ripples of devaluation spread in ever wider circles. Thus from personal bankruptcies you move to commercial, then municipal, then state and, finally, sovereign bankruptcy becomes probable if not inevitable.

TwoShortPlanks

Madoff is in the safest place...for now.

laughing_swordfish

Nuremberg Tribunals for Politicians, Banksters, Lobbyists, and Multinational CEO's...

Confessions of "Crimes Against The State" carried on live TV...

After that, we take a page from "Uncle Joe" Stalin's playbook and let the purges begin..

Remember, it's ONE Politician per Lamppost...

ONE Bankster or Lobbyist per Treelimb...

ONE CEO or Hedgie per Impalement stake..

4 meter stakes for the CEO's...5 meter for the Hedgies (they complain about the smell)

And the lackeys or fellow travelers who don't repent and switch sides?

500 lb. Trapezoidal knife on the neck...

Paging Madame DeFarge...

Hang The Fed

It just goes to show that capitalism, communism, or whatever-ism will always be exposed to usury by some pile of jackasses who believe that they're somehow better, whether they paint that portrait in the strokes of religion, finance, or any other social vehicle. Further, the only thing that makes it work, every time, is the complicity of those on the receiving end of the great shafting. Never mind that the skins in which the "elite" wander about are no better or more valuable than any others.

Sadly enough, we've taken such joy in manipulating everything, from finance to the world that surrounds us, all in the name of "getting ahead," that we've forgotten that it wasn't a tremendously long time ago that we were still just monkeys hurling shit at each other in the trees. Hahaha, if you don't believe me, watch the bloviating fucktards on CSPAN for a bit...maybe the face is different, but the paradigm still stands.

The only difference between then and now, really, is that we've propped up this useless existence for so long that the damage to other systems is becoming "inconvenient" to our way of life, or, if you're looking at it from my end, completely fucking disastrous...so much for our comfy belief in manifest destiny, or some deus ex machina moment to bail us out. If cats have nine lives, I wonder how many of ours we've used up already?

Hang The Fed

On that note...I'm going to try to avoid throwing up in the next five minutes. Anyone want to take out a CDS against that event?

count_zero

While there's certainly truth in this article, it's too light on the other offenders. What has happened has been a FAILURE AT EVERY LEVEL. The Fed's loose money, gov housing mandates and interference, bankers obscuring bad loans into CDO's, rating companys' rubber stamps, investors who bought the crap, loan officers fudging numbers, and finally, people buying homes with loans they couldn't afford.

Everyone assumed someone else was making sure things were ok. Oops!

Hang The Fed

Manipulation+complicity=OH, SHIT!!

guidoamm

That's right. But the lack of monitoring is not an omission; it is deliberate.

Fiat money has an inbuilt reset mechanism. If left alone, a fiat monetary system would bring about regular periods of slow growth and/or recession. The desire of the authorities to short circuit the system so as to keep it on a perpetual expansionary trajectory, can only be achieved by intentionally masking the imbalances that result from this policy.

As fiat money conforms to the law of diminishing returns, the imbalances that are brought about and that manifest themselves in diminished purchasing power of the currency (declining intrinsic value), can only be masked by expanding credit. Hence the vital need to keep credit markets on an expansionry trajectory that must neccessarily be faster than the expansion of the underlying economy by any means such as Off Balance Sheet Investments, or Special Purpose Vehicles, or CDSs, or MBSs or special accounting treatment for select entities like Fannie Mae or Citibank for example. Hence the reason that, for example, since 1980 GDP has expanded by 100% (it has doubled) but Federal debt has expanded by 1200%. Hence the reason that as the fiat monetary logic pushes its own mathematical limits (as in 1929 or in 1970), nominal profits concentrate in the financial industry.

As the logical conclusion of fiat money approaches, the authorities will prevent regulation and apply special provisions to select entities, mostly represented by banks but also by other political groups such as unions, in a gambit to both keep government alive (raison d'etat) and keep profits flowing to the banks.

It's all a logical necessity of this type of monetary system as was suggested to politicians it should be imposed by a select number of banks in 1913.

Hang The Fed

The Creature from Jekyll Island will certainly swallow us whole.

Segestan

Reads like some socialist rant. The top of the food chain is just as fucked as the bottom once the game implodes. Perhaps they will build Ack-ack towers?

VWbug

Reads like some socialist rant.

it's is a good example of how in reality religion and socialism are simply variants on the same theme (you are your brother's keeper, money is the root of all evil, reason is bad, faith is good, etc etc)

yabs

I think this article misses the point in some respects. The CDO's etc, credit deafult swaps

are a symptom of the problem not the cause.

The cause is a monetary system that needs perpetual growth. When a mature economy like the US no longer actually needs to grow anymore

I mean it has most of the roads it needs, the shops it needs and every perosn who can get a mortgage has then there is only one option for growth

create s synthetic economy and thats what happened. the banksters are scum for not having the morals but they are really only playing the system which is the route of the problem.

It makes me laugh when I see Rothchild going around the world in a boat to promote global warming and the environement when its his families money system which has caused all the problmes in the first place

growth for growths sake is a cancer and now

the cancer has overpowered the victim

death is near

cossack55

Got to agree, Yabs. I don't get why folks think growth is constant. I can't think of one thing in nature that grows forever. They say even the universe, though, still expanding, will reach a point and then contract. Illogical

AssFire

There are lots of jobs down here in Texas- especially for mechanical engineers & fabricators. The land rig business is booming and businesses are moving in from all over (running from their former state's taxes).

We surpassed California several years ago as the nation's largest exporting state. Manufactured goods like electronics, chemicals, and machinery account for a bigger chunk of Texas' exports than petroleum does. In the first two months of 2010, exports of stuff made in Texas rose 24.3 percent, to $29 billion, from 2009. That's about 10 percent of the nation's total exports. There are more than 700,000 Texan jobs geared to manufacturing goods for export.

While the nation continues to lose jobs, Texas has added 181,500 jobs this year through July, including 30,700 in the D-FW area. D-FW gained 2,300 construction jobs in that time, but the 158,000 total was 6.5 percent less than a year ago.

Texas accounts for more than half of the 10 largest upcoming construction projects in the South, valued at about $15 billion. That includes the $2 billion second phase of the Dallas Logistics Hub in southern Dallas County and the $1.2 billion DFW Airport terminal redevelopment.

Texas has supplied over 55% of the jobs in the US and responsible For 111.5% Of All Private Job Creation In Last 12 Months

Bottom line if you want to work, you might need to do it here; or just wait for your state to cut back (if you can wait forever).

HungrySeagull

Yes, I agree with the Texas Solution. Go big or stay out of Texas. Imagine for a moment if every state in the union was properly run as Texas was run. We would have such a embarrasment of riches with untold prosperity and able to carry the world to such heights of wonder and awe at the wonderful things they can only dream of watching American Movies in thier theaters.

The States with the most crushing taxes have managed to groan and stagger under the constant and unfettered hunger that gnaws upon them as the riches move out and everyone who can afford to flee. Taking the revenue and production with them to free states that have no need of such taxes to stay properly functioning.

Indeed the exodus that we think we have seen these last 10 years now will become a pernament change in the future as the Union breaks up into a loose collection of regions with very different laws, some of which will be against everything that America has ever been good for.

dondonsurvelo

guillotine

three chord sloth

Nice. Quite a good rant.

The trouble is this: Where are you gonna turn to fix it? The government? Hah! The financial robber barons are one wing of the pincer movement crushing America... unfortunately for us, our government (who is supposed to rein them in) is the other half. We have nowhere to turn.

The coup by the financial industry began 3 decades ago; the master/servant inversion by the government began 5. The die was cast in the early 60's, when government workers were permitted to unionize. Once the bureaucracies were allowed to become their own special interest the citizens lost control of their government. We are working for them, they aren't working for us any longer. We don't set the agenda anymore, DC and Wall Street pull the strings and the elected puppets dance.

You see, bureaucracies do a few things quite naturally; they expand, they grow inefficient, and they forget their original mission and focus primarily on their own internal needs. Under the best of circumstances it's difficult to keep the government contained and focused; add in civil service protections and it becomes damn near impossible. Throw on another layer of armor from union contracts and forget about it... the servants have taken over the manor. Government will do what is best for the government... their motivations are strictly internal now.

And here we are today... trapped between a predatory financial sector who is allied with a predatory government. A classic pincer movement. The feds pretend to regulate and reform the banks, the banks pretend to be contrite and reformed, the "watchdog" media praises the charade and gives awards to itself for "bringing the issues to light" and "forcing needed changes", and the looting continues.

So where are we supposed to turn?

Temporalist

Ahhh, god's country...and he can have it along with all those mega churches.

A lot of good seceding will do when you will need all good agrarian states to feed your people...or you can live off fish from the GOM I guess. Not everyone can be an oil baron.

HungrySeagull

Don't forget the Bull, Cattle and great resources. Parts of Texas and the greater part of that western region keeps the rest of the United States in Beef. Throw in the Grain from the Dakotas who have lived carefully and within thier means suffering none of the collapse that others have suffered. Then look to Nebraska with such water and land that one can only dream of when standing on a grimy and choked city street that has been sinking each year since Manhattan was bought from the Indians 200 years ago. Look further into the Mountains where you must work to live or die.

Once a time long ago common people endured 6 to 9 months walk to get to these great western lands. The ones of good stock that survived the trip are able to make do with what they have and they have done well.

The problem I see now is the great danger of those who have nothing but money and tender hands that have not seen labor going to these places and trying to buy it all.

Aint gonna happen.

guidoamm

The coup began in 1913

ATTILA THE WIMP
- 08:20 #552678

It's simple. Just watch for the "riot dog."

http://www.huffingtonpost.com/2010/05/07/hardcore-riot-dog-seen-at_n_568271.html

Djirk
- 04:03 #552475

If we had a government with balls (or guts for da ladies) there is an easy fix.

Raise the tax rates to 50-60% for the top 1%, while closing the loopholes.

Given that rock stars, CEOs and bankers make money from the sales, labor and pensions from the other 99% it is in there interest to make sure there is a market for thier "services"

Especially the later group of "investment" bankers who siphon funds from the retirement funds of others.

A non political solution for the last group is for the buy side pension and mutual funds to grow a pair and not rely on sell side, funds of funds, hedge funds and private equity who siphon returns.

When you go to the super market, do you ask the snot nosed check out clerk which vegtables to buy?

Do your homework, look for longer macro trends in industries with real economic growth (or at least throwing off cash) and buy from an electronic exchange. Fjuck the sell side traders and funds of fund of funds of funds of funds and their filthy carry.

Jesus can't help you now!

hugolp
- 04:54 #552517

What about eliminating all the subsudies for business?

VWbug
- 07:56 #552633

excellent idea. they should eliminate all subsidies, to farmers, fishermen, etc.

guidoamm

Raising taxes on the top 1% will not solve the underlying problem which is the monetary system. Besides, the top 1% can very easily shift wealth and/or domiciles and residence across borders. Taxes are not an efficient solution to this crisis.

Djirk

Agreed, over leverage and leveraged market speculation (especially in commodities and FX) cause major problems. Not to mention the financial illiteracy of the US public are both different problems. But there could be a better tax structure where the % of income earned is closer to % taxes paid in the country where income is derived. There would be of course gaming of the rules, but now it is ridiculous.

Now the wealthy individuals, especially financial services employees are destrying thier own source of income by this wealth allocation structure.

Not to mention investment bankers are WAY overpaid for the service they provide to society. Sorry to burst your bubble lord Blakenscheck, but GODmansachs employees are not just more productive.

VWbug

Not to mention investment bankers are WAY overpaid for the service they provide to society. Sorry to burst your bubble lord Blakenscheck, but GODmansachs employees are not just more productive.

How do you know? Mr Market says otherwise. I'm betting mr market is right.

docj

Well, that's of course true. And personally I'm all for letting people keep everything they earn minus a small piece off the bottom (say, 3-5%, total) for fed/state/local gov'ts to provide basic, and charter (Constutionally) mandated services.

But so long as we're going to bail-out the so-called "Too Big To Fail" on a regular basis then I say fuck-em - 99% taxation above some threshold (say, $10M).

MiningJunkie

"So you think that money is the root of all evil?" said Francisco d'Anconia. "Have you ever asked what is the root of money? Money is a tool of exchange, which can't exist unless there are goods produced and men able to produce them. Money is the material shape of the principle that men who wish to deal with one another must deal by trade and give value for value. Money is not the tool of the moochers, who claim your product by tears, or of the looters, who take it from you by force. Money is made possible only by the men who produce. Is this what you consider evil?"

Francisco D'Anconia (Atlas Shrugged)

Horatio Beanblower

Relax, everything will soon be OK...

"Anton Kreil, who starred as the portfolio manager in the BBC Two programme that gave eight members of the public $1m (£640,000) to run their own hedge fund, has set up a training business, called the "Anton Kreil Institute of Trading and Portfolio Management", to give students and private investors an insight into the complex world of share trading.

The school is aimed at helping its students gain an insight into how the top 5pc of City traders make real money." - http://www.telegraph.co.uk/finance/markets/7970715/Star-trader-Kreil-to-share-his-million-dollar-tips.html

http://www.antonkreil.com/category/institute-of-trading-and-portfolio-management/

The HFT lessons should be good fun.

MarketFox
- 06:32 #552558

The Harvard Princeton Yale Club....

Once in...you get a shot at being in the 1% of the US population that controls the same level of wealth that 90% of US population has....

Sound fair ?????

Troy Ounce

Tell me, what are the chances the Dems pull the plug and turn their back on Wall Street?

Yes, I agree, WS would shut down the banking system and mayhem would follow.

But if the Dems want to have power to govern that would be the only option open to them, no?

Eeehhh, sorry, that ...and war.

docj

That train left Barry Obama station the day he signed-on to the Bush bailouts - before he was even elected.

TWORIVER

Some call it Babylon. Politricks, I say.

jailnotbail

This could all be solved quite easily, were there the desire to do so. For instance, below is A modest proposal by Professor Emeritus Richard Wolff, published under the title "Economic Recovery for the Few" @ http://www.rdwolff.com/content/economic-recovery-few

Now, of course the mere mention of such a possibility will ignite howls of interference with the sacrosanct free market, and outrage at the suggestion of such a violation of property rights, and general wailing and crying.

This is to be expected. And the proposal itself is, of course, beyond the wildest possible politically feasible solution.

It's a non-starter. Instead, we shall punish the innocent, and reward the guilty with absolute dominion over those whose lives and country they have ruined. The predators will rule like gods over the sheep, and the republic will be consigned to the dustbin of history.

Where is this elusive recovery? The banks, some say, have "recovered." Yet they remain dependent on Washington, they do not make the loans needed for a general recovery, and many medium and small banks keep collapsing. The stock market shows no recovery. The Dow index was 14,000 in late 2007 when capitalism hit the fan, and it is around 10,000 now. The Nasdaq market index was 2800 then and is 2300 now. Everywhere else -- unemployment, foreclosures, bankruptcies, depressed housing market, and so on -- no recovery in sight. Yet, my search finally found genuine recovery for one group, and its recovery offers a better policy to treat this crisis.

Every year, two major companies catering to rich investors co-author a survey of their clients. Capgemini and Merrill Lynch Wealth Management's World Wealth Report covers the two groups that interest them: High Net Worth Individuals (HNWIs) and Ultra-High Net Worth Individuals (Ultra-HNWIs). The first group counts all individuals with at least $1 million of "investible assets" in addition to the values of their primary residence, art works, collectibles, etc. The second group includes individuals with at least $30 million of such investible assets.

Their latest Report, covering the year 2009, finds 10 million HNWIs in the world that year: 3.1 million in North America, while Europe and Asia-Pacific each had 3.0 million. The rest of the world had a mere 0.9 million of the rich and richer.

The 10 million HNWIs -- in a global population of 6.8 billion in 2009 -- amounted to 0.14 per cent of the earth's people. Together, they owned a total of $39 trillion in "investible assets." To see what this means: in 2009, the US GDP (total output of goods and services) was $14.6 trillion. The combined GDPs of the world's 9 richest countries(US, Japan, China, Germany, France, UK, Italy, Russia, and Spain) totaled less in 2009 than the investible assets of the world's HNWIs.

During 2009, as tens of millions lost their jobs, the number of HNWIs rose by 17.1 per cent and their combined wealth rose by 18.9 per cent. They had a genuine "recovery." HNWIs regained in wealth most of what they lost in 2008. No wonder they celebrate "recovery" while the rest of the world wonders (or rages at) what they are talking about. In the US, for example, the HNWI population grew by 16.6 per cent in 2009 while the US GDP fell by 2.4 per cent.

Only 1 per cent of all HNWIs were Ultra-HNWIs, but what a group that was and is. Ultra-HNWIs alone owned 35.5 per cent of the $39 trillion owned by all 10 million HNWIs. And they recovered more during 2009 than their fellow HNWIs.

Capitalism is the name of the global economic system that delivers the outcomes summarized in these numbers. Capitalism produces "recovery" for those who need it least while offering austerity for nearly everyone else. Today's business and political leaders tell the people of all advanced industrial countries that there is no alternative to years of government budget austerity (raised taxes and/or reduced government employment and services).

They don't explain that they could tap instead the immense wealth of the richest 0.14 per cent who (a) made huge gains in wealth over the last 25 years, and (b) already recovered in 2009 what they had lost in 2008.

What notions of fairness, decency, ethics, or democracy could justify such economic performance, especially in a time of global economic crisis? Recall as well that these same rich and richer people contributed so significantly (as industrial employers, bankers, and investors) to generating that global economic crisis.

Let's now concentrate on the HNWIs in just the US (including its Ultra-HNWIs). They numbered 2.9 million in 2009: well under 1 per cent of US citizens. Their investible assets totaled $12.09 trillion. For 2009, the total US budgetary deficit was $1.7 trillion. Had the US government levied an economic emergency tax of a modest 15 per cent on only the HNWI's investible assets, it could have erased its entire 2009 deficit. Over 99 per cent of US citizens would have been exempted from that tax.

The European, Japanese, and other governments could have treated the crisis likewise in their countries. Then governments would not have had to borrow trillions. They would instead have taxed the super rich tiny minority a small portion of its immense wealth. Those governments would not then have had to turn to lenders (often those same super rich). There would be no current "sovereign debt crisis" in Greece, Portugal, Spain, Ireland, etc., and no need for the resulting austerities to satisfy those lenders. Republicans would have no "deficit, deficit" drum to beat hoping for election-day gains.

Taxing the HNWIs and Ultra-HNWIs would be the policy of governments responsive to the needs of their working-class majorities instead of their rich and super-rich patrons. Austerity is not the only policy. Modestly taxing the wealth of HNWIs is the far better policy choice. The two wealth management companies that cater to HNWIs have kindly provided us all with the facts and figures needed to support the better policy.

Across Europe, coalitions of trade unions, socialist, communist, and some green parties, and many social, religious, and community organizations are organizing growing mass demonstrations and general strikes. These oppose austerity and demand alternative ways to deal with economic crisis. In France, mobilization focuses on a nationwide general strike September 7. Plans are underway for an all-European day of public actions on September 29. National actions like this have already happened in Greece, Portugal, and other countries.

The business and political leaders generated by the last 30 years of neoliberal capitalism simply assumed that they could impose the costs of their crisis on their countries' people. That assumption is now being contested. The European people are beginning to fight back. And here, in the USA?

docj

Capitalism is the name of the global economic system that delivers the outcomes summarized in these numbers.

When you start your "analysis" from such a ludicrous premise the ensuing lunacy is to be expected, I suppose.

ElvisDog

Here's the problem - the U.S. has a structural deficit of about $1T, so for your "tax the rich" scheme to work you would have to take 15% of the Ultra-wealthy's wealth every single year. Do you really think they would sit around and take it year after year? No, they would bug out as fast as they could taking their wealth to more friendly countries.

RockyRacoon

Think of it as a claw back. Kinda like the gov't saying, "Ooops, our policies allowed you to be overpaid a tad there." After enough of being clawed-back to death there would be some reforms. Like maybe some sort of way to hide the wealth. I think Greece has some experience we could tap to reach that end. Those who don't get covers for their swimming pools or register their yachts in small Caribbean countries don't deserve to keep their spoils!

Blackheath

There is no doubt that the stratification of classes is more prevelant in the recent past in the US. Two comments:

(i) historically, you need to look further in the past; and,

(ii) it is ironic that there are so many "libertarian" thinkers and commentators on these pages, yet the group-think seems to be to rail against enterprise - fair or unfair - highly (overly) or not compensated. That really makes it easy to feel victimized by the "evil" bankers. That is just the mental equivalent of curling up in a fetal position. Unless you all want to be living in a more socialistic state like Germany, Britain or France (nothing wrong with this, mind you...), then you may want to consider that historically, the disparities between the top and bottom are not so wide now to be out of range (look it up) and if you are truly interested in limited government then let people earn what they can - absent fraud. We have a lot of laws that prevent fraudulent behaviour (except with the government sanctions it or participates). Sure, respond agrily...

Arraya

The US mirrors the world in wealth distribution. And, yes, todays stratification is it is not out of line historically. All wealth structures pull wealth from the periphery towards the center. Which is why we get a pyramid structure with wealth concentrated at the top and "wealth conveyors" pulling wealth towards the center. Debt markets are a good example of "wealth conveyors" . The US is the center of the global economic structure, so it gets wealth conveyed to it in the form of resource extraction via globalization and sophisticated forms financialization.

Now is about the time in history when these wealth conveyors start to break down. As time goes on, we should see an increased number of failed states globally and underclass internally. As the periphery gets stripped of all it's wealth, the elite will move further up the pyramid via public policy to maintain their privileged positions and levels of wealth extraction as well as increased fighting over resource deposits on a global scale. This really can't be stopped and what we are witnessing is the elite using their political power not to lose their god-given share. As time goes on, and the wealth pie shrinks, even they will start to turn on each other as their is not enough to go around. It should be quite a show.

jailnotbail

From Wikipedia: Capital offences in the People's Republic of China - Crimes of Financial Fraud

12. Whoever, for the purpose of illegal possession, unlawfully raises funds by means of fraud

13. Whoever commits fraud by means of financial bills in any of the following ways:

(1) knowingly using forged or altered bills of exchange, promissory notes or cheques;

(2) knowingly using invalidated bills of exchange, promissory notes or cheques;

(3) illegally using another's bills of exchange, promissory notes or cheques;

(4) signing and issuing a rubber cheque or a cheque, on which the seal is not in conformity with the reserved specimen seal, in order to defraud money or property; or

(5) signing or issuing bills of exchange or promissory notes without funds as a guaranty, in the capacity of a drawer, falsely specifying the particulars thereon at the time of issue, in order to defraud money or property.

14. Whoever commits fraud by means of a letter of credit in any of the following ways:

(1) using a forged or altered letter of credit or any of its attached bills or documents;

(2) using an invalidated letter of credit;

(3) fraudulently obtaining a letter of credit; or

(4) in any other ways.

... AND if the amount involved is especially huge, and especially heavy losses are caused to the interests of the State and the people.

15. Whoever falsely makes out special invoices for value-added tax or any other invoices to defraud a tax refund for exports or to offset tax money if the amount involved is especially huge, and the circumstances are especially serious, thus causing especially heavy losses to the interests of the State.

16. Whoever forges or sells forged special invoices for value-added tax shall, if the number involved is especially huge, and the circumstances are especially serious so that economic order is seriously disrupted.

And they mean it, too.

bankonzhongguo

There will NEVER be ANY sort of offical investigation/prosecution of these this elite class of banksters/lobbyists.speculators that ran the Republic into the ground like Soros did with Asia in the 1990's. There is no Truth and Reconcillation Committee. Everyone knows it. There wasn't after the First Great Depression, or the Second. The few with much to lose have already left the country - hanging their shingle in Dubai, or some other gelded monarchy, waiting for the statue of limitations to run or to avoid another half-assed subpoena, to dance a fantasy that more consulting to make/trade debt paper is a possitive impact for society. Everyone knows its a farce.

It is most regrettable that as the real economy decouples from the Central Bank fantasy of bailing out wholesale Patrician waggering; people - Citizens, cold from the Winter, dreadful of their children's ruined future, starved for Justice will bizarrely act out of rage on those perceived un-punished criminals.

A saw a t-shirt yesterday. It said, "Kill the Rich."

jailnotbail

That's a little gauche. I prefer the 1970s expression of the same sentiment - "Eat the Rich."

TrulyStupid

It's time the American people stood up and took responsibility for their part in supporting there own exploitation. In their attempts to avoid footing the bill for outrageous spending, they have demanded lower taxes, lower interest rates and suported wasteful and immoral foreign wars. Start by changing yourselves.

mark mchugh

Know what the pivot point was for Wall Street?

The 401(k) laws that went into effect January 1, 1980.

That was the biggest, bestest bailout Wall Street ever got. For thirty years now, Americans have been throwing money at Wall Street and the biggest joke in the world is those "investments" have underperformed inflation and you still owe taxes on ALL of it (initial investment plus gain). This means inflation adjusted losses of more than 20%.

And we're going to re-load this trade?

Insanity: Doing the same thing over and over again and expecting different results.

~Einstein

Ckierst1

"It has become a oligarchic consumer capitalist society that is manipulated, in a deliberate and coordinated way, on a very large scale, through mass-marketing techniques, to the advantage of Wall Street and mega-corporations."

"They are the Wall Street elite, corporate CEOs and the privileged classes that control the power in NYC and Washington DC."

I don't disagree with main tenets of this piece. These people are criminal traitors and they and their protectors need to be punished. I disagree with calling it a form capitalism. I'm not fond of the term "crony capitalism" and its variants, because I think it muddies the water, contributes nothing to communication and permits propagandistic spin and confusion. It should be called what it is - mercantilism. An elite is benefitting and they beleive in big government to cover their actions, provide protection, propagandize, confuse and fail to properly inform the citizenry, and maintain control nationally and globally (stormtroopers). This ain't new folks. We've been at war with this impulse since the founding of the nation and we've been in the clutches of "big government" PTB for about 150 years - protosocialism and increasingly globalist socialism (progressivism). Leonard Cohen needs to ask "Which war?". Where is a jack hammer when you really need one? This shit needs to end and soon. We need real live laissez faire to re-center, determine real value and rebuild wealth. I suggest Austrian School economics.

JLee2027

P.S. Faith has no place in discussions of markets, law, economics, or finance.

One guess who decided that only Gold and Silver are money, that fiat currency is an abomination and the other rules of economics. Economic rules that are as finely and carefully balanced as the fundamental forces of the universe.

TruthHunter

Wow! What a junkfest!

Is that a president on that $100 bill, or your deity? I'm reminded of the Blood Sweat and Tears Song.

It seems to be a common philosophy around here...

"I swear there ain't no heaven and pray there ain't no hell"

Whether in bed or on a pike, all psychopaths die uneasy!

Morality and religion are difficult to separate, but the

laws of cause and effect keep working.

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