The Capitalists will sell us the rope with which we will hang them,” V.I. Lenin famously boasted. Nineteen years after the collapse of the Soviet Empire, Wall Street seems to be doing what Communism couldn’t: threading its own neck through the noose. The unfolding ship wreck is enough to bring your committed Marxist ‘round to the intractable, iron-clad reverence for the inviolability of Milton Friedman-style “free market,” gnawing itself to death like a coyote in a leg-hold trap.
In a report from the Independent, UK scientists are speculating that for the first time in human history, this summer, all the ice at the North Pole may melt, the thick pack ice already gone, leaving only thin and fragile seasonal ice that forms and melts each year. Since that disaster, and that of mega-capitalism (also on the rocks) are likely linked, which will be the first melt down, the North Pole or the Global financioeconomic system?
One cannot help harboring political thoughts vis a vis the unfolding global financial train wreck. The whole fictive “free market” whose zombies support with the fervor of Jim Jones’ People’s Temple is dragging itself down along with the economies of the United States and the rest of the world. The Bear Stearns debacle has once again displayed the “free market” to be a catastrophic fraud what with the large banking concerns just beginning to whine for help from the Federal Reserve. Again, a “Federal” as Federal Express—a consortium of private banks whose investors remain carefully concealed behind the facade of officialdom.
The background is that banking and especially central banking are vast Ponzi schemes foisted on trusting chumps, starting with England in 1697 via the Bank of England. Ponzi schemes or in this case what is called Fractional Reserve banking work just fine – until the hustlers run out of suckers. The whole modus operandi, the chimera of “growth,” is based on suckering fiat money, the fake, unbacked snot rags we call “dollars” from more and more marks, suckering new suckers in by giving the previous ones just enough of a return on their investments to “prove” the validity the market. But when you run out of suckers and can’t pay the last ones, towards the collapse of the sub-prime markets, the whole fraudulent edifice becomes poised to crumble and collapse, precisely what is beginning to occur now— on a scale beyond the ability of most ordinary schmoes to even begin to comprehend.
“It’s a gambling game,” said Scott Weir, a Durham economist, during a wide ranging six hour discussion, a marathon even for a motor-mouth like me.
“You know the story of the Florentine goldsmiths and the origin of fractional reserve banking? The story is the goldsmiths had the vaults in renaissance Florence. People would bring their gold and pay them to store it. And the smiths as a sideline would also lend out gold with interest. Eventually they realized most of the gold just sits in the vault. People reasoned, ‘I don’t have to lug all this gold around, have it stolen or lose it,” so they just carried these receipts, the note, and the note served as currency. Eventually the goldsmiths realized most of the gold is just sitting here all the time and I’ve got my gold loaned out. People don’t want the gold, they want the receipts, so I’ll just write and extra receipt on Joe’s gold and everybody’s happy, nobody’s any the wiser. Now there’re two receipts – exactly what money is.”
“Well, it’s nothing now,” I responded, “with the U.S. and the world’s abandonment of a commodity backing for money, the gold standard.”“Well, yeah.”
“‘Full faith and credit of the United States’? Hah!”
“Well, nobody has much faith in ‘em and their credit is burned which is unfortunate because everything depends on credit. Business would not exist without credit. Credit drove the industrial revolution and it’s still the foundation of business and it’s also the foundation of Social Security unfortunately. That would be sound as long as the government paid its debts, which is has up to this point.”
“Bush has tacked on another three trillion or so dollars on the deficit.”
“And that comment about the ‘worthless IOUs’ four years ago, some people took that as an explicit threat to renege on that part of the debt.”
While the Fed cheers the “innovative” financial instruments that have revolutionized investment, what they don’t tell you is that these schemes have gutted what was a fairly stable system, hollowed it out until the global structure is beginning to crack and crumble under the weight of itself and the bills that can’t possibly be paid, like the now infamous Credit Default Swap, or CDS. Simple enough in concept, insurance policies called monolines are written to holders of financial issues, securities. They render payments to hedge funds (you and your 401, say) in exchange for a payout of the issue goes south, in essence betting on a negative return. Brilliant. You really can have your cake and eat it, a financial manager can get a hefty return, win or loose – assuming the backing fund has the capital to make good on a disaster. CDSs are the epitome of the unregulated “free market.” Problem is, there are no auditors checking to see if the originating fund has the money to bail the issue out. For example, recently Morgan Stanley assumed a loss of 120 million because of a London rogue trader, Matt Piper “mismarking his books,” part of his handling of credit index options “used to gamble on contracts that can act as insurance against defaults.” 1 Besides that example, there has been little notice in the press on these sorts of potentially catastrophic games that the anointed one, Alan Greenspan “insisted that regulators keep hands off.” 2
“Bets on bets on bets on bets,” said Scott “It’s a high-stakes gambling game. And the idea of hedging, you know, you bet against yourself so you win something no matter what happens – unless the wrong thing happens, of course. Basic derivatives: options and futures contracts are the most fundamental kind of derivatives – but we’ve gone so far beyond that.”
There is an analogy to the flip of the century before last – the Guilted, oops Gilded age, very similar only the one now is a pumped up international version. Likewise, the reckless financial shell game that led to the crash of ‘29 is on the verge of hatching a new, global crash, for the same reason – the only thing the financial wizards understand is more and more and more, until the whole thing comes crashing down.
The question is could these guys be this stupid and have such short sight? Can greed transcend common sense? Well, maybe yes and maybe no. The prescient or paranoid may be inclined to think that this is a replay of the panic of 07, hatched, goes the persistent legend, by rumors ignited by J.P. Morgan to give credence to the need for the Federal Reserve, created with the help of Woodrow Wilson in 1913. This could presage some sort of a segue from the Federal Reserve built on the ruins of the Gilded Age to an international Central bank emerging out of the collapse of the modern “Platinum Age” built on a similar “need” for a global body to dictate, initially, economic issues on an international level . And then? Who knows? Your John Bircher might likely sees this as a prelude of global government, a notion that Chris Lizak, a political analyst for NCM Capital in Durham, agrees with “Big money likes to make its moves during financial crises. That was what was behind Baron Rothschild saying ‘Permit me to issue and control the money of a nation, and I care not who makes its laws.’” Lizak then quoted Jefferson, “If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them, will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.”
Given the FED’s horrible track record, the wise person would look at this whole thing very skeptically. The FED has utterly failed at everything they claim they set out to do – monumentally – and apologized for it, as did Ben Bernanke about the ‘29 Crash and subsequent depression at an event honoring Friedman’s 90th birthday:
“Let me end my talk by abusing my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna [Schwartz] You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.” 3
And here they are, doing it again! Meddling with the “free” market and giving sanction for people to make as many bad bets as want to. It’ll all be taken care of, except this one’s too big. The British, for illustration, swallowed India. China was just too big. Same thing here, except instead of geography and a piddly little opium trade, an entire global economy, wobbling like a stack of china that somebody has stacked a few too many plates on top of with the giddy insouciance of a drunk driver. Meddling with the “free” market vis a vis Bear Sterns and giving sanction for fishy financiers to make as many bad bets, derivatives, as they want to, the towering, wiggling column of derivatives brand china stacked up to 681 Trillion, so said the Bank for International Settlements in December, equivalent the gross product of all the countries in the world – times ten. When the banks really start to slide, not even the well endowed FED will be able to do a thing about it.
“Ah, everything flows downhill,” Scott laughed. “There are physical restraints on what you can do, period. Not only can’t you get more out than you put in, you can’t ever get as much out.”
“Economics and thermodynamics—loss.”
“Yeah. So there are a number of people who’ve been writing, trying to find a way to use that principle to explain economics – for twenty five years or more.”
“There is inherent loss, entropy.”“No one’s gotten it, apparently. Nobody quite has the connection, but quite clearly economic events are constrained by physical events. The economics is an over-layer. Because of the fractional reserves, we’ve gotten way out on a limb. It’s the same thing that happened in the late seventies, early eighties, only bigger. It’s big. The stagflation, low economic growth combined with inflation. Keynesian theory.
“There’s good reason to discredit what Keynes – before, anyways – that was his followers, later, after WW II—these nice, neat mechanical curves, Samuels actually—that the economy works like a solar system or a table full of billiard balls, and if you believe that, I have a nice big bridge I’d like you to buy. That’s what modern economics is. It’s a pseudo science. It’s a formulation of the classical Ricardian assumptions in terms of Newtonian mathematics. I’ve said for years the economy works like a steam engine. Steam engines involve thermodynamics. You don’t even get that in the standard mathematical formulations of classical economics. It’s total bullshit. Stagflation. That’s one of the curves, that there’s a trade off between the Phillips curve. Newtonian mathematics produces curves, functions, and you can use calculus to find out the curvature of the functions and how rapidly it’s changing at any given time.”
“To use the steam engine a little further. Steam engines have to ... you have to actually have guys digging coal out of the ground and shoveling it into a firebox. And there’s no such thing here, It’s paper, it’s treasury bonds, whatever. They can make as much as they want; it’s not like coal.”
“It’s not subject to the laws of thermodynamics, but the physical world is. That’s why the paper world keeps crashing every now and then.”
“It’s the arbitrary creation of money and wealth.”
“It’s subtler than that. You just write loans, When banks want to write loans, they do, and that increases the amount of money in circulation —and that’s what drives interest rates down.”
“Creation of money is a policy issue.”
“Yeah. It has become that because they want to regulate the economy – without regulating business, whatever that might mean.”
“Well, banking is business.”
“Yeah. So it’s a contradiction in terms from the outset. But everyone agrees that inflation in most cases is bad and most everybody agrees unemployment of any resource, my resource, their resource, everybody wants to keep their resources productive. So we want to keep prices stable and keep everything running. If your figure out how to do that, you will be killed. It is a shell game because the pretense, I don’t know if its a pretense or if they really believe they can do it, self-deception. I’m not sure just what goes on, but you can’t be sure as long as you have these arbitrary factors. What the FED does is just what banks do in general, they just do it on a larger scale and they have official sanction for it. Printing money is a good metaphor that expresses what they do. And they decide to print money because more money will get people to do more stuff. People who have more money will spend it on something. Or they decide that prices are going up. So they print less money so prices won’t go up. Nobody knows. By the mid to late seventies, it was quite clear that all these measures of how much money there was in circulation, a lot of which was developed by Schwartz and Friedman, none didn’t work. There were two, three, actually four primary different measures and they didn’t coincide in any meaningful way. The idea is ... it is smoke and mirrors. Spain experienced enormous inflation in the sixteenth century as they hauled all this gold back from the new world. Gold became worth less, quite a lot less in Spain and, ultimately, in all of Europe. There is no fixed standard of value, there can’t be.”
“It’s floating.”
“Everything ultimately floats. You can write laws and say it doesn’t, but you know, you can write laws that say you can only go fifty five miles per hour.”
“And bumblebees can’t fly.”
“Yeah, exactly. It’s smoke and mirrors. Again, nobody knows quite what money is. There are four standard definitions of money, functions of money. First, it is a medium of exchange. So anything that people choose to use as a medium of exchange therefore is money. Cigarettes are money in a war zone. Second, it is a standard of value against which other goods are valued. Well that’s fine except when it’s shifting. Third, it’s a store of value. Well that’s fine except when it’s shifting. Forth, it’s a unit of account. Well that’s fine except when things are shifting – which they constantly do. Then your accounts get screwed up and that’s what drives exchange rates, variations. That can all vanish in a blink of an eye.”
1 Craig,Susanne; Mollenkamp,Carrick. Still Brutal at Morgan Stanley.
Wall Street Journal June 19 2008
2 nd Brown, Ellen. Credit Default Swaps: Derivative Disaster Du Jour. Web page
3 Galbraith, James K. The Collapse of Monetarism and the Irrelevance
of the New Monetary Consensus. Policy note, The Levy Economics
Institute of Bard College
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