"The Jewish people as a whole will be its own Messiah. It will attain world domination by the dissolution of other races...and by the establishment of a world republic in which everywhere the Jews will exercise the privilege of citizenship. In this New World Order the Children of Israel...will furnish all the leaders without encountering opposition..." (Karl Marx in a letter to Baruch Levy, quoted in Review de Paris, June 1, 1928, p. 574)

Saturday, 8 January 2011

Fraud and Complicity Are Now the Lifeblood of the Status Quo

By Charles Hugh Smith

If the Fraud Stops the Financial System Collapses

The status quo would collapse were systemic fraud and complicity banished. Rather than the acts of evil conspirators, they have become the foundation of the U.S. economy and financial system.

Though fraud and complicity are presented in the mainstream media as isolated conspiracies outside the status quo, the truth is that the status quo is now entirely dependent on fraud and complicity for its very survival. Every level of the status quo would immediately implode were fraud and complicity suddenly withdrawn from the system.

How is this true? let me count the ways.

1. The mortgage market. As I reported recently in this Daily Finance story, the private market for mortgage-backed securities is dead. Now that we all understand the entire mortgage is not just riddled with fraud and misrepresentation of risk, but it is entirely dependent on fraud and misrepresentation of risk to function, no one is willing to touch any of this debt--except if it is guaranteed by the Federal government (and thus by its taxpayers).

Now that the systemic fraud and misrepresentation of risk have been exposed, the $10 trillion mortgage market has ceased to function except as a dumping ground where private players can dump 100% of their losses on the taxpayers (profits were privatized, losses are socialized).

2. Foreclosures and our Banana Republic system of "law". There are two sets of laws (and two sets of books) in status quo America: one set of laws for "too big to fail" banks and Wall Street, and one for the rest of us peons.

Courts Helping Banks Screw Over Homeowners.

3. Housing and commercial real estate (CRE). Does anyone seriously think housing is recovering from organic demand? Does anyone seriously think housing wouldn't fall off a cliff if the Central State withdrew its collusive propping-up of the real estate market?

As I reported in These Numbers Paint a Bleak Picture for Housing, there is essentially no evidence that housing is recovering due to "organic" (that is, non-State-manipulated) supply and demand.

Rather, Home Prices Fall in Nearly Half of U.S. Metro Areas and the percentage of underwater homeowners rises.

4. Wall Street. Perhaps no finer example of a system totally dependent on fraud and misrepresentation of risk exists than Wall Street. To pluck but a few from dozens of recent examples:

J.P. Morgan, BofA Report Perfect Trading Quarters.

Proprietary Trading Goes Under Cover: Michael Lewis.

Want to get away with murder? Become a bank.

SIGTARP Report: Treasury Hid AIG Losses.

5. The stock market. As I outlined in Dependency, The Fed and the Market (November 8, 2010), the stock market would roll over and crater without constant intervention and manipulation by the Federal Reserve and other Power Elite/Central State agencies.

Astute reader Russ R. and Zero Hedge pointed me to this interview with Jeremy Grantham in which he rightly identifies the Fed's goal as controlling the economy rather than the money supply, and the Fed's only avenue for this manipulation is the "wealth effect" which it believes is triggered by a rising stock market.

But as I laid out in Are the Fed's Honchos Simpletons, Or Are They Just Taking Orders? (November 1, 2010), the "wealth effect" and its discredited cousin, the "trickle-down" theory, are both doomed to fail.

The stock market gained over 50% in 2009, adding trillions of dollars in "wealth effect," yet the median household income fell 0.7% to $49,777 in 2009. So much for the "wealth effect" from rising stocks having any positive effect on actual household incomes.

In essence, the Fed is counting on an illusion of temporary wealth to ignite a firestorm of new borrowing and spending. Unfortunately for the Fed, 90% of American households don't own enough financial assets to feel even the illusion of newfound wealth, and those that do have been burned twice this decade when all that "wealth" in stocks vanishes (NASDAQ down almost 80% in 2000-02, S&P 500 down 45% from October 2008 to March 2009).

6. Corporate accounting. With pro-forma earnings, off-balance sheet assets, derivatives booked as "mark to fantasy," much of Corporate America's accounting is dependent on fraud and misrepresentation of risk to plump up the all-important quarterly earnings.

I have written extensively on this recently:

U.S. Financial Markets: The Well Has Been Poisoned (Anger of the Honest Part II) (October 23, 2010)

The Loss of Trust and the Great Unraveling To Come (October 18, 2010)

The Normalization of Sociopathology in America (October 16, 2010)

The Rot Within: Our Culture of Financial Fraud and the Anger of the Honest (October 15, 2010)

7. Politics. I addressed this recently in two entries:

Concentrated Wealth and the Purchase of Political Power: Democracy's Death Spiral (October 29, 2010)

The Stealth Coup D'Etat: U.S.A. 2008-2010 (October 28, 2010)

8. The entire status quo, from worker bees to Power Elites and the Political Class.

The Banality of (Financial) Evil (November 9, 2010)

The Strain of Being Evil

(The present) state is marked by the rise of the pygmy leader, the sovereign as dolt, the CEO as figurehead that knows little, who has no real need of knowing. It is in this gimlet-eyed tone that Hegel should be read when he says that "no reference to particularity of character" is necessary in the leader of an advanced state or in this case, large bank in an advanced money economy. Hegel continues:

"In a completed organization we have to do with nothing but the extreme of formal decision, and that for this office is needed only a man who says 'Yes,' and so puts the dot upon the 'i.' The pinnacle of state must be such that the private character of its occupant shall be of no significance."

What is known in the literature as "moral hazard" creates an ecology that results in moral lassitude rather than evil. Thus our bankers are no robber barons, no blood suckers, but rather "dot the i" dolts, and at their best, their very best, they are performers who pantomime what a leader should look like in order to "dot the i" or appear to.

I think that sums up the foreclosure crisis, the banks, the courts, the regulatory agencies, Wall Street, the Fed, the Treasury, and the rest of the Political Class.

When a system becomes dependent on fraud and misrepresentation of risk for "business as usual," then all that is required of the complicit is to "dot the i's" and fill out the report, court order, balance sheet, act of Congress, etc., just like everyone else does.

Thus does the banality of (financial) evil come to full flower.


How and why the next Great Depression will engulf us

Why the US economy far more fragile and vulnerable than it was in 1929

1. Our federal government, since the "Reagan Revolution" of 1981 (e.g. don't tax and spend, just borrow and spend), has borrowed during so-called good times, on a scale once reserved for a rare Keynesian stimulus to combat serious recession. Thus we find ourselves at unprecedented levels of debt (comparable, in terms of GDP, to the entire cost of World War II), and so our current Depression has begun.

2. A corrupt-to-the-core corporate structure riddled with bogus accounting, reliance on financial trickery for profits and misdirected/worthless regulatory oversight.

3. A banking sector of such debauchery and fraud that the excesses of the 1920s are by comparison more like the pranks of slighty-naughty choirboys and girls.

4. A Federal system of entitlements (Medicare, Medicaid and Social Security) which has grown far faster than the underlying economy for decades and now threatens the very solvency of the government itself, so stupendous are the future obligations.

5. A global military hegemony which costs more than all the other military's and intelligence operations of the entire world put together -- the US military consumes more oil than the nation of Sweden (9 million residents).

6. An industrial, transportation and energy infrastructure that, rather than being rebuilt during the past 26 years of debt-based "prosperity," has crumbled in a long decline. Rather than invest in electrical power grids and energy-efficient transport systems, the US squandered the trillions of borrowed dollars on toys, gewgaws, electronics made elsewhere, malls and commercial towers with only transient value and millions of bloated, inefficient poorly constructed homes no one needed or could afford, i.e. "assets" which were not productive at all, "assets" which are now capital traps on a scale heretofore unimaginable.

7. A paucity of US savings (and thus of domestic capital) with only one historical comparison: during the depths of the Great Depression when unemployment was 25%.

8. A huge reliance on financial leverage, debt, borrowing and trickery for corporate profits -- the US exports soybeans, increasingly worthless dollars and "financial innovations" that are now exploding in economies from Ireland to India with the destructive force of superweapons. In exchange for this dubious paper, we have accepted actual tangible goods from the rest of the world. And the rest of the world is now slowly waking up to the fact they've been conned on a scale few can yet grasp.

9. Globalization has reworked the global supply chain in an astonishingly brief period of time. As a result, the arbitrage of currencies, wages, governance (less is more profitable) and environmental regulations (zero is the most profitable) have all placed advanced post-industrial economies like the US at great structural disadvantage.

10. The US claims to be competitive but much of this competitiveness is highly selective and thus illusory. Everything in the U.S. -- labor, goods, buildings and taxes -- is high-cost, overregulated (except for finance, banking and governance) and vulnerable to unpredictable lawsuits and officially sanctioned looting. Other than recent immigrants, non-US employers find the workforce is often surly, unappreciative, narcissistic, entitlement-obsessed, unhealthy, poorly educated, unmotivated, and more inclined to get-rich-quick schemes than actual enterprise or productivity.

The middle management labors under impossible demands to enrich stockholders next quarter and heavy turnover insures few stay in any job long enough to learn it effectively. Team cooperation is a doublespeak fraud imposed by "facilitators," creating a phony work environment where employees and managers alike pretend to care. This bogus environment breeds a looting, game-the-system mentality in which everyone is grabbing for all they can before retirement, restructuring, reassignment, resignation or getting fired.

A "quarterly-profits-are-God" mentality reduces the workforce (even the good workers) to units of input which are pared back or hired without regard to morale or loyalty. This managerial and cultural pathology makes a mockery of worker loyalty and breeds the very qualities of distrust and "I got mine" attitude which undermines both productivity and workplace happiness.

11. Last but certainly not least, the US economy is highly dependent on cheap, abundant fossil fuels -- the very fuels that are in the global depletion phase, happy stories about unlimited natural gas and tar sands notwithstanding.

For all these reasons, we can anticipate that the Depression currently beginning to unfold will be deeper, longer and more destructive than the Great Depression of the 1930s.

Next, let's recount the chain of events that partly parallel those of the first Great Depression but are about to synergistically take their toll in even more destructive ways:

1. The postwar income convergence (i.e the rise of the great middle class, the reduction of poverty and the relative reduction of the Plutocracy's share of national income) reverses in the early 1970s as the "true prosperity" of the postwar era ends and is replaced by income flowing increasingly to the top, as stagflation, globalization and the decline of dollar gut the purchasing power of the middle class.

2. The rising productivity of the 50s and 60s slips into flatline throughout the 70s and early 80s, only picking up again as computer software and hardware revolutionize the back office, sales, manufacturing, just-in-time shipping/production, etc.

3. Concurrent with this gradual return to productivity in the mid-80s is the gradual rise of finance as the key profit-center of corporate America. As income skews ever more heavily to the top 1-5%, capital/productive assets become ever more heavily concentrated in the hands of the financial Plutocracy. The top 1% now owns some 2/3 of the nation's entire productive wealth.

4. As profits rise (from rising productivity), profits flow not to wages (which remain flat-to-down from 1975 to 2009 for all but the top-10% professional class), but rather they flow to that 1% who own the lion's share of the capital / productive assets.

5. As the middle class experiences a decline in their income and purchasing power (for reasons cited above, i.e. declining dollar, rising income disparity, and wages falling due to global wage arbitrage), they (the middle class) turn more and more to borrowing and ever greater debt, to `pay' for what they have been brainwashed to believe is "the American dream" of imported luxury goods, bloated homes, vacuous cruises, etc.
The only other mechanism available to the middle class to increase household income, besides longer hours of work, is for Mom/Aunt/Grandmom to enter the workforce, which she does in the tens of millions, with sociological consequences that are still unfolding (i.e. ever higher rates of juvenile delinquency, drug abuse, homicide and suicide).

6. This advert/media-driven desire to borrow to fund the "good life" is hugely profitable to the money-center banks, which expand rapidly into mortgage securization, derivatives and consumer credit, to the point that they come to dominate corporate profits.

7. The financial Plutocracy, observing that actually producing goods is no longer very profitable unless you can fix prices, as per ADM (Archer Daniels Midlands), or gain government subsidies and tax giveaways (oil lease depreciation, etc.), sinks its capital into the FIRE economy (finance, insurance and real estate), eschewing real-world investments as comparatively unprofitable.

(Though rarely noted, this is a longstanding trait of capitalism stretching back to 1400-era Venice: When trade became less profitable than mainland farming, the Venetian Elite stopped funding trading and bought farms on the mainland. As a side effect, Venice ceased to be a military and trading power. But the Elite remained immensely wealthy.)

8. As the tech bubble expands, middle-class investors see the Plutocracy (those with enough capital to qualify as angel investors of vulture . . oops, I mean venture, capital) reaping huge gains, and they enter the dot-com stock bubble buildup with a vengeance.

9. In a happy accident, the Soviet Empire collapses just as productivity begins its computer-fueled rise in the US. In a so-called Unipolar World, in which US military, political and financial influence is unrivaled, non-US investors seek the relative safety and high returns (based on appreciation of the dollar) of US financial instruments.

10. The dot-com bubble implodes in a speculative meltdown (dot-bomb), and retail investors (a.k.a. middle class 401K investors) are devastated. The ephemeral wealth they once possessed, however briefly, fuels their speculative desire to get into the next get-rich-quick game, which just so happens to be "something everyone understands:" real estate and housing.

11. Having exhausted the dot-com play, Elite capital seeks a new high-profit home. The miracles of derivatives (CDOs, credit default swaps, etc.) and securitized debt (mortgage tranches, etc.) open up vast new opportunities for leverage (investing using lots of other peoples money), off-balance sheet shenanigans, and outright fraud/debauchery of credit. As chip wafer plants disappear from Silicon Valley (too dirty, too costly, etc.), they're replaced with paper, i.e. mortgage-backed securities that eventually prove to be near worthless.

12. Sniffing gold in them thar exurban hills, the under-capitalized and over-indebted US working class and middle class reach for the chalice of easy-money gold: leveraged real estate.

13. With the Federal financial regulatory agencies in a Republican/Democrat-enforced somnambulance, the coast is clear for brigands, shysters, fraudsters, con artists, liars, cheats, and assorted riff-raff in the realtor, mortgage and appraisal businesses, who all feed the ravenous maw of the money-center banks' apparently limitless appetite for real estate assets to securitize and leverage in exotic and highly profitable ways.

14. For a wonderful five years circa 2001-2006, "the game" is afoot, and no-down-payment Jill and $100-million-bonus Jack get immensely enriched. Meanwhile, the underlying real economy is becoming ever more unbalanced and ever more fragile as real production and real productivity plummet, and everyone rushes to the speculative riches of exurban McMansions and malls.

15. This last best speculative leveraged bubble pops, gutting a Wall Street that had grown utterly dependent on ever greater degrees of leverage & debt, fraudulent accounting, and bubbles, for its rising profits.

16. Doubly devastated by the implosion of housing and their stock investments (mostly in retirement funds), the middle class faces the terrible consequences of its 26-year stupor regarding the ever-rising indebtedness that surrounds them and engulfs them. Alas, the Emperor's new clothes are revealed as remarkably transparent.

17. Just as in the Great Depression, and to its great surprise, the Elite has also suffered catastrophic losses and declines in capital and income.

18. Having borrowed and squandered trillions of dollars since 1981 on unaffordable entitlements, military misadventures and assorted worthless bridges-to-nowhere pork spending, the Federal government (the Fed and the Treasury) finds that its ability to borrow its way out of its current debt hole is limited. The rest of the world has finally caught on to the con, and Chinese university students openly mock Treasury Secretary Geithner's Orwellian claim that "we support a strong dollar." The miracle is that he was not pelted with tomatoes for making such an absurd statement.

19. With the global media concentrated in a scant few corporate hands, this pulling away the curtain is purposely ignored by the media, in their ruthless campaign of pure "green shoots" propaganda.

20. As the wheels fall off the US economy and bubbles cannot be re-inflated, fruitless attempts at holding back the tide with incantations (stop, tide, I am Obama/Geithner/Bernanke!) and loopy claims (the market bottom is here, buy now! -- Green shoots are sprouting everywhere) abound. Unresponsive to such propaganda, the real economy grinds down into a global Depression without foreseeable end.



Post a Comment

Subscribe to Post Comments [Atom]

<< Home