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USA Plutocracy As A Giant Ponzi Scheme In Denial

by Patrice Ayme Sun Apr 12th, 2009 at 09:05:56 PM EST

Abstract: The financial crisis is not what it is usually assumed to be. It's essentially a crisis of the plutocrats, and the economy has been stopped to come to their rescue. Sadly, it will be in vain.


April 12, 2009 by Patrice Ayme



In an excellent editorial in the New York Times, "Awake and Sing!", [NYT, April 11, 2009], Frank Rich says that: "it is time to leave behind the bubble's toxic culture that not only took away wealth but certain American values, and do something good... Some spoilsports raise the conflict-of-interest question about Summers: Can he be a fair broker of the bailout when he so recently received lavish compensation from some of its present and, no doubt, future players?" Rich, in his magnanimity, does not mention that some of the "players" have already been explicitly proposed as future recipients of the PPIP. Here is an expanded and clearer version of my comment on Frank Rich's work, that the NYT was kind enough to publish:

What is a Ponzi scheme? It is also known as a pyramid scheme. It is as scheme that is advertised as giving positive returns to investors, when, in truth, all they get is the money that new investors put in, while attracted by the claimed returns they are themselves bequeathing to their predecessors. This works until the last investors come in. The U.S. real estate market functioned like a giant pyramid scheme, the largest ever in history, and the last investors were called the "subprime" people. Naturally enough, those who set up the scheme, the plutocrats, deflected criticism heading their way, by pointing at the subprime people as the root of all evil.

Geithner's scheme, the PPIP (Public Pays for Impudent Plutocrats) is the last attempt to save the richest of the rich from the collapse of the real estate pyramid scheme. These attempts have been made, one after the other, each a variant of the preceding one, to save the hyper rich. Such attempts, to make the hyper rich as rich as it used to be, cannot fix the economy, because the economy was made poor by the hyper rich being so rich that no money was left for the real economy. So the economy is left without enough money, while most of the disposable U.S. government money is diverted to the hyper rich.

Geithner's PPIP is the most impudent Ponzi scheme ever planned in the history of humankind. It was advertised by the administration as the transfer of two trillion dollars of the public to the richest people in the world. That may sound baffling. Why, if they are already so rich, would one want to send them a few more trillions? The grave problem for these poor richest people in the world is that most of their riches is tied in derivatives, hedge funds, securitization, structured investment vehicles, most of them tremendously leveraged from real estate. In other words, the richest people in the world are threatened with losing their riches, except if the Summers-Geithner plan comes to their rescue. (By definition in this essay, some of these "hyper rich" are individuals, some are institutions, and various funds for the ultra rich, some hedge funds, some are institutions similar to hedge funds, all very leveraged with public money; an example being AIG, an insurance company part of which acted like a hedge fund; most insurance companies did nothing of the sort.)

What did some of the hyper rich do? They invested one million dollars, say, and then went to one of the largest banks, and asked the huge bank to lend them 40 millions. The bank did it, because it had huge deposits of the public's money. So the bank took the public's money and gave it to the hyper rich. Now, having started with just one million, the hyper rich had 40 million to invest. They invested it (say) in real estate.

But now the value of real estate, three years later, has been cut in half. Whereas the hyper rich invested 40 millions, now this property the hyper rich acquired is worth twenty millions. This means that, should the hyper rich try to get rid of that property, it would have a hole of twenty-million dollars, that would still be owed, by the hyper rich, to the huge bank (and, thus, indirectly, to the public). But all the hyper rich truly had was one million. Now the loan would be, typically, a "recourse" loan, which means that the huge bank, in theory, could seize the rest of the hyper rich's property, in the amount of the sum owned, namely twenty-million dollars. But you know, these people are friends. Another way had to be found. So Geithner and Summers say: "This could not possibly be right, the market is not functioning correctly. We will reflate it with taxpayer money, until the hyper rich owe nothing, and that will help everybody".

In truth it helps only the hyper rich, because millions of Americans would have been foreclosed, or forced to sell at drastically reduced prices. Moreover, Summers and Geithner plan to have hedge funds buy, with public money, only restricted types of assets, namely those the hyper rich own, and are highly leveraged with. It is not about average Americans. It's all about the hyper rich remaking their money, with transfers of public money.

There have not been enough protests to stop the deployment of the PPIP. And the somewhat similar TARP; in TARP, contrarily to the even more outrageous PPIP, loans are supposed to be paid back, and some giant banks have been making a big noise about that. They claimed they wanted to pay back the loans of TARP money right away. But they conveniently omitted to say that they had already profited from GIFTS of TARP money made through intermediaries. Thus, for example, Goldman Sachs got a gift of 12 billion of TARP dollars made through AIG, as a payment, not as a loan.)

So this will go on, until the system blows up. And it will. A back of the envelope computation, using some plausible guesswork about what the giant banks have probably been up to, shows that, just directly from real estate, the four biggest banks are in a seven trillion dollar hole. And there is more worthless debt out there. There is no way that the U.S. public will keep on paying such giant sums. At some point, purchasing pitchforks, and going out in the street will seem less expensive.

Indeed, after wasting a few trillion dollars of the public thing in that bottomless pit of endless debt owed by the insolvent hyper rich, the four big banks will still go down. They know this. So they will not lend at anything approaching the old lending levels. The giant banks are part of what is known as the "shadow banking system". That is what is completely broken beyond repair. It's this entangled mess of leveraged Structured Investment Vehicles, firms handling derivatives, hedge funds, private equity, giant banks, etc... that is shattered. The crisis will go on.

The first thing to do, at the very least, is to remove the people responsible of the crisis, as the S&L regulator, Black, pointed out. That would include Summers, who is, with Clinton, G. W. Bush, Rubin, Greenspan, and some members of the republican party under Newt Gingrich, one of the individuals most culprit of what happened. Geithner was there all along too: he is a fast talker, and know who his masters are, and serves them well. Black suggested that to find good people a good starting point was that good people pay their taxes. There are thousands of competent and honest bank managers in the USA. (To punish them, though, Geithner is going to try to bankrupt the FDIC with his PPIP Ponzi scheme, so FDIC fees will skyrocket, another way to exploit the public without directly using taxes.)

The solution is to write off the debt of the big banks (eradicate the wealth of the richest connected to that). And recapitalize. This is done by the FDIC, it's called "receivership" in the USA (more than a thousand U.S. banks have gone through receivership in the past). Anywhere else, it's called nationalization. It is all the more urgent to do so, because, now that the "shadow banking system" has vanished, it is of the essence to reconstitute conventional, old fashion, boring banking: that is the only way to get credit restarted, big time. The future consists into going back to the distant, financially healthy past, when the economy was expanding for real.

Ireland's economy has been all too much a part of the international pyramid scheme. The Irish government just wrote off the books the entire commercial sector of its 6 largest banks. This is the sort of legislative effort that needs to be done: as I suggested many times, the G20 should outright outlaw many of the financial schemes involving various derivatives, and then write off the bank debts connected to these. That would help recapitalize the banks without spending money. The drawback is that many plutocrats would be wiped out, and some small people would have to learn new names to look up to. (Apparently Putin, who also has a problem of highly leveraged plutocrats suddenly owing billions, told them there will be no rescue for them, just for the workers who work all the way down in their industries; Putin has proven a great traitor to the plutocrats who helped put him where he is; maybe Obama should emulate him? Getting rid of Summers and Geithner would be a good start.)

In most civilized countries, Summers would be viewed as completely corrupt. He pushes to send a one way gift of trillions of dollars to hedge funds, that he worked for, and obviously will work for some more. The emperor has no clothes, and advocates to strip everybody else of all their possessions, but nobody dares to say that this should stop.

In France Summers would be probably arrested next week at 3 am, his homes would be searched, his computers seized (this has happened to top bank managers in France before, and even to Louis XIV's Secretary of the Treasury). For suspected "traffic of influence". At the very least, millions of aggrieved citizens would be demonstrating in the street to ask for Summers' resignation.

But this is the USA: justice is not independent, and the public is afraid of itself. Actually, unbelievably, Federal judges are named by the president of the USA. The preceding presidents, Clinton and Bush, contributed to this giant Ponzi scheme that the financial system of the USA turned into, and contributed more than all their predecessors combined. It is actually fairly probable that this is the most corrupt episode of the entire history of the USA. It leaves far behind all the personal corruption that was involved in the launch of the Great Depression of the 1930s. How could those judges, named by those perpetrators, find that strength?


Patrice Ayme



Addendum: It is important to understand that the banks do not have a direct mortgage problem: more than 97% of the mortgages are paid in full, on time. Mortgage business is profitable. That may change, though, as Summers and Geithner extend the crisis, and leave credit starved of money (thus shrinking the economy, hence jobs).

Moreover banks can borrow from the Fed at 0% and lend long at 5%, so that, too is extremely profitable.

Thus, the basic banking business is profitable at this point. It does not have a liquidity problem.

The problem is then entirely with of the "Shadow Banking System" that the bank holding companies have allowed to steal the money from the banks, thus creating a 40 times leverage for the hyper rich. That system is so insolvent, it will disappear. Right now, it's on fire, shaken by great explosions, but desperate plutocrats and their agents (Summers, Geithner, etc.) hope to save it. It does not matter to them that much if they steal all the liquidity from the real economy, as long as they save their personal advancement to the top of the world.

Hence to restart the credit system is easy: cut off, through receivership, the link between the basic banking business and the bank holding companies that have been exploiting them. To do this, the plutocratic agents have to be removed first.

Sorry to be so repetitious, but I have been saying this for more than 8 months, and the message does not seem to have reached the mainstream media yet...


Posted in Ethics, Finance, Justice

that current Western system may be described as plutocracy. Even neocon mouthpiece Economist couple of issues ago ran a cover story on the subject, calling it plutonomy. Now ruling cliques are busy with cover up of massive frauds from public.

In a word they offer them a deal - you don't demonstrate, don't make trouble over banks bailouts, because it's anti-national, anti-patriotic, protests damage reputation of the country. In these uncertain times everybody is nationalistic. Nobody wants to be traitor.

That's why they bought off (for the time being) silence of the public, that's why nobody (even here on EuroTrib) does not want to shake the boat. That's why many people still naively believe that troubled Western banks like RBS or Citi can crawl out of crisis.

small note on Putin - he did not prove to be traitor to plutocrats cause just yet. He orchestrated (through Vnesheconombank) bailout of abominable oligarchs like Mr Deripaska, giving him money to repay Western loans. Deripaska and others devalued ruble ripping off the population. So Putin stopped bailouts only when currency collapsed on 30% (though most world currencies collapsed on the same scale, it's small consolation for ordinary people, as we in the Far East used to trade, visit and study in China, which currency yuan appreciated to dollar by 10-20%).

by FarEasterner on Mon Apr 13th, 2009 at 04:29:59 AM EST
Putin... Agreed!

Patrice Ayme Patriceayme.com Patriceayme.wordpress.com http://tyranosopher.blogspot.com/
by Patrice Ayme on Tue Apr 14th, 2009 at 02:27:31 PM EST
[ Parent ]
Patrice Ayme: USA Plutocracy As A Giant Ponzi Scheme In Denial
... Mortgage business is profitable.

Moreover banks can borrow from the Fed at 0% and lend long at 5%, so that, too is extremely profitable.

Thus, the basic banking business is profitable at this point. It does not have a liquidity problem.

The problem is then entirely with of the "Shadow Banking System" that the bank holding companies have allowed to steal the money from the banks, thus creating a 40 times leverage for the hyper rich. ...

Hence to restart the credit system is easy: cut off, through receivership, the link between the basic banking business and the bank holding companies that have been exploiting them.

Essentially what BruceMcF was suggesting a while ago...

Turning Bad Bank / Good Bank on its head (Update)

OK, now, suppose we do it this way. Bank examiners do "stress testing", which is to say, a real world audit instead of the fantasy audits that we have been doing in order to avoid official recognition of the depths of the problem. And banks that are in too much financial peril to be allowed to continue operating as they have been doing ... are put into receivership.

Now, the US government strips out the liabilities that we wish to protect ... the account liabilities ... and takes over the "good" assets. If that is a net plus, the government pays the original bank for the positive net assets. If that is a net minus, the government makes up the difference with the new Good Bank, and takes a compensating Senior claim in the old Bad Bank.

Then the residual of the old Bad Bank is run through ordinary Chapter 11 proceedings ... in most cases the shareholders will be zeroed out, the bondholders will become shareholders, the new shareholders are quite likely to sack the old senior executive management, and the old Bad Bank will see what they can do to recover whatever value can be had in the trash that forms their asset base.

The "solution" is obvious to those who don't have a personal interest in prolonging the problem...

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Apr 13th, 2009 at 04:39:57 AM EST

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