Let banks fail, says Nobel economist Joseph Stiglitz

Posted on April 14, 2014 by

Haidar, Suhasini. Jan 29, 2017. Trump makes sense to a grocery store owner. thehindu.com

Economist-mathematician Nassim Nicholas Taleb is seen as something of an oracle, given that he saw the 2008 economic crash coming, predicted the Brexit vote, and the outcome of the Syrian crisis. Do you see another crisis coming?

Oh, absolutely! The last crisis [2008] hasn’t ended yet because they just delayed it. Obama… didn’t fix the economic system, he put Novocain in the system. He delayed the problem by working with the bankers whom he should have prosecuted. And now we have double the deficit to create six million jobs, with a massive debt and the system isn’t cured. We retained zero interest rates, and that hasn’t helped. Basically we shifted the problem from the private corporates to the government in the U.S. So, the system remains very fragile.  People don’t realize that Obama created inequalities when he distorted the system. You can only get rich if you have assets. 

Feb 2, 2009 www.telegraph.co.uk/finance/

The Government should allow every distressed bank to go bankrupt and set up a fresh banking system under temporary state control rather than cripple the country by propping up a corrupt edifice, according to Joseph Stiglitz, the Nobel Prize-winning economist. Professor Stiglitz, the former chair of the White House Council of Economic Advisers, told The Daily Telegraph that Britain should let the banks default on their vast foreign operations and start afresh with new set of healthy banks.

“The UK has been hit hard because the banks took on enormously large liabilities in foreign currencies. Should the British taxpayers have to lower their standard of living for 20 years to pay off mistakes that benefited a small elite?” he said. “There is an argument for letting the banks go bust. It may cause turmoil but it will be a cheaper way to deal with this in the end. The British Parliament never offered a blanket guarantee for all liabilities and derivative positions of these banks,” he said. Mr Stiglitz said the Government should underwrite all deposits to protect the UK’s domestic credit system and safeguard money markets that lubricate lending. It should use the skeletons of the old banks to build a healthier structure. “The new banks will be more credible once they no longer have these liabilities on their back.”

Mr Stiglitz said the City of London would survive the shock of such a default because it would uphold the principle of free market responsibility. “Counter-parties entered into voluntary agreements with the banks and they must accept the consequences,” he said. Such a drastic course of action would be fraught with difficulties and risks, however. It would leave healthy banks in an untenable position since they would have to compete for funds in the markets with state-run entities. Mr Stiglitz’s radical proposal is a “Chapter 11” scheme for households to allow them to bring their debts under control without having to go into bankruptcy. “Families matter just as much as firms. The US government can borrow at 1pc so why can’t it lend directly to poor people for mortgages at 4pc. ,” he said.

Feb 3, 2009 German news service Deutsche Welle asks Stiglitz:

Q: Economists Nouriel Roubini and Nassim Taleb, who predicted the global economic downturn, have called for a nationalization of banks in order to stop the financial meltdown. Do you agree?

A: The fact of the matter is, the banks are in very bad shape. The U.S. government has poured in hundreds of billions of dollars to very little effect. It is very clear that the banks have failed. American citizens have become majority owners in a very large number of the major banks. But they have no control. Any system where there is a separation of ownership and control is a recipe for disaster. Nationalization is the only answer. These banks are effectively bankrupt.

In 2010 Stiglitz said “What is needed is a quick write-down of the value of the mortgages. Banks will have to recognise the losses and, if necessary, find the additional capital to meet reserve requirements. This, of course, will be painful for banks , but their pain will be nothing in comparison to the suffering they have inflicted on people throughout the rest of the global economy.”

Ilargi at theautomaticearth replies “The reality is though, and it’s hard to believe Stiglitz doesn’t see this, that if mortgage values are written down to realistic levels, i.e. levels that a nation of debt ridden consumers could buy a home at, it wouldn’t just be painful to the banks, it would kill them outright. As it would the US government, which has untold trillions in both mortgages and securities bet on the notion that it can keep those levels up. Neither the government nor the banks, have any intention of letting that happen, unless it becomes inevitable. By which time they wager they’ll have secured as much and as many of their own interests at the cost of the American people as they possibly can.”

Posted in Banking | Comments Off on Let banks fail, says Nobel economist Joseph Stiglitz

What derivatives are and why you’re screwed

Posted on April 14, 2014 by

You are the Crisis

Feb 2, 2009 by Ilargi at theautomaticearth

Oh no, we’re not rid of the bad bank drivel yet, are we? I started out trying to make a point about the character of the paper a bad bank, wherever on the planet, would be set up to buy. And I wrote this:

It may well be wise, just so everyone gets a clearer picture of what we are talking about, to stop referring to all this paper as “assets” or “investments”. In this case, these are misleading terms. An asset is something that exists in the real world. A derivative, on the other hand, can best be compared to the paper slip you receive at the racetrack when you place a bet on a horse. That paper slip doesn’t buy you a part of the horse, it buys you the chance of winning an X amount of money if the horse wins the race you’re betting on. When that race is run, you have either won that X amount or you have lost the money the wager has cost you.

Now, that took me back to something I wrote on September 29, 2008, the day the original TARP bail-out was defeated in the House, and the Dow fell 777 points. It was called: Monday at the Racetrack. Allow me please to quote myself, taking into consideration that the big Dow drop came after I wrote it.

(Sep 29 2008) If you go to the racetrack and bet on a horse, you receive a piece of paper that confirms the bet you made. There are many different varieties of bets possible; for now, let’s say you simply bet on one specific horse to win the race. After the race is over, you have either won your bet or lost it. There’s nothing difficult about the process, anyone can -learn to- understand it, and everyone, except in very rare circumstances, accepts it, both the winners and the losers.

What is happening in world finance these days is that a group of very heavy betters have become very heavy losers, and they have done so with borrowed money. In the past few years, in order to hide their losses, they have turned to a very clever little trick: they want to make us believe that the race is not over, even though we can all see that it is. In fact, if they have their way, the race will never be over, unless and until their horse wins.

The US government has joined the argument on the side of the losing betters. They have allowed the losers – who are their friends-, for years, to hide their predicament, their losing tickets, through Level 3 and off-balance sheet “creative accounting”. Now that the government’s betting buddies’ creditors are losing patience, and demand their money back, which the buddies don’t have, the Fed and Treasury want to buy all those losing tickets, with money that belongs to the taxpayers whose best interests they are presumed to represent.

And they up the ante today: the president declares that this will cost the taxpayer nothing; and if you believe that one, you’ll like the guys who claim that there are profits to be made on this avalanche of losing bets. Now there’ll be plenty of “experts” who are more than willing to tell you that comparing mortgage-backed securities –to take just one sort of bet–  with horse racing is inherently flawed. Their argument will be that there is true value behind the securities: the homes that were purchased with the underlying mortgages.

At first glance, that may look plausible: it seems clear that the homes are not all of a sudden worthless, so how could the mortgages and securities be? My first thought is that the horse you bet on is not worthless either just because it lost one race. But that doesn’t make you win your bet, does it? And the horse is still tired. There are deeper problems with the “the home still has value” argument. The most flagrant is the actual purchase prices, which doubled or tripled in a decade, while no value was added to the home itself. From that follows that many homes were sold at prices that people couldn’t truly afford. The US has for that reason already seen millions of foreclosures, with many more inevitably to come. And the elevated prices, of course. are also the ones the securities are based on.

So perhaps at some time in the future your losing horse might win a race, and perhaps at one point some money can be made on a new mortgage for a foreclosed home. But that makes no difference for your losing bet, and neither does it make the securities valuable again. Both races are over. For good. Which makes it impossible for the US taxpayer to play even on the losing betting tickets their government is about to buy with their money, while making a profit on them is too ridiculous to seriously discuss.

If home sales ever recover to any kind of extent, it will be at prices that are far lower than they have been so far in this millenium. That is the only way to make them affordable. And even if it happens, it is going to take years. In the meantime, the gambling losses will have to be paid. Your government tries to convince you that your life will be miserable without their losing betting buddies. If you ask me, it will be much worse with them, because if you want to keep them around, you’ll have to pay their debts. And they’ll just use the money to go bet on the next race. Maybe you should keep the money and buy your own tickets. That way you get to keep the profits too, if there are any.

But if I were you, I’d lay off the gambling for a while. It looks to me like a sure bet that you’re going to need every penny you have just to feed your children.

Back to today: I know the above is not perfect, but it still works for me. I must admit, as I read back, I’m sort of surprised myself how little has changed since then, with all the things that have happened, including of course the new US president. Who now is discussing doing the same thing: buying leftover paperslips from bets lost long ago. And doing so with your money. But that’s not the only thing wrong with this.

Buying $1 trillion worth of toxic assets is nowhere near enough, it doesn’t even begin make a dent in the mess. And if too much of the soiled casino bathroom tissue is left behind in the banks’ vaults, two things inevitably will happen. First, no confidence is restored. None. And second, banks will have to keep hoarding cash to provide for the additional writedowns on the remaining assets, writedowns everybody knows (but doesn’t tell) that are sure to come. The report from the Office of the Comptroller of the currency we discussed last week states that just the three biggest US banks have over $170 trillion “worth” in derivatives positions. Their real assets are stated as just over $5 trillion, and even then we have to look at how real these are.

What lies in the vaults of the remaining 8500 US banks “insured” by the FDIC is an open question. Let’s assume it’s another $170 trillion when all is added up. There are scores of institutional investors, insurance companies, pension funds, hedge funds, mutual funds, etc., that have positions in these wagers. The essential point in all of it, I think, is that the bets have already been lost. That is, the paper is worth close to zero. You’re about to just about literally purchase the emperor’s clothes. As much as people like Tim Geithner, last week before the Senate Finance Committee, and the CEO’s of the banks involved, shout at the top of their lungs that it’s oh-so hard to value the paper, it’s simply not. Just lay it out on the table, and you’ll know.

Thing is, if it were on that table for everyone to see, it would have to be marked to a market value of pennies on the buck, simply because that is the market value. Thing is also that as long as it’s not on the table, it will be politically palatable to to shove additional trillions of dollars that belong to people not yet born, towards institutions whose “leaders” have amassed hundreds of millions for their individual selves, by cashing in on the 1-in-10 bets that won, while offloading the 9-in-10 that lost, onto the public coffer.

Today, your new president and his team are trying hard to find a way to make you believe the races haven’t been run yet. But they have. And that’s why it takes so long to get a bad bank plan together: They need to find the words and reasoning and excuses to make it politically palatable. That is what’s hard, that is what’s making it take so long. It’s not about applying valuations to toilet paper. We all know what that’s worth. It’s about making you believe that the valuation is indeed difficult. Because if you believe that, more of your money, and that of your children, can be stolen from you. Geithner last week talked about computer models putting values on the paper, and about independent (yeah, right!) institutions doing so. Both have failed miserably. All that’s left is a market that will slaughter the entire thing. And that’s not what they want. And that’s what makes it take so long. Nothing has changed since September 29.

Every single day, every single move by our governments dig us into ever deeper holes. Maybe you remember, or at least can imagine, how it was when you were five years old, and tried to cover a lie with another lie, and then another, and all the time you were afraid your mother would see right through you. See? That’s the essence of the emperor’s new clothes, an dof our new-fanged government policies.

Anyway, I’m just trying to tell you, once more, that assets are not necessarily assets, even if your president tries to make you believe that they are, or can be, or might be sometime in the future. So there you have it: if only 15% of the paper slips of only the 3 biggest US banks goes stale and stinky, there is a loss risk of over $25 trillion, roughly twice the annual US GDP. This is not a secret in banking circles. Therefore, $1 trillion will do nothing towards restoring confidence. It’s like the emperor in his new clothes plays hide and seek. And you’re it.

Posted in Derivatives | Comments Off on What derivatives are and why you’re screwed

Wall Street’s version of capitalism is a fraud wrapped inside a delusion

Posted on April 14, 2014 by

Demerit-Based Pay

Feb 5, 2009. Eric J. Fry. Rude Awakening

Russia, according to Winston Churchill, was a “riddle wrapped inside an enigma.” Wall Street’s version of capitalism, according to us, is a fraud wrapped inside a delusion.

The fraud is that merit-based pay is always meritorious; the delusion is that capitalist enterprises are always capitalistic.

When you combine these two deceptions, you find lots and lots of people defending the right of incompetent corporate executives to receive multi-million-dollar paychecks…even after the companies that employ these executives receive multi-billion bailouts from the U.S. government.

Sadly, mass deceptions tend to maintain their grip on the public imagination for destructively long periods of time. The executive compensation deception is no different. During the many years that stocks priced trudged from their 1982 lows to their 2007 highs, the merit-based pay deception advanced from benign heresy to malignant gospel.

A series of warped deductions about cause and effect led America to embrace one of the greatest financial frauds of all time. Here’s how the rationale for merit-based pay mutated over time:

A CEO who increases shareholder value is a good CEO; and if a company’s shareholder value is increasing, its share price will also increase over time. And if a company’s share price increases over time, shareholder wealth increases. Therefore, to the extent that a company’s share price is rising, the company’s CEO is a good CEO who deserves hefty compensation.

Unfortunately, dear investor, “rising share price” is not a synonym for “shareholder value”…and every merit-based CEO in America understands the difference. Indeed, some of America’s worst CEOs deliberately and methodically erode shareholder value, solely for the sake of boosting their company’s share price and – oh by the way – their own “merit-based pay.”

One of the most popular tactics is called the “option grant,” whereby a company dispenses massive amounts of stock options to its executive team, in addition to traditional cash compensation. The stated rationale for these option grants (often stated by a grant recipient) is to incentive executives to focus their efforts on activities that will produce a rising share price. But of course, most executives exercise about as much influence over their companies’ share prices as a starfish over a tsunami.

By contrast, the option grant compensation mechanism itself CAN influence the share price. Back in the go-go days of the dot.com era, lots of tech companies doled out lots of stock options. And since these option grants did not show up in the income statements as a compensation expense, the companies that dispensed the grants were able to report much higher earnings than if they had paid equivalent amounts of compensation in cash. This practice provided no small benefit in the dot.com days, when “beating the estimate by a penny” could goose a stock by 30% or 40% in a single day.

As long as share prices were rising, no one cared that the expense of option grants landed squarely on the backs of common shareholders as a reduction of “shareholder equity.” But they should have. To satisfy the option grants, companies issued new shares. If the share count goes up without any underlying change to the balance sheet, each share of stock outstanding represents a smaller piece of the company and, therefore, is worth less than before.

Favored tactic #2: The share buy-back. This tactic is a very simple, and effective, executive-enrichment tool, especially when used in concert with tactic #1, the option grant. The share buy-back is exactly that, buying shares of the company with cash from the corporate treasury.

Not all buy-backs are bad, of course, but many are. A good buy-back uses corporate cash to buy the DEPRESSED shares of a company – e.g., buying one dollar of assets for fifty cents. A bad buyback does the opposite. But for some corporate insiders, nothing feels quite as good as a buyback that is bad…very, very bad.

An option-laden executive loves the buyback for two reasons: 1) It contributes some marginal buying interest to the marketplace, thereby helping to boost the share price and; 2) It reduces the number of shares outstanding, which helps to produce a more flattering earnings per share result.

Are you confused yet? You should be; Tactic #1 increases the share count. Tactic #2 DECREASES the share count.

The sinister nature of coordinated option grants and share buybacks becomes painfully clear when you realize that many, many American companies simply churn the number of share outstanding without producing a net benefit for the common shareholder. The churning activity does, however, produce an enormous benefit for company insiders.

Many, many other tactics – both legally fraudulent and overtly criminal – can combine to produce simultaneous wealth creation for management and wealth destruction for shareholders. Few played this game with greater audacity than the federally coddled GSEs, Fannie Mae and Freddie Mac.

In July 2003, my former colleagues at Apogee Research, led by a brilliant forensic accountant named Robert Tracy, observed, “For the two years ended December 2002, Fannie [Mae] lost $11.8 billion of asset value that was never reflected in its GAAP [accounting] calculations, while simultaneously reporting GAAP earnings of $10.5 billion. Had the lost asset value been included in Fannie’s GAAP net income, it would have booked losses for both years.”

Obviously, the difference between a profit of $10.5 billion and a loss of more than $1 billion during the years 2001 and 2002 would have seemed material to some investors – material enough to have kicked Fannie’s share price into cellar.

The list of abuses committed in the name of merit-based pay does not end with option grants and buybacks. Indeed, many of the merit-based compensation schemes do not erode shareholder value methodically. Instead, they place shareholder capital in extreme peril, solely for the sake of a rising share price. Let’s call this the “Wall Street Model.”

The main advantage of this tactic, from a CEO’s standpoint, is that criminal intent is much harder to prove. A CEO who causes his company to leverage up the balance sheet 45-to-1 and uses the leverage to buy risky securities that no pawnbroker would buy at any price can say, “Hey, it seemed like a good idea. Everyone else was doing it. Besides, it wasn’t even our fault. It was those damn short sellers that caused the problem!”

And if you believe that, then you might also believe that nominally capitalist enterprises always behave capitalistically. But they don’t. And neither does the American capitalistic system.

The “capitalists” on Wall Street probably imagine that their DNA descends from the likes of Henry Ford, Sam Walton, Bill Gates or some other legendary entrepreneur. But under the microscope of honest examination, Wall Street’s DNA appears almost identical to that of most DMV workers.

Like their DMV counterparts, Wall Street’s chieftains punch a clock each day, devise ways to work as little as possible, provide as little assistance to clients as possible, and periodically tabulate the value of their entitlements.

Stated simply, CEOs are not entrepreneurs. They are stewards of the owners’ capital. A good steward deserves a good reward…after the fact. A bad steward deserves a pink slip, and two weeks severance. A very bad steward deserves litigation.

But American capitalism has strayed very far from these simple precepts of appropriate compensation. Miserable CEOs make spectacular amounts of money. And recent attempts to bring compensation back into line with actual merit must face an indignant chorus of apologists who complain that government-mandated pay is anti-capitalist and interferes with the free market.

Really? Don’t trillion-dollar bailouts interfere just a little bit with the free market?

Wall Street’s version of “capitalism” seems to distinguish between different parts of a corporate balance sheet. Assets and revenues belong to the “capitalists;” liabilities and expenses belong to the government. I’ve got a four-letter word for that: Balderdash.

A capitalist takes responsibility for every part of the balance sheet and a truly free market treats assets and liabilities with ambivalence. A free market does not care if the assets belong to a sinner or a saint, or if the liabilities belong to high school dropout or a PhD in Economics. And a free market doesn’t give a hoot if the victims of financial mismanagement belong to a country club or a bowling league.

So if the truly free markets don’t care about these considerations, why should anyone else?

To conclude, we would like to issue both a word of caution and an apology. First, the word of caution: The fact that obscenely large executive compensation packages can still claim legions of defenders and apologists suggests that the financial crisis has not yet run its course. When merit-based compensation features more prison bracelets than option grants, the crisis may be drawing to a close…but not until then.

And now for our apology: We admit that comparing a Wall Street CEO to a DMV employee is neither exactly fair, nor exactly kind. We apologize, therefore, to all employees of the DMV.

Posted in Distribution of Wealth | Comments Off on Wall Street’s version of capitalism is a fraud wrapped inside a delusion

Your Bank is NOT Safe

Posted on April 14, 2014 by

PublicBankingTV : Your Money Is Not Safe in the Big Banks

August 25, 2013 by Ellen Brown

This 13 minute video explains the situation well, a couple of points made:

  • In 2014 the FDIC can only cover .25% of deposits and .008% of derivatives now.
  • Dodd-Frank assigns losses to unsecured creditors if there is another banking crash.  You are an unsecured creditor, so that means your money will be confiscated.
  • Solutions: a state-level public bank like North Dakota’s which treats funds as a utility and invests in local priorities, completely independent of risky wall street gambling tactics and not at risk of confiscation like the big banks.

How Safe is My FDIC-Insured Bank Account?

2008. Chris Martenson.  marketoracle.co.uk

Why cash is better than gold

 

How to preserve your wealth in the worst depression ever

 

Think Your Money is Safe in an Insured Bank Account? Think Again.

July 5, 2013 by Ellen Brown

Some excerpts:

A trend to shift responsibility for bank losses onto blameless depositors lets banks gamble away your money.

Who should bear the loss in the event of systemic collapse? The choices currently on the table are limited to taxpayers and bank creditors, including the largest class of creditor, the depositors. Imposing the losses on the profligate banks themselves would be more equitable , but if they have gambled away the money, they simply won’t have the funds.

The solution:

Real nationalization occurs when governments act in the public interest to take over private property. . . . Nationalizing the banks along these lines would mean that the government would supply the nation’s credit needs. The Treasury would become the source of new money, replacing commercial bank credit. Presumably this credit would be lent out for economically and socially productive purposes, not merely to inflate asset prices while loading down households and business with debt as has occurred under today’s commercial bank lending policies. 

Anne Sibert proposes another solution along those lines. Rather than imposing losses on either the taxpayers or the depositors, they could be absorbed by the central bank, which would have the power to simply write them off. As lender of last resort, the central bank (the ECB or the Federal Reserve) can create money with computer entries, without drawing it from elsewhere or paying it back to anyone.

That solution would allow the depositors to keep their deposits and would save the taxpayers from having to pay for a banking crisis they did not create. But there would remain the problem of “moral hazard” – the temptation of banks to take even greater risks when they know they can dodge responsibility for them. That problem could be avoided, however, by making the banks public utilities, mandated to operate in the public interest. And if they had been public utilities in the first place, the problems of bail-outs, bail-ins, and banking crises might have been averted altogether.

Winner Takes All: The Super-priority Status of Derivatives

April 9, 2013 by Ellen Brown

Derivatives have “super-priority” status in bankruptcy, and Dodd Frank precludes further taxpayer bailouts. In a big derivatives bust, there may be no collateral left for the creditors who are next in line.  

When governments are no longer willing to use taxpayer money to bail out banks that have gambled away their capital, the banks are now being instructed to “recapitalize” themselves by confiscating the funds of their creditors, turning debt into equity, or stock; and the “creditors” include the depositors who put their money in the bank thinking it was a secure place to store their savings. The Cyprus bail-in was not a one-off emergency measure but was consistent with similar policies already in the works for the US, UK, EU, Canada, New Zealand, and Australia, as detailed in my earlier articles here and here.  “Too big to fail” now trumps all.  Rather than banks being put into bankruptcy to salvage the deposits of their customers, the customers will be put into bankruptcy to save the banks.

Why Derivatives Threaten Your Bank Account

The big risk behind all this is the massive $230 trillion derivatives boondoggle managed by US banks. Derivatives are sold as a kind of insurance for managing profits and risk; but as Satyajit Das points out in Extreme Money, they actually increase risk to the system as a whole.

In the US after the Glass-Steagall Act was implemented in 1933, a bank could not gamble with depositor funds for its own account; but in 1999, that barrier was removed. Recent congressional investigations have revealed that in the biggest derivative banks, JPMorgan and Bank of America, massive commingling has occurred between their depository arms and their unregulated and highly vulnerable derivatives arms. Under both the Dodd Frank Act and the 2005 Bankruptcy Act, derivative claims have super-priority over all other claims, secured and unsecured, insured and uninsured. In a major derivatives fiasco, derivative claimants could well grab all the collateral, leaving other claimants, public and private, holding the bag.

The tab for the 2008 bailout was $700 billion in taxpayer funds, and that was just to start. Another $700 billion disaster could easily wipe out all the money in the FDIC insurance fund, which has only about $25 billion in it.  Both JPMorgan and Bank of America have over $1 trillion in deposits, and total deposits covered by FDIC insurance are about $9 trillion. According to an article on Bloomberg in November 2011, Bank of America’s holding company then had almost $75 trillion in derivatives, and 71% were held in its depository arm; while J.P. Morgan had $79 trillion in derivatives, and 99% were in its depository arm. Those whole mega-sums are not actually at risk, but the cash calculated to be at risk from derivatives from all sources is at least $12 trillion; and JPM is the biggest player, with 30% of the market.

It used to be that the government would backstop the FDIC if it ran out of money. But section 716 of the Dodd Frank Act now precludes the payment of further taxpayer funds to bail out a bank from a bad derivatives gamble. As summarized in a letter from Americans for Financial Reform quoted by Yves Smith:

Section 716 bans taxpayer bailouts of a broad range of derivatives dealing and speculative derivatives activities. Section 716 does not in any way limit the swaps activities which banks or other financial institutions may engage in. It simply prohibits public support for such activities.

There will be no more $700 billion taxpayer bailouts. So where will the banks get the money in the next crisis? It seems the plan has just been revealed in the new bail-in policies.

All Depositors, Secured and Unsecured, May Be at Risk

The bail-in policy for the US and UK is set forth in a document put out jointly by the Federal Deposit Insurance Corporation (FDIC) and the Bank of England (BOE) in December 2012, titled Resolving Globally Active, Systemically Important, Financial Institutions.

In an April 4th article in Financial Sense, John Butler points out that the directive does not explicitly refer to “depositors.”  It refers only to “unsecured creditors.”  But the effective meaning of the term, says Butler, is belied by the fact that the FDIC has been put on the job. The FDIC has direct responsibility only for depositors, not for the bondholders who are wholesale non-depositor sources of bank credit. Butler comments:

Do you see the sleight-of-hand at work here? Under the guise of protecting taxpayers, depositors of failing institutions are to be arbitrarily, de-facto subordinated to interbank claims, when in fact they are legally senior to those claims!

The FDIC was set up to ensure the safety of deposits. Now it, it seems, its function will be the confiscation of deposits to save Wall Street. In the only mention of “depositors” in the FDIC-BOE directive as it pertains to US policy, paragraph 47 says that “the authorities recognize the need for effective communication to depositors, making it clear that their deposits will be protected.” But protected with what? As with MF Global, the pot will already have been gambled away. From whom will the bank get it back? Not the derivatives claimants, who are first in line to be paid; not the taxpayers, since Congress has sealed the vault; not the FDIC insurance fund, which has a paltry $25 billion in it. As long as the derivatives counterparties have super-priority status, the claims of all other parties are in jeopardy.

That could mean not just the “unsecured creditors” but the “secured creditors,” including state and local governments. Local governments keep a significant portion of their revenues in Wall Street banks because smaller local banks lack the capacity to handle their complex business. In the US, banks taking deposits of public funds are required to pledge collateral against any funds exceeding the deposit insurance limit of $250,000. But derivative claims are also secured with collateral, and they have super-priority over all other claimants, including other secured creditors. The vault may be empty by the time local government officials get to the teller’s window. Main Street will again have been plundered by Wall Street.

Super-priority Status for Derivatives Increases Rather than Decreases Risk 

Harvard Law Professor Mark Row maintains that the super-priority status of derivatives needs to be repealed. He writes:

. . . [D]erivatives counterparties, . . . unlike most other secured creditors, can seize and immediately liquidate collateral, readily net out gains and losses in their dealings with the bankrupt, terminate their contracts with the bankrupt, and keep both preferential eve-of-bankruptcy payments and fraudulent conveyances they obtained from the debtor, all in ways that favor them over the bankrupt’s other creditors.

. . . [W]hen we subsidize derivatives and similar financial activity via bankruptcy benefits unavailable to other creditors, we get more of the activity than we otherwise would. Repeal would induce these burgeoning financial markets to better recognize the risks of counterparty financial failure, which in turn should dampen the possibility of another AIG-, Bear Stearns-, or Lehman Brothers-style financial meltdown, thereby helping to maintain systemic financial stability.

In The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences, David Skeel agrees. He calls the Dodd-Frank policy approach “corporatism” – a partnership between government and corporations. Congress has made no attempt in the legislation to reduce the size of the big banks or to undermine the implicit subsidy provided by the knowledge that they will be bailed out in the event of trouble.

Undergirding this approach is what Skeel calls “the Lehman myth,” which blames the 2008 banking collapse on the decision to allow Lehman Brothers to fail. Skeel counters that the Lehman bankruptcy was actually orderly, and the derivatives were unwound relatively quickly. Rather than preventing the Lehman collapse, the bankruptcy exemption for derivatives may have helped precipitate it.  When the bank appeared to be on shaky ground, the derivatives players all rushed to put in their claims, in a run on the collateral before it ran out. Skeel says the problem could be resolved by eliminating the derivatives exemption from the stay of proceedings that a bankruptcy court applies to other contracts to prevent this sort of run.

Putting the Brakes on the Wall Street End Game

Besides eliminating the super-priority of derivatives, here are some other ways to block the Wall Street asset grab:

(1) Restore the Glass-Steagall Act separating depository banking from investment banking. Support Marcy Kaptur’s H.R. 129.

(2) Break up the giant derivatives banks.  Support Bernie Sanders’ “too big to jail” legislation.

(3) Alternatively, nationalize the TBTFs, as advised in the New York Times by Gar Alperovitz.  If taxpayer bailouts to save the TBTFs are unacceptable, depositor bailouts are even more unacceptable.

(4) Make derivatives illegal, as they were between 1936 and 1982 under the Commodities Exchange Act. They can be unwound by simply netting them out, declaring them null and void.  As noted by Paul Craig Roberts, “the only major effect of closing out or netting all the swaps (mostly over-the-counter contracts between counter-parties) would be to take $230 trillion of leveraged risk out of the financial system.”

(5) Support the Harkin-Whitehouse bill to impose a financial transactions tax on Wall Street trading.  Among other uses, a tax on all trades might supplement the FDIC insurance fund to cover another derivatives disaster.

(5) Establish postal savings banks as government-guaranteed depositories for individual savings. Many countries have public savings banks, which became particularly popular after savings in private banks were wiped out in the banking crisis of the late 1990s.

(6) Establish publicly-owned banks to be depositories of public monies, following the lead of North Dakota, the only state to completely escape the 2008 banking crisis. North Dakota does not keep its revenues in Wall Street banks but deposits them in the state-owned Bank of North Dakota by law.  The bank has a mandate to serve the public, and it does not gamble in derivatives.

A motivated state legislature could set up a publicly-owned bank very quickly. Having its own bank would allow the state to protect both its own revenues and those of its citizens while generating the credit needed to support local business and restore prosperity to Main Street.

 

Europe Considers Wholesale Savings Confiscation, Enforced Redistribution

At first we thought Reuters had been punk’d in its article titled “EU executive sees personal savings used to plug long-term financing gap” which disclosed the latest leaked proposal by the European Commission, but after several hours without a retraction, we realized that the story is sadly true. Sadly, because everything that we warned about in “There May Be Only Painful Ways Out Of The Crisis” back in September of 2011, and everything that the depositors and citizens of Cyprus had to live through, seems on the verge of going continental. In a nutshell, and in Reuters’ own words, “the savings of the European Union’s 500 million citizens could be used to fund long-term investments to boost the economy and help plug the gap left by banks since the financial crisis, an EU document says.” What is left unsaid is that the “usage” will be on a purely involuntary basis, at the discretion of the “union”, and can thus best be described as confiscation.

The source of this stunner is a document seen be Reuters, which describes how the EU is looking for ways to “wean” the 28-country bloc from its heavy reliance on bank financing and find other means of funding small companies, infrastructure projects and other investment. So as Europe finally admits that the ECB has failed to unclog its broken monetary pipelines for the past five years – something we highlight every month (most recently in No Waking From Draghi’s Monetary Nightmare: Eurozone Credit Creation Tumbles To New All Time Low), the commissions report finally admits that “the economic and financial crisis has impaired the ability of the financial sector to channel funds to the real economy, in particular long-term investment.”

The solution? “The Commission will ask the bloc’s insurance watchdog in the second half of this year for advice on a possible draft law “to mobilize more personal pension savings for long-term financing”, the document said.”

Mobilize, once again, is a more palatable word than, say, confiscate.

And yet this is precisely what Europe is contemplating:

Banks have complained they are hindered from lending to the economy by post-crisis rules forcing them to hold much larger safety cushions of capital and liquidity.

The document said the “appropriateness” of the EU capital and liquidity rules for long-term financing will be reviewed over the next two years, a process likely to be scrutinized in the United States and elsewhere to head off any risk of EU banks gaining an unfair advantage.

But wait: there’s more!

Inspired by the recently introduced “no risk, guaranteed return” collectivized savings instrument in the US better known as MyRA, Europe will also complete a study by the end of this year on the feasibility of introducing an EU savings account, open to individuals whose funds could be pooled and invested in small companies.

Because when corporations refuse to invest money in Capex, who will invest? Why you, dear Europeans. Whether you like it or not.

But wait, there is still more!

Additionally, Europe is seeking to restore the primary reason why Europe’s banks are as insolvent as they are: securitizations, which the persuasive salesmen and sexy saleswomen of Goldman et al sold to idiot European bankers, who in turn invested the money or widows and orphans only to see all of it disappear.

It is also seeking to revive the securitization market, which pools loans like mortgages into bonds that banks can sell to raise funding for themselves or companies. The market was tarnished by the financial crisis when bonds linked to U.S. home loans began defaulting in 2007, sparking the broader global markets meltdown over the ensuing two years.

The document says the Commission will “take into account possible future increases in the liquidity of a number of securitization products” when it comes to finalizing a new rule on what assets banks can place in their new liquidity buffers. This signals a possible loosening of the definition of eligible assets from the bloc’s banking watchdog.

Because there is nothing quite like securitizing feta cheese-backed securities and selling it to a whole new batch of widows and orphans.

And topping it all off is a proposal to address a global change in accounting principles that will make sure that an accurate representation of any bank’s balance sheet becomes a distant memory:

More controversially, the Commission will consider whether the use of fair value or pricing assets at the going rate in a new globally agreed accounting rule “is appropriate, in particular regarding long-term investing business models”.

To summarize: forced savings “mobilization”, the introduction of a collective and involuntary CapEx funding “savings” account, the return and expansion of securitization, and finally, tying it all together, is a change to accounting rules that will make the entire inevitable catastrophe smells like roses until it all comes crashing down.

So, aside from all this, Europe is “fixed.”

The only remaining question is: why leak this now? Perhaps it’s simply because the reallocation of “cash on the savings account sidelines” in the aftermath of the Cyprus deposit confiscation, into risk assets was not forceful enough? What better way to give it a much needed boost than to leak that everyone’s cash savings are suddenly fair game in Europe’s next great wealth redistribution strategy.

 

 

Posted in Banking | Comments Off on Your Bank is NOT Safe

Ellen Brown’s Web of Debt blog

Posted on April 14, 2014 by

Brown’s Web of Debt blog and books are well researched and worthwhile reading, but she isn’t aware of the energy and resource crises, so her work isn’t fully informed.  But still, you can see that even without those larger issues, the financial system is so corrupt that it could easily topple on its own before energy and resource shortages force the system to collapse from ecological reasons.

Why Do Banks Want Our Deposits? Hint: It’s Not to Make Loans.

Oct 28, 2014 by Ellen Brown

Many authorities have said it: banks do not lend their deposits. They create the money they lend on their books.  Robert B. Anderson, Treasury Secretary under Eisenhower, said it in 1959:

When a bank makes a loan, it simply adds to the borrower’s deposit account in the bank by the amount of the loan. The money is not taken from anyone else’s deposits; it was not previously paid in to the bank by anyone. It’s new money, created by the bank for the use of the borrower.

The Bank of England said it in the spring of 2014, writing in its quarterly bulletin:

The reality of how money is created today differs from the description found in some economics textbooks: Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits. . . . Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.

All of which leaves us to wonder: If banks do not lend their depositors’ money, why are they always scrambling to get it? Banks advertise to attract depositors, and they pay interest on the funds. What good are our deposits to the bank?

The answer is that while banks do not need the deposits to create loans, they do need to balance their books; and attracting customer deposits is usually the cheapest way to do it.

Reckoning with the Fed

Ever since the Federal Reserve Act was passed in 1913, banks have been required to clear their outgoing checks through the Fed or another clearinghouse. Banks keep reserves in reserve accounts at the Fed for this purpose, and they usually hold the minimum required reserve. Attracting customer deposits, called “retail deposits,” is a cheap way to do it. But if the bank lacks retail deposits, it can borrow in the money markets, typically the Fed funds market where banks sell their “excess reserves” to other banks. These purchased deposits are called “wholesale deposits.” Borrowing from the Fed funds market is pretty inexpensive – a mere 0.25% interest yearly for overnight loans. But it’s still more expensive than borrowing from the bank’s own depositors.

That is one reason banks try to attract depositors, but there is another, more controversial reason. In response to the 2008 credit crisis, the Bank for International Settlements (Basel III), the Dodd-Frank Act, and the Federal Reserve have limited the amount of wholesale deposits banks can borrow.

 

Usurious Returns on Phantom Money: The Credit Card Gravy Train

February 14, 2014 by Ellen Brown

The credit card business is now the banking industry’s biggest cash cow, and it’s largely due to lucrative hidden fees. 

You pay off your credit card balance every month, thinking you are taking advantage of the “interest-free grace period” and getting free credit. You may even use your credit card when you could have used cash, just to get the free frequent flier or cash-back rewards. But those popular features are misleading. Even when the balance is paid on time every month, credit card use imposes a huge hidden cost on users—hidden because the cost is deducted from what the merchant receives, then passed on to you in the form of higher prices.

Visa and MasterCard charge merchants about 2% of the value of every credit card transaction, and American Express charges even more. That may not sound like much. But consider that for balances that are paid off monthly (meaning most of them), the banks make 2% or more on a loan averaging only about 25 days (depending on when in the month the charge was made and when in the grace period it was paid). Two percent interest for 25 days works out to a 33.5% return annually (1.02^(365/25) – 1), and that figure may be conservative.

Merchant fees were originally designed as a way to avoid usury and Truth-in-Lending laws. Visa and MasterCard are independent entities, but they were set up by big Wall Street banks, and the card-issuing banks get about 80% of the fees. The annual returns not only fall in the usurious category, but they are returns on other people’s money – usually the borrower’s own money!  Here is how it works . . . .

Winner Takes All: The Super-priority Status of Derivatives

Posted on April 9, 2013 by Ellen Brown

The Global Banking Game Is Rigged, and the FDIC Is Suing

April 13, 2014 by Ellen Brown

Taxpayers are paying billions of dollars for a swindle pulled off by the world’s biggest banks, using a form of derivative called interest-rate swaps; and the Federal Deposit Insurance Corporation has now joined a chorus of litigants suing over it. According to an SEIU report:

Derivatives . . . have turned into a windfall for banks and a nightmare for taxpayers. . . . While banks are still collecting fixed rates of 3 to 6 percent, they are now regularly paying public entities as little as a tenth of one percent on the outstanding bonds, with rates expected to remain low in the future. Over the life of the deals, banks are now projected to collect billions more than they pay state and local governments – an outcome which amounts to a second bailout for banks, this one paid directly out of state and local budgets.

It is not just that local governments, universities and pension funds made a bad bet on these swaps. The game itself was rigged, as explained below. The FDIC is now suing in civil court for damages and punitive damages, a lead that other injured local governments and agencies would be well-advised to follow. But they need to hurry, because time on the statute of limitations is running out. Continue reading →

Usurious Returns on Phantom Money: The Credit Card Gravy Train

February 14, 2014 by Ellen Brown

The credit card business is now the banking industry’s biggest cash cow, and it’s largely due to lucrative hidden fees. 

You pay off your credit card balance every month, thinking you are taking advantage of the “interest-free grace period” and getting free credit. You may even use your credit card when you could have used cash, just to get the free frequent flier or cash-back rewards. But those popular features are misleading. Even when the balance is paid on time every month, credit card use imposes a huge hidden cost on users—hidden because the cost is deducted from what the merchant receives, then passed on to you in the form of higher prices. Continue reading →

Prosperity For Main Street, Not Wall Street

February 4, 2014

Enough Is Enough: Fraud-ridden Banks Are Not L.A.’s Only Option

January 29, 2014 by Ellen Brown

“Epic in scale, unprecedented in world history.” That is how William K. Black, professor of law and economics and former bank fraud investigator, describes the frauds in which JPMorgan Chase (JPM) has now been implicated. They involve more than a dozen felonies, including bid-rigging on municipal bond debt; colluding to rig interest rates on hundreds of trillions of dollars in mortgages, derivatives and other contracts; exposing investors to excessive risk; failing to disclose known risks, including those in the Bernie Madoff scandal; and engaging in multiple forms of mortgage fraud.

So why, asks Chicago Alderwoman Leslie Hairston, are we still doing business with them? Continue reading →

From Austerity to Abundance: Why I Am Running for California Treasurer

 January 15, 2014 by Ellen Brown

100 Years Is Enough: Time to Make the Fed a Public Utility

 December 22, 2013 by Ellen Brown

Amend the Fed: We Need a Central Bank that Serves Main Street

 December 7, 2013 by Ellen Brown

December 23rd marks the 100th anniversary of the Federal Reserve. Dissatisfaction with its track record has prompted calls to audit the Fed and end the Fed. At the least, Congress needs to amend the Fed, modifying the Federal Reserve Act to give the central bank the tools necessary to carry out its mandates.

The Federal Reserve is the only central bank with a dual mandate. It is charged not only with maintaining low, stable inflation but with promoting maximum sustainable employment. Yet unemployment remains stubbornly high, despite four years of radical tinkering with interest rates and quantitative easing (creating money on the Fed’s books). After pushing interest rates as low as they can go, the Fed has admitted that it has run out of tools. Continue reading →

What We Could Do with a Postal Savings Bank: Infrastructure that Doesn’t Cost Taxpayers a Dime

September 23, 2013 by Ellen Brown

The U.S. Postal Service (USPS) is the nation’s second largest civilian employer after WalMart. Although successfully self-funded throughout its long history, it is currently struggling to stay afloat. This is not, as sometimes asserted, because it has been made obsolete by the Internet. In fact the post office has gotten more business from Internet orders than it has lost to electronic email. What has pushed the USPS into insolvency is an oppressive 2006 congressional mandate that it prefund healthcare for its workers 75 years into the future. No other entity, public or private, has the burden of funding multiple generations of employees who have not yet even been born.

The Carper-Coburn bill (S. 1486) is the subject of congressional hearings this week. It threatens to make the situation worse, by eliminating Saturday mail service and door-to-door delivery and laying off more than 100,000 workers over several years.

The Postal Service Modernization Bills brought by Peter DeFazio and Bernie Sanders, on the other hand, would allow the post office to recapitalize itself by diversifying its range of services to meet unmet public needs.

Needs that the post office might diversify into include (1) funding the rebuilding of our crumbling national infrastructure; (2) servicing the massive market of the “unbanked” and “underbanked” who lack access to basic banking services; and (3) providing a safe place to save our money, in the face of Wall Street’s new “bail in” policies for confiscating depositor funds. All these needs could be met at a stroke by some simple legislation authorizing the post office to revive the banking services it efficiently performed in the past. Continue reading →

The Armageddon Looting Machine: The Looming Mass Destruction from Derivatives

September 17, 2013 by Ellen Brown

Increased regulation and low interest rates are driving lending from the regulated commercial banking system into the unregulated shadow banking system. The shadow banks, although free of government regulation, are propped up by a hidden government guarantee in the form of safe harbor status under the 2005 Bankruptcy Reform Act pushed through by Wall Street. The result is to create perverse incentives for the financial system to self-destruct.

Five years after the financial collapse precipitated by the Lehman Brothers bankruptcy on September 15, 2008, the risk of another full-blown financial panic is still looming large, despite the Dodd Frank legislation designed to contain it. As noted in a recent Reuters article, the risk has just moved into the shadows:

[B]anks are pulling back their balance sheets from the fringes of the credit markets, with more and more risk being driven to unregulated lenders that comprise the $60 trillion “shadow-banking” sector. Continue reading →

The Leveraged Buyout of America

August 26, 2013 by Ellen Brown

Giant bank holding companies now own airports, toll roads, and ports; control power plants; and store and hoard vast quantities of commodities of all sorts. They are systematically buying up or gaining control of the essential lifelines of the economy. How have they pulled this off, and where have they gotten the money?

In a letter to Federal Reserve Chairman Ben Bernanke dated June 27, 2013, US Representative Alan Grayson and three co-signers expressed concern about the expansion of large banks into what have traditionally been non-financial commercial spheres. Specifically:

[W]e are concerned about how large banks have recently expanded their businesses into such fields as electric power production, oil refining and distribution, owning and operating of public assets such as ports and airports, and even uranium mining. Continue reading →

PublicBankingTV : Your Money Is Not Safe in the Big Banks

August 25, 2013 by Ellen Brown

Not Too Big to Jail: Why Eliot Spitzer Is Wall Street’s Worst Nightmare

August 19, 2013 by Ellen Brown

Before Eliot Spitzer’s infamous resignation as governor of New York in March 2008, he was one of our fiercest champions against Wall Street corruption, in a state that had some of the toughest legislation for controlling the banks. It may not be a coincidence that the revelation of his indiscretions with a high-priced call girl came less than a month after he published a bold editorial in the Washington Post titled “Predatory Lenders’ Partner in Crime: How the Bush Administration Stopped the States from Stepping in to Help Consumers.”  The editorial exposed the collusion between the Treasury, the Federal Reserve and Wall Street in deregulating the banks in the guise of regulating them, by taking regulatory power away from the states. It was an issue of the federal government versus the states, with the Feds representing the banks and the states representing consumers.

The Detroit Bail-In Template: Fleecing Pensioners to Save the Banks

August 5, 2013 by Ellen Brown

The Detroit bankruptcy is looking suspiciously like the bail-in template originated by the G20’s Financial Stability Board in 2011, which exploded on the scene in Cyprus in 2013 and is now becoming the model globally. In Cyprus, the depositors were “bailed in” (stripped of a major portion of their deposits) to re-capitalize the banks. In Detroit, it is the municipal workers who are being bailed in, stripped of a major portion of their pensions to save the banks.

Collateral Damage: QE3 and the Shadow Banking System

July 22, 2013 by Ellen Brown

Rather than expanding the money supply, quantitative easing (QE) has actually caused it to shrink by sucking up the collateral needed by the shadow banking system to create credit. The “failure” of QE has prompted the Bank for International Settlements to urge the Fed to shirk its mandate to pursue full employment, but the sort of QE that could fulfill that mandate has not yet been tried.

Think Your Money is Safe in an Insured Bank Account? Think Again.

 July 5, 2013 by Ellen Brown

A trend to shift responsibility for bank losses onto blameless depositors lets banks gamble away your money.

Elizabeth Warren’s QE for Students: Populist Demagoguery or Economic Breakthrough?

June 14, 2013 by Ellen Brown

On July 1, interest rates will double for millions of students – from 3.4% to 6.8% – unless Congress acts; and the legislative fixes on the table are largely just compromises. Only one proposal promises real relief – Sen. Elizabeth Warren’s “Bank on Students Loan Fairness Act.” This bill has been dismissed out of hand as “shameless populist demagoguery” and “a cheap political gimmick,” but is it? Or could Warren’s outside-the-box bill represent the sort of game-changing thinking sorely needed to turn the economy around?

Bail-out Is Out, Bail-in Is In: Time for Some Publicly-Owned Banks

April 29, 2013 by Ellen Brown

“[W]ith Cyprus . . . the game itself changed. By raiding the depositors’ accounts, a major central bank has gone where they would not previously have dared. The Rubicon has been crossed.”  —Eric Sprott, Shree Kargutkar, “Caveat Depositor”

The crossing of the Rubicon into the confiscation of depositor funds was not a one-off emergency measure limited to Cyprus.  Similar “bail-in” policies are now appearing in multiple countries.  (See my earlier articles here.)  What triggered the new rules may have been a series of game-changing events including the refusal of Iceland to bail out its banks and their depositors; Bank of America’s commingling of its ominously risky derivatives arm with its depository arm over the objections of the FDIC; and the fact that most EU banks are now insolvent.  A crisis in a major nation such as Spain or Italy could lead to a chain of defaults beyond anyone’s control, and beyond the ability of federal deposit insurance schemes to reimburse depositors.

Winner Takes All: The Super-priority Status of Derivatives

April 9, 2013 by Ellen Brown

Cyprus-style confiscation of depositor funds has been called the “new normal.”  Bail-in policies are appearing in multiple countries directing failing TBTF banks to convert the funds of “unsecured creditors” into capital; and those creditors, it turns out, include ordinary depositors. Even “secured” creditors, including state and local governments, may be at risk.  Derivatives have “super-priority” status in bankruptcy, and Dodd Frank precludes further taxpayer bailouts. In a big derivatives bust, there may be no collateral left for the creditors who are next in line.  

It Can Happen Here: The Confiscation Scheme Planned for US and UK Depositors

March 28, 2013 by Ellen Brown

Confiscating the customer deposits in Cyprus banks, it seems, was not a one-off, desperate idea of a few Eurozone “troika” officials scrambling to salvage their balance sheets. A joint paper by the US Federal Deposit Insurance Corporation and the Bank of England dated December 10, 2012, shows that these plans have been long in the making; that they originated with the G20 Financial Stability Board in Basel, Switzerland (discussed earlier here); and that the result will be to deliver clear title to the banks of depositor funds.

How the Fed Could Fix the Economy—and Why It Hasn’t

February 24, 2013 by Ellen Brown

It’s the Interest, Stupid! Why Bankers Rule the World

November 8, 2012 by Ellen Brown

QE Infinity: What Is It Really About?

October 3, 2012 by Ellen Brown

Catherine Austin Fitts recently posted a revealing article on that enigma.  She says the true goal of QE Infinity is to unwind the toxic mortgage debacle, in a way that won’t bankrupt pensioners or start another war:

The challenge for Ben Bernanke and the Fed governors since the 2008 bailouts has been how to deal with the backlog of fraud – not just fraudulent mortgages and fraudulent mortgage securities but the derivatives piled on top and the politics of who owns them, such as sovereign nations with nuclear arsenals, and how they feel about taking massive losses on AAA paper purchased in good faith.

On one hand, you could let them all default. The problem is the criminal liabilities would drive the global and national leadership into factionalism that could turn violent, not to mention what such defaults would do to liquidity in the financial system. Then there is the fact that a great deal of the fraudulent paper has been purchased by pension funds. So the mark down would hit the retirement savings of the people who have now also lost their homes or equity in their homes. The politics of this in an election year are terrifying for the Administration to contemplate.

How can the Fed make the investors whole without wreaking havoc on the economy?  Using its QE tool, it can quietly buy up toxic mortgage-backed securities (MBS) with money created on a computer screen.

 

Posted in Banking, Inflation or Deflation | Comments Off on Ellen Brown’s Web of Debt blog

The Armageddon Looting Machine: The Looming Mass Destruction from Derivatives

Posted on April 14, 2014 by

The Armageddon Looting Machine: The Looming Mass Destruction from Derivatives

Posted on September 17, 2013 by Ellen Brown

Increased regulation and low interest rates are driving lending from the regulated commercial banking system into the unregulated shadow banking system. The shadow banks, although free of government regulation, are propped up by a hidden government guarantee in the form of safe harbor status under the 2005 Bankruptcy Reform Act pushed through by Wall Street. The result is to create perverse incentives for the financial system to self-destruct.

Five years after the financial collapse precipitated by the Lehman Brothers bankruptcy on September 15, 2008, the risk of another full-blown financial panic is still looming large, despite the Dodd Frank legislation designed to contain it. As noted in a recent Reuters article, the risk has just moved into the shadows: Banks are pulling back their balance sheets from the fringes of the credit markets, with more and more risk being driven to unregulated lenders that comprise the $60 trillion “shadow-banking” sector.

Increased regulation and low interest rates have made lending to homeowners and small businesses less attractive than before 2008. The easy subprime scams of yesteryear are no more. The void is being filled by the shadow banking system. Shadow banking comes in many forms, but the big money today is in repos and derivatives. The notional (or hypothetical) value of the derivatives market has been estimated to be as high as $1.2 quadrillion, or twenty times the GDP of all the countries of the world combined.

According to Hervé Hannoun, Deputy General Manager of the Bank for International Settlements, investment banks as well as commercial banks may conduct much of their business in the shadow banking system (SBS), although most are not generally classed as SBS institutions themselves. At least one financial regulatory expert has said that regulated banking organizations are the largest shadow banks.

The Hidden Government Guarantee that Props Up the Shadow Banking System

According to Dutch economist Enrico Perotti, banks are able to fund their loans much more cheaply than any other industry because they offer “liquidity on demand.” The promise that the depositor can get his money out at any time is made credible by government-backed deposit insurance and access to central bank funding.  But what guarantee underwrites the shadow banks? Why would financial institutions feel confident lending cheaply in the shadow market, when it is not protected by deposit insurance or government bailouts?

Perotti says that liquidity-on-demand is guaranteed in the SBS through another, lesser-known form of government guarantee: “safe harbor” status in bankruptcy. Repos and derivatives, the stock in trade of shadow banks, have “superpriority” over all other claims. Perotti writes:

Security pledging grants access to cheap funding thanks to the steady expansion in the EU and US of “safe harbor status”. Also called bankruptcy privileges, this ensures lenders secured on financial collateral immediate access to their pledged securities. . . .

Safe harbor status grants the privilege of being excluded from mandatory stay, and basically all other restrictions. Safe harbor lenders, which at present include repos and derivative margins, can immediately repossess and resell pledged collateral.

This gives repos and derivatives extraordinary super-priority over all other claims, including tax and wage claims, deposits, real secured credit and insurance claims. Critically, it ensures immediacy (liquidity) for their holders. Unfortunately, it does so by undermining orderly liquidation.

When orderly liquidation is undermined, there is a rush to get the collateral, which can actually propel the debtor into bankruptcy.

The amendment to the Bankruptcy Reform Act of 2005 that created this favored status for repos and derivatives was pushed through by the banking lobby with few questions asked. In a December 2011 article titled “Plan B – How to Loot Nations and Their Banks Legally,” documentary film-maker David Malone wrote:

This amendment which was touted as necessary to reduce systemic risk in financial bankruptcies . . . allowed a whole range of far riskier assets to be used . . . . The size of the repo market hugely increased and riskier assets were gladly accepted as collateral because traders saw that if the person they had lent to went down they could get [their] money back before anyone else and no one could stop them.

Burning Down the Barn to Get the Insurance

Safe harbor status creates the sort of perverse incentives that make derivatives “financial weapons of mass destruction,” as Warren Buffett famously branded them. It is the equivalent of burning down the barn to collect the insurance. Says Malone:

All other creditors – bond holders – risk losing some of their money in a bankruptcy. So they have a reason to want to avoid bankruptcy of a trading partner. Not so the repo and derivatives partners. They would now be best served by looting the company – perfectly legally – as soon as trouble seemed likely. In fact the repo and derivatives traders could push a bank that owed them money over into bankruptcy when it most suited them as creditors. When, for example, they might be in need of a bit of cash themselves to meet a few pressing creditors of their own.

The collapse of . . . Bear Stearns, Lehman Brothers and AIG were all directly because repo and derivatives partners of those institutions suddenly stopped trading and ‘looted’ them instead.

The global credit collapse was triggered, it seems, not by wild subprime lending but by the rush to grab collateral by players with congressionally-approved safe harbor status for their repos and derivatives.

Bear Stearns and Lehman Brothers were strictly investment banks, but now we have giant depository banks gambling in derivatives as well; and with the repeal of the Glass-Steagall Act that separated depository and investment banking, they are allowed to commingle their deposits and investments. The risk to the depositors was made glaringly obvious when MF Global went bankrupt in October 2011. Malone wrote:

When MF Global went down it did so because its repo, derivative and hypothecation partners essentially foreclosed on it. And when they did so they then ‘looted’ the company. And because of the co-mingling of clients money in the hypothecation deals the ‘looters’ also seized clients money as well. . . JPMorgan allegedly has MF Global money while other people’s lawyers can only argue about it.

MF Global was followed by the Cyprus “bail-in” – the confiscation of depositor funds to recapitalize the country’s failed banks. This was followed by the coordinated appearance of bail-in templates worldwide, mandated by the Financial Stability Board, the global banking regulator in Switzerland.

The Auto-Destruct Trip Wire on the Banking System

Bail-in policies are being necessitated by the fact that governments are balking at further bank bailouts. In the US, the Dodd-Frank Act (Section 716) now bans taxpayer bailouts of most speculative derivative activities. That means the next time we have a Lehman-style event, the banking system could simply collapse into a black hole of derivative looting. Malone writes:

. . . The bankruptcy laws allow a mechanism for banks to disembowel each other. The strongest lend to the weaker and loot them when the moment of crisis approaches. The plan allows the biggest banks, those who happen to be burdened with massive holdings of dodgy euro area bonds, to leap out of the bond crisis and instead profit from a bankruptcy which might otherwise have killed them. All that is required is to know the import of the bankruptcy law and do as much repo, hypothecation and derivative trading with the weaker banks as you can.

. . . I think this means that some of the biggest banks, themselves, have already constructed and greatly enlarged a now truly massive trip wired auto-destruct on the banking system.

The weaker banks may be the victims, but it is we the people who will wind up holding the bag. Malone observes:

For the last four years who has been putting money in to the banks? And who has become a massive bond holder in all the banks? We have. First via our national banks and now via the Fed, ECB and various tax payer funded bail out funds. We are the bond holders who would be shafted by the Plan B looting. We would be the people waiting in line for the money the banks would have already made off with. . . .

. . . [T]he banks have created a financial Armageddon looting machine. Their Plan B is a mechanism to loot not just the more vulnerable banks in weaker nations, but those nations themselves. And the looting will not take months, not even days. It could happen in hours if not minutes.

Crisis and Opportunity: Building a Better Mousetrap

There is no way to regulate away this sort of risk. If both the conventional banking system and the shadow banking system are being maintained by government guarantees, then we the people are bearing the risk. We should be directing where the credit goes and collecting the interest. Banking and the creation of money-as-credit need to be made public utilities, owned by the public and having a mandate to serve the public. Public banks do not engage in derivatives.

Today, virtually the entire circulating money supply (M1, M2 and M3) consists of privately-created “bank credit” – money created on the books of banks in the form of loans. If this private credit system implodes, we will be without a money supply. One option would be to return to the system of government-issued money that was devised by the American colonists, revived by Abraham Lincoln during the Civil War, and used by other countries at various times and places around the world. Another option would be a system of publicly-owned state banks on the model of the Bank of North Dakota, leveraging the capital of the state backed by the revenues of the state into public bank credit for the use of the local economy.

Change happens historically in times of crisis, and we may be there again today.

_______________

Ellen Brown is an attorney, president of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. In The Public Bank Solution, her latest book, she explores successful public banking models historically and globally. Her websites are http://WebofDebt.com, http://PublicBankSolution.com, and http://PublicBankingInstitute.org.

Posted in Derivatives | Comments Off on The Armageddon Looting Machine: The Looming Mass Destruction from Derivatives

Credit Cards

Posted on April 14, 2014 by

Usurious Returns on Phantom Money: The Credit Card Gravy Train

 February 14, 2014 by Ellen Brown

The credit card business is now the banking industry’s biggest cash cow, and it’s largely due to lucrative hidden fees. 

You pay off your credit card balance every month, thinking you are taking advantage of the “interest-free grace period” and getting free credit. You may even use your credit card when you could have used cash, just to get the free frequent flier or cash-back rewards. But those popular features are misleading. Even when the balance is paid on time every month, credit card use imposes a huge hidden cost on users—hidden because the cost is deducted from what the merchant receives, then passed on to you in the form of higher prices.

Visa and MasterCard charge merchants about 2% of the value of every credit card transaction, and American Express charges even more. That may not sound like much. But consider that for balances that are paid off monthly (meaning most of them), the banks make 2% or more on a loan averaging only about 25 days (depending on when in the month the charge was made and when in the grace period it was paid). Two percent interest for 25 days works out to a 33.5% return annually (1.02^(365/25) – 1), and that figure may be conservative.

Merchant fees were originally designed as a way to avoid usury and Truth-in-Lending laws. Visa and MasterCard are independent entities, but they were set up by big Wall Street banks, and the card-issuing banks get about 80% of the fees. The annual returns not only fall in the usurious category, but they are returns on other people’s money – usually the borrower’s own money!  Here is how it works . . . .

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How to survive the coming century

Posted on April 13, 2014 by

Excerpts from 25 Feb 2009  How to survive the coming century

http://www.newscientist.com/article/mg20126971.700-how-to-survive-the-coming-century.html?full=true

All of the world’s major deserts are predicted to expand, with the Sahara reaching right into central Europe. Glacial retreat will dry Europe’s rivers from the Danube to the Rhine, with similar effects in mountainous regions including the Peruvian Andes, and the Himalayan and Karakoram ranges, which as result will no longer supply water to Afghanistan, Pakistan, China, Bhutan, India and Vietnam. Along with the exhaustion of aquifers, all this will lead to two latitudinal dry belts where human habitation will be impossible, say Syukuro Manabe of Tokyo University, Japan, and his colleagues. One will stretch across Central America, southern Europe and north Africa, south Asia and Japan; while the other will cover Madagascar, southern Africa, the Pacific Islands, and most of Australia and Chile.

The first problem would be that many of the places where people live and grow food would no longer be suitable for either. Rising sea levels – from thermal expansion of the oceans, melting glaciers and storm surges – would drown today’s coastal regions in up to 2 meters of water initially, and possibly much more if the Greenland ice sheet and parts of Antarctica were to melt. “It’s hard to see west Antarctica’s ice sheets surviving the century, meaning a sea-level rise of at least 1 or 2 meters,” says climatologist James Hansen, who heads NASA’s Goddard Institute for Space Studies in New York. “CO2 concentrations of 550 parts per million [compared with about 385 ppm now] would be disastrous,” he adds, “certainly leading to an ice-free planet, with sea level about 80 meters higher… and the trip getting there would be horrendous.”

Half of the world’s surface lies in the tropics, between 30° and -30° latitude, and these areas are particularly vulnerable to climate change. India, Bangladesh and Pakistan, for example, will feel the force of a shorter but fiercer Asian monsoon, which will probably cause even more devastating floods than the area suffers now. Yet because the land will be hotter, this water will evaporate faster, leaving drought across Asia. Bangladesh stands to lose a third of its land area – including its main bread basket. The African monsoon, although less well understood, is expected to become more intense, possibly leading to a greening of the semi-arid Sahel region, which stretches across the continent south of the Sahara desert. Other models, however, predict a worsening of drought all over Africa. A lack of fresh water will be felt elsewhere in the world, too, with warmer temperatures reducing soil moisture across China, the south-west US, Central America, most of South America and Australia.

So if only a fraction of the planet will be habitable, how will our vast population survive? Some, like Lovelock, are less than optimistic. “Humans are in a pretty difficult position and I don’t think they are clever enough to handle what’s ahead. I think they’ll survive as a species all right, but the cull during this century is going to be huge,” he says. “The number remaining at the end of the century will probably be a billion or less.”

When, and if, we get 4 degrees hotter depends not only on how much greenhouse gas we pump into the atmosphere and how quickly, but how sensitive the world’s climate is to these gases. It also depends whether “tipping points” are reached, in which climate feedback mechanisms rapidly speed warming. According to models, we could cook the planet by 4 °C by 2100. Some scientists fear that we may get there as soon as 2050. If this happens, the ramifications for life on Earth are so terrifying that many scientists contacted for this article preferred not to contemplate them, saying only that we should concentrate on reducing emissions to a level where such a rise is known only in nightmares.

This will probably be a mostly vegetarian world: the warming, acidic seas will be largely devoid of fish, thanks to a crash in plankton that use calcium carbonate to build shells. Molluscs, also unable to grow their carbonate shells, will become extinct. Poultry may be viable on the edges of farmland but there will simply be no room to graze cattle. Livestock may be restricted to hardy animals such as goats, which can survive on desert scrub. One consequence of the lack of cattle will be a need for alternative fertilisers – processed human waste is a possibility. Synthetic meats and other foods could meet some of the demand. Cultivation of algal mats, and crops grown on floating platforms and in marshland could also contribute.

While the exact changes would depend on how quickly the temperature rose and how much polar ice melted, we can expect similar scenarios to unfold this time around.

The only places we will be guaranteed enough water will be in the high latitudes. “Everything in that region will be growing like mad. That’s where all the life will be,” says former NASA scientist James Lovelock, who developed the “Gaia” theory, which describes the Earth as a self-regulating entity. “The rest of the world will be largely desert with a few oases.”

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Bill Moyers & Bill Black on Ponzi schemes, Fraud, & Liar’s loans

Posted on April 13, 2014 by

Bill Moyers talks to Bill Black about the fraud that pervades the financial industry and the Obama government

April 3, 2009  pbs.org

William Kurt Blackis an American lawyer, academic, author, and a former bank regulator. His expertise is white-collar crime, public finance, and regulation. He developed the concept of “control fraud”, in which a business or national executive uses the entity he or she controls as a “weapon” to commit fraud.

BILL MOYERS:  For months now, revelations of the wholesale greed and blatant transgressions of Wall Street have reminded us that “The Best Way to Rob a Bank Is to Own One.” In fact, the man you’re about to meet wrote a book with just that title. It was based upon his experience as a tough regulator during one of the darkest chapters in our financial history: the savings and loan scandal in the late 1980s.

WILLIAM K. BLACK: These numbers as large as they are, vastly understate the problem of fraud.

BILL MOYERS: Bill Black was in New York this week for a conference at the John Jay College of Criminal Justice where scholars and journalists gathered to ask the question, “How do they get away with it?” Well, no one has asked that question more often than Bill Black.

The former Director of the Institute for Fraud Prevention now teaches Economics and Law at the University of Missouri, Kansas City. During the savings and loan crisis, it was Black who accused then-house speaker Jim Wright and five US Senators, including John Glenn and John McCain, of doing favors for the S&L’s in exchange for contributions and other perks. The senators got off with a slap on the wrist, but so enraged was one of those bankers, Charles Keating — after whom the senate’s so-called “Keating Five” were named — he sent a memo that read, in part, “get Black — kill him dead.” Metaphorically, of course. Of course.

Now Black is focused on an even greater scandal, and he spares no one — not even the President he worked hard to elect, Barack Obama. But his main targets are the Wall Street barons, heirs of an earlier generation whose scandalous rip-offs of wealth back in the 1930s earned them comparison to Al Capone and the mob, and the nickname “banksters.”

I was taken with your candor at the conference here in New York to hear you say that this crisis we’re going through, this economic and financial meltdown is driven by fraud. What’s your definition of fraud?

WILLIAM K. BLACK: Fraud is deceit. And the essence of fraud is, “I create trust in you, and then I betray that trust, and get you to give me something of value.” And as a result, there’s no more effective acid against trust than fraud, especially fraud by top elites, and that’s what we have.

BILL MOYERS: In your book, you make it clear that calculated dishonesty by people in charge is at the heart of most large corporate failures and scandals, including, of course, the S&L, but is that true? Is that what you’re saying here, that it was in the boardrooms and the CEO offices where this fraud began?

WILLIAM K. BLACK: Absolutely.

BILL MOYERS: How did they do it? What do you mean?

WILLIAM K. BLACK: Well, the way that you do it is to make really bad loans, because they pay better. Then you grow extremely rapidly, in other words, you’re a Ponzi-like scheme. And the third thing you do is we call it leverage. That just means borrowing a lot of money, and the combination creates a situation where you have guaranteed record profits in the early years. That makes you rich, through the bonuses that modern executive compensation has produced. It also makes it inevitable that there’s going to be a disaster down the road.

BILL MOYERS: So you’re suggesting, saying that CEOs of some of these banks and mortgage firms in order to increase their own personal income, deliberately set out to make bad loans?

WILLIAM K. BLACK: Yes.

BILL MOYERS: How do they get away with it? I mean, what about their own checks and balances in the company? What about their accounting divisions?

WILLIAM K. BLACK: All of those checks and balances report to the CEO, so if the CEO goes bad, all of the checks and balances are easily overcome. And the art form is not simply to defeat those internal controls, but to suborn them, to turn them into your greatest allies. And the bonus programs are exactly how you do that.

BILL MOYERS: If I wanted to go looking for the parties to this, with a good bird dog, where would you send me?

WILLIAM K. BLACK: That’s exactly what hasn’t happened. We haven’t looked. The Bush Administration essentially got rid of regulation, so if nobody was looking, you were able to do this with impunity and that’s exactly what happened. Where would you look? You’d look at the specialty lenders. The lenders that did almost all of their work in the sub-prime and liars’ loans.

BILL MOYERS: Why did they call them liars’ loans?

WILLIAM K. BLACK: Because they were liars’ loans, and they knew it. They knew that they were frauds.

WILLIAM K. BLACK: Liars’ loans mean that we don’t check. You tell us what your income is. You tell us what your job is. You tell us what your assets are, and we agree to believe you. We won’t check on any of those things. And by the way, you get a better deal if you inflate your income and your job history and your assets.

BILL MOYERS: You think they really said that to borrowers?

WILLIAM K. BLACK: We know that they said that to borrowers. In fact, they were also called, in the trade, ninja loans.

BILL MOYERS: Ninja?

WILLIAM K. BLACK: Yeah, because no income verification, no job verification, no asset verification.

BILL MOYERS: You’re talking about significant American companies.

WILLIAM K. BLACK: Huge! One company produced as many losses as the entire Savings and Loan debacle.

BILL MOYERS: Which company?

WILLIAM K. BLACK: IndyMac specialized in making liars’ loans. In 2006 alone, it sold $80 billion dollars of liars’ loans to other companies. $80 billion.

BILL MOYERS: And was this happening exclusively in this sub-prime mortgage business?

WILLIAM K. BLACK: No, and that’s a big part of the story as well. Even prime loans began to have non-verification. Even Ronald Reagan, you know, said, “Trust, but verify.” They just gutted the verification process. We know that will produce enormous fraud, under economic theory, criminology theory, and two thousand years of life experience.

BILL MOYERS: Is it possible that these complex instruments were deliberately created so swindlers could exploit them?

WILLIAM K. BLACK: Oh, absolutely. This stuff, the exotic stuff that you’re talking about was created out of things like liars’ loans, that were known to be extraordinarily bad. And now it was getting triple-A ratings. Now a triple-A rating is supposed to mean there is zero credit risk. So you take something that not only has significant, it has crushing risk. That’s why it’s toxic. And you create this fiction that it has zero risk. That itself, of course, is a fraudulent exercise. And again, there was nobody looking, during the Bush years. So finally, only a year ago, we started to have a Congressional investigation of some of these rating agencies, and it’s scandalous what came out. What we know now is that the rating agencies never looked at a single loan file. When they finally did look, after the markets had completely collapsed, they found, and I’m quoting Fitch, the smallest of the rating agencies, “the results were disconcerting, in that there was the appearance of fraud in nearly every file we examined.”

BILL MOYERS: So if your assumption is correct, your evidence is sound, the bank, the lending company, created a fraud. And the ratings agency that is supposed to test the value of these assets knowingly entered into the fraud. Both parties are committing fraud by intention.

WILLIAM K. BLACK: Right, and the investment banker that — we call it pooling — puts together these bad mortgages, these liars’ loans, and creates the toxic waste of these derivatives. All of them do that. And then they sell it to the world and the world just thinks because it has a triple-A rating it must actually be safe. Well, instead, there are 60 and 80 percent losses on these things, because of course they, in reality, are toxic waste.

BILL MOYERS: You’re describing what Bernie Madoff did to a limited number of people. But you’re saying it’s systemic, a systemic Ponzi scheme.

WILLIAM K. BLACK: Oh, Bernie was a piker. He doesn’t even get into the front ranks of a Ponzi scheme…

BILL MOYERS: But you’re saying our system became a Ponzi scheme.

WILLIAM K. BLACK: Our system…

BILL MOYERS: Our financial system…

WILLIAM K. BLACK: Became a Ponzi scheme. Everybody was buying a pig in the poke. But they were buying a pig in the poke with a pretty pink ribbon, and the pink ribbon said, “Triple-A.”

BILL MOYERS: Is there a law against liars’ loans?

WILLIAM K. BLACK: Not directly, but there, of course, many laws against fraud, and liars’ loans are fraudulent.

BILL MOYERS: Because…

WILLIAM K. BLACK: Because they’re not going to be repaid and because they had false representations. They involve deceit, which is the essence of fraud.

BILL MOYERS: Why is it so hard to prosecute? Why hasn’t anyone been brought to justice over this?

WILLIAM K. BLACK: Because they didn’t even begin to investigate the major lenders until the market had actually collapsed, which is completely contrary to what we did successfully in the Savings and Loan crisis, right? Even while the institutions were reporting they were the most profitable savings and loan in America, we knew they were frauds. And we were moving to close them down. Here, the Justice Department, even though it very appropriately warned, in 2004, that there was an epidemic…

BILL MOYERS: Who did?

WILLIAM K. BLACK: The FBI publicly warned, in September 2004 that there was an epidemic of mortgage fraud, that if it was allowed to continue it would produce a crisis at least as large as the Savings and Loan debacle. And that they were going to make sure that they didn’t let that happen. So what goes wrong? After 9/11, the attacks, the Justice Department transfers 500 white-collar specialists in the FBI to national terrorism. Well, we can all understand that. But then, the Bush administration refused to replace the missing 500 agents. So even today, again, as you say, this crisis is 1000 times worse, perhaps, certainly 100 times worse, than the Savings and Loan crisis. There are one-fifth as many FBI agents as worked the Savings and Loan crisis.

BILL MOYERS: You talk about the Bush administration. Of course, there’s that famous photograph of some of the regulators in 2003, who come to a press conference with a chainsaw suggesting that they’re going to slash, cut business loose from regulation, right?

WILLIAM K. BLACK: Well, they succeeded. And in that picture, by the way, the other — three of the other guys with pruning shears are the…

BILL MOYERS: That’s right.

WILLIAM K. BLACK: They’re the trade representatives. They’re the lobbyists for the bankers. And everybody’s grinning. The government’s working together with the industry to destroy regulation. Well, we now know what happens when you destroy regulation. You get the biggest financial calamity of anybody under the age of 80.

BILL MOYERS: But I can point you to statements by Larry Summers, who was then Bill Clinton’s Secretary of the Treasury, or the other Clinton Secretary of the Treasury, Rubin. I can point you to suspects in both parties, right?

WILLIAM K. BLACK: There were two really big things, under the Clinton administration. One, they got rid of the law that came out of the real-world disasters of the Great Depression. We learned a lot of things in the Great Depression. And one is we had to separate what’s called commercial banking from investment banking. That’s the Glass-Steagall law. But we thought we were much smarter, supposedly. So we got rid of that law, and that was bipartisan. And the other thing is we passed a law, because there was a very good regulator, Brooksley Born, that everybody should know about and probably doesn’t. She tried to do the right thing to regulate one of these exotic derivatives that you’re talking about. We call them C.D.F.S. And Summers, Rubin, and Phil Gramm came together to say not only will we block this particular regulation. We will pass a law that says you can’t regulate. And it’s this type of derivative that is most involved in the AIG scandal. AIG all by itself, cost the same as the entire Savings and Loan debacle.

BILL MOYERS: What did AIG contribute? What did they do wrong?

WILLIAM K. BLACK: They made bad loans. Their type of loan was to sell a guarantee, right? And they charged a lot of fees up front. So, they booked a lot of income. Paid enormous bonuses. The bonuses we’re thinking about now, they’re much smaller than these bonuses that were also the product of accounting fraud. And they got very, very rich. But, of course, then they had guaranteed this toxic waste. These liars’ loans. Well, we’ve just gone through why those toxic waste, those liars’ loans, are going to have enormous losses. And so, you have to pay the guarantee on those enormous losses. And you go bankrupt. Except that you don’t in the modern world, because you’ve come to the United States, and the taxpayers play the fool. Under Secretary Geithner and under Secretary Paulson before him… we took $5 billion dollars, for example, in U.S. taxpayer money. And sent it to a huge Swiss Bank called UBS. At the same time that that bank was defrauding the taxpayers of America. And we were bringing a criminal case against them. We eventually get them to pay a $780 million fine, but wait, we gave them $5 billion. So, the taxpayers of America paid the fine of a Swiss Bank. And why are we bailing out somebody who that is defrauding us?

BILL MOYERS: And why…

WILLIAM K. BLACK: How mad is this?

BILL MOYERS: What is your explanation for why the bankers who created this mess are still calling the shots?

WILLIAM K. BLACK: Well, that, especially after what’s just happened at G.M., that’s… it’s scandalous.

BILL MOYERS: Why are they firing the president of G.M. and not firing the head of all these banks that are involved?

WILLIAM K. BLACK: There are two reasons. One, they’re much closer to the bankers. These are people from the banking industry. And they have a lot more sympathy. In fact, they’re outright hostile to autoworkers, as you can see. They want to bash all of their contracts. But when they get to banking, they say, ???contracts, sacred.’ But the other element of your question is we don’t want to change the bankers, because if we do, if we put honest people in, who didn’t cause the problem, their first job would be to find the scope of the problem. And that would destroy the cover up.

BILL MOYERS: The cover up?

WILLIAM K. BLACK: Sure. The cover up.

BILL MOYERS: That’s a serious charge.

WILLIAM K. BLACK: Of course.

BILL MOYERS: Who’s covering up?

WILLIAM K. BLACK: Geithner is charging, is covering up. Just like Paulson did before him. Geithner is publicly saying that it’s going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they’re allowing all the banks to report that they’re not only solvent, but fully capitalized. Both statements can’t be true. It can’t be that they need $2 trillion, because they have masses losses, and that they’re fine.

These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed, not because…

BILL MOYERS: What do you mean?

WILLIAM K. BLACK: Well, Geithner has, was one of our nation’s top regulators, during the entire subprime scandal, that I just described. He took absolutely no effective action. He gave no warning. He did nothing in response to the FBI warning that there was an epidemic of fraud. All this pig in the poke stuff happened under him. So, in his phrase about legacy assets. Well he’s a failed legacy regulator.

BILL MOYERS: But he denies that he was a regulator. Let me show you some of his testimony before Congress. Take a look at this.

TIMOTHY GEITHNER:I’ve never been a regulator, for better or worse. And I think you’re right to say that we have to be very skeptical that regulation can solve all of these problems. We have parts of our system that are overwhelmed by regulation.

Overwhelmed by regulation! It wasn’t the absence of regulation that was the problem, it was despite the presence of regulation you’ve got huge risks that build up.

WILLIAM K. BLACK: Well, he may be right that he never regulated, but his job was to regulate. That was his mission statement.

BILL MOYERS: As?

WILLIAM K. BLACK: As president of the Federal Reserve Bank of New York, which is responsible for regulating most of the largest bank holding companies in America. And he’s completely wrong that we had too much regulation in some of these areas. I mean, he gives no details, obviously. But that’s just plain wrong.

BILL MOYERS: How is this happening? I mean why is it happening?

WILLIAM K. BLACK: Until you get the facts, it’s harder to blow all this up. And, of course, the entire strategy is to keep people from getting the facts.

BILL MOYERS: What facts?

WILLIAM K. BLACK: The facts about how bad the condition of the banks is. So, as long as I keep the old CEO who caused the problems, is he going to go vigorously around finding the problems? Finding the frauds?

BILL MOYERS: You–

WILLIAM K. BLACK: Taking away people’s bonuses?

BILL MOYERS: To hear you say this is unusual because you supported Barack Obama, during the campaign. But you’re seeming disillusioned now.

WILLIAM K. BLACK: Well, certainly in the financial sphere, I am. I think, first, the policies are substantively bad. Second, I think they completely lack integrity. Third, they violate the rule of law. This is being done just like Secretary Paulson did it. In violation of the law. We adopted a law after the Savings and Loan crisis, called the Prompt Corrective Action Law. And it requires them to close these institutions. And they’re refusing to obey the law.

BILL MOYERS: In other words, they could have closed these banks without nationalizing them?

WILLIAM K. BLACK: Well, you do a receivership. No one — Ronald Reagan did receiverships. Nobody called it nationalization.

BILL MOYERS: And that’s a law?

WILLIAM K. BLACK: That’s the law.

BILL MOYERS: So, Paulson could have done this? Geithner could do this?

WILLIAM K. BLACK: Not could. Was mandated–

BILL MOYERS: By the law.

WILLIAM K. BLACK: By the law.

BILL MOYERS: This law, you’re talking about.

WILLIAM K. BLACK: Yes.

BILL MOYERS: What the reason they give for not doing it?

WILLIAM K. BLACK: They ignore it. And nobody calls them on it.

BILL MOYERS: Well, where’s Congress? Where’s the press? Where–

WILLIAM K. BLACK: Well, where’s the Pecora investigation?

BILL MOYERS: The what?

WILLIAM K. BLACK: The Pecora investigation. The Great Depression, we said, “Hey, we have to learn the facts. What caused this disaster, so that we can take steps, like pass the Glass-Steagall law, that will prevent future disasters?” Where’s our investigation?

What would happen if after a plane crashes, we said, “Oh, we don’t want to look in the past. We want to be forward looking. Many people might have been, you know, we don’t want to pass blame. No. We have a nonpartisan, skilled inquiry. We spend lots of money on, get really bright people. And we find out, to the best of our ability, what caused every single major plane crash in America. And because of that, aviation has an extraordinarily good safety record. We ought to follow the same policies in the financial sphere. We have to find out what caused the disasters, or we will keep reliving them. And here, we’ve got a double tragedy. It isn’t just that we are failing to learn from the mistakes of the past. We’re failing to learn from the successes of the past.

BILL MOYERS: What do you mean?

WILLIAM K. BLACK: In the Savings and Loan debacle, we developed excellent ways for dealing with the frauds, and for dealing with the failed institutions. And for 15 years after the Savings and Loan crisis, didn’t matter which party was in power, the U.S. Treasury Secretary would fly over to Tokyo and tell the Japanese, “You ought to do things the way we did in the Savings and Loan crisis, because it worked really well. Instead you’re covering up the bank losses, because you know, you say you need confidence. And so, we have to lie to the people to create confidence. And it doesn’t work. You will cause your recession to continue and continue.” And the Japanese call it the lost decade. That was the result. So, now we get in trouble, and what do we do? We adopt the Japanese approach of lying about the assets. And you know what? It’s working just as well as it did in Japan.

BILL MOYERS: Yeah. Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?

WILLIAM K. BLACK: Absolutely.

BILL MOYERS: You are.

WILLIAM K. BLACK: Absolutely, because they are scared to death. All right? They’re scared to death of a collapse. They’re afraid that if they admit the truth, that many of the large banks are insolvent. They think Americans are a bunch of cowards, and that we’ll run screaming to the exits. And we won’t rely on deposit insurance. And, by the way, you can rely on deposit insurance. And it’s foolishness. All right? Now, it may be worse than that. You can impute more cynical motives. But I think they are sincerely just panicked about, “We just can’t let the big banks fail.” That’s wrong.

BILL MOYERS: But what might happen, at this point, if in fact they keep from us the true health of the banks?

WILLIAM K. BLACK: Well, then the banks will, as they did in Japan, either stay enormously weak, or Treasury will be forced to increasingly absurd giveaways of taxpayer money. We’ve seen how horrific AIG — and remember, they kept secrets from everyone.

BILL MOYERS: A.I.G. did?

WILLIAM K. BLACK: What we’re doing with — no, Treasury and both administrations. The Bush administration and now the Obama administration kept secret from us what was being done with AIG. AIG was being used secretly to bail out favored banks like UBS and like Goldman Sachs. Secretary Paulson’s firm, that he had come from being CEO. It got the largest amount of money. $12.9 billion. And they didn’t want us to know that. And it was only Congressional pressure, and not Congressional pressure, by the way, on Geithner, but Congressional pressure on AIG.

Where Congress said, “We will not give you a single penny more unless we know who received the money.” And, you know, when he was Treasury Secretary, Paulson created a recommendation group to tell Treasury what they ought to do with AIG. And he put Goldman Sachs on it.

BILL MOYERS: Even though Goldman Sachs had a big vested stake.

WILLIAM K. BLACK: Massive stake. And even though he had just been CEO of Goldman Sachs before becoming Treasury Secretary. Now, in most stages in American history, that would be a scandal of such proportions that he wouldn’t be allowed in civilized society.

BILL MOYERS: Yeah, like a conflict of interest, it seems.

WILLIAM K. BLACK: Massive conflict of interests.

BILL MOYERS: So, how did he get away with it?

WILLIAM K. BLACK: I don’t know whether we’ve lost our capability of outrage. Or whether the cover up has been so successful that people just don’t have the facts to react to it.

BILL MOYERS: Who’s going to get the facts?

WILLIAM K. BLACK: We need some chairmen or chairwomen–

BILL MOYERS: In Congress.

WILLIAM K. BLACK: –in Congress, to hold the necessary hearings. And we can blast this out. But if you leave the failed CEOs in place, it isn’t just that they’re terrible business people, though they are. It isn’t just that they lack integrity, though they do. Because they were engaged in these frauds. But they’re not going to disclose the truth about the assets.

BILL MOYERS: And we have to know that, in order to know what?

WILLIAM K. BLACK: To know everything. To know who committed the frauds. Whose bonuses we should recover. How much the assets are worth. How much they should be sold for. Is the bank insolvent, such that we should resolve it in this way? It’s the predicate, right? You need to know the facts to make intelligent decisions. And they’re deliberately leaving in place the people that caused the problem, because they don’t want the facts. And this is not new. The Reagan Administration’s central priority, at all times, during the Savings and Loan crisis, was covering up the losses.

BILL MOYERS: So, you’re saying that people in power, political power, and financial power, act in concert when their own behinds are in the ringer, right?

WILLIAM K. BLACK: That’s right. And it’s particularly a crisis that brings this out, because then the class of the banker says, “You’ve got to keep the information away from the public or everything will collapse. If they understand how bad it is, they’ll run for the exits.”

BILL MOYERS: Yeah, and this week in New York, at this conference, you described this as more than a financial crisis. You called it a moral crisis.

WILLIAM K. BLACK: Yes.

BILL MOYERS: Why?

WILLIAM K. BLACK: Because it is a fundamental lack of integrity. But also because, if you look back at crises, an economist who is also a presidential appointee, as a regulator in the Savings and Loan industry, right here in New York, Larry White, wrote a book about the Savings and Loan crisis. And he said, you know, one of the most interesting questions is why so few people engaged in fraud? Because objectively, you could have gotten away with it. But only about ten percent of the CEOs, engaged in fraud. So, 90 percent of them were restrained by ethics and integrity. So, far more than law or by F.B.I. agents, it’s our integrity that often prevents the greatest abuses. And what we had in this crisis, instead of the Savings and Loan, is the most elite institutions in America engaging or facilitating fraud.

BILL MOYERS: This wound that you say has been inflicted on American life. The loss of worker’s income. And security and pensions and future happened, because of the misconduct of a relatively few, very well-heeled people, in very well-decorated corporate suites, right?

WILLIAM K. BLACK: Right.

BILL MOYERS: It was relatively a handful of people.

WILLIAM K. BLACK: And their ideologies, which swept away regulation. So, in the example, regulation means that cheaters don’t prosper. So, instead of being bad for capitalism, it’s what saves capitalism. “Honest purveyors prosper” is what we want. And you need regulation and law enforcement to be able to do this. The tragedy of this crisis is it didn’t need to happen at all.

BILL MOYERS: When you wake in the middle of the night, thinking about your work, what do you make of that? What do you tell yourself?

WILLIAM K. BLACK: There’s a saying that we took great comfort in. It’s actually by the Dutch, who were fighting this impossible war for independence against what was then the most powerful nation in the world, Spain. And their motto was, “It is not necessary to hope in order to persevere.”

Now, going forward, get rid of the people that have caused the problems. That’s a pretty straightforward thing, as well. Why would we keep CEOs and CFOs and other senior officers, that caused the problems? That’s facially nuts. That’s our current system.

So stop that current system. We’re hiding the losses, instead of trying to find out the real losses. Stop that, because you need good information to make good decisions, right? Follow what works instead of what’s failed. Start appointing people who have records of success, instead of records of failure. That would be another nice place to start. There are lots of things we can do. Even today, as late as it is. Even though they’ve had a terrible start to the administration. They could change, and they could change within weeks. And by the way, the folks who are the better regulators, they paid their taxes. So, you can get them through the vetting process a lot quicker.

Posted in Banking, Mortgages, Ponzi Schemes | Comments Off on Bill Moyers & Bill Black on Ponzi schemes, Fraud, & Liar’s loans

Joe Bageant : We’ve Let Corporations and Media Rob Our Souls–It’s Time to do something Meaningful

Posted on April 13, 2014 by

[One of the best books that explains why poor people go against their own interests by voting for Trump and Republicans in general is Joe’s highly entertaining “Deer Hunting with Jesus: Dispatches from America’s Class War“.

Alice Friedemann   www.energyskeptic.com  author of “When Trucks Stop Running: Energy and the Future of Transportation”, 2015, Springer and “Crunch! Whole Grain Artisan Chips and Crackers”. Podcasts: Derrick Jensen, Practical Prepping, KunstlerCast 253, KunstlerCast278, Peak Prosperity , XX2 report ]

Joe Bageant. April 5, 2009. We’ve Let Corporations and Media Rob Our Souls — It’s Time to Do Something Meaningful. Alternet.org.

The most chilling accomplishment of American capitalist culture is that we have commodified our own consciousness.

I just returned from several months in Central America. And the day I returned I had iguana eggs for breakfast, airline pretzels for lunch and a $7 shot of Jack Daniels for dinner at the Houston Airport, where I spent two hours listening to a Christian religious fanatic tell about Obama running a worldwide child porn ring out of the White House. Entering the country shoeless through airport homeland security, holding up my pants because they don’t let old men wear suspenders through security, well, I knew I was back home in the land of the free.

Anyway, here I am with you good people asking myself the first logical question: What the hell is a redneck writer supposed to say to a prestigious school of psychology? Why of all places am I here? It is intimidating as hell. But as Janna Henning and Sharrod Taylor here have reassured me that all I need to do is talk about is what I write about. And what I write about is Americans, and why we think and behave the way we so. To do that here today I am forced to talk about three things — corporations, television and human spirituality.

No matter how smart we may think we are, the larger world cannot and does not exist for most of us in this room, except through media and maybe through the shallow experience of tourism, or in the minority instance, we may know of it through higher education. The world however, is not a cultural history course, a National Geographic special or recreational destination. It is a real place with many fast developing disasters, economic and ecological collapse being just two. The more aware among us grasp that there is much at stake. Yet, even the most informed and educated Americans have cultural conditioning working against them round the clock. As psych students, most of you understand that there is no way you can escape being conditioned by your society, one way or another. You are as conditioned as any trained chicken in a carnival. So am I. When we go to the ATM machine and punch the buttons to make cash fall out, we are doing the same thing as the chickens that peck the colored buttons make corn drop from the feeder. You will not do a single thing today, tomorrow or the next day that you have not been generally indoctrinated and deeply conditioned to do — mostly along class lines.

For instance, as university students, you are among the 20% or so of Americans indoctrinated and conditioned to be the administrating and operating class of the American Empire in some form or another. In the business of managing the other 75% in innumerable ways. Psychologists, teachers, lawyers, social workers, doctors, accountants, sociologists, mental health workers, clergy — all are in the business of coordinating and managing the greater mass of working class citizenry by the Empire’s approved methods, and toward the same end: Maximum profitability for a corporate based state.  Yet it all seems so normal. Certainly the psychologists who have prescribed so much Prozac that it now shows up in the piss of penguins, saw what they did as necessary. And the teacher, who sees no problem with 20% of her fourth graders being on Ritalin, in the name of “appropriate behavior,” is happy to have control of her classroom. None of these feel like dupes or pawns of a corporate state. It seems like just the way things are. Just modern American reality. Which is a corporate generated reality.

Given the financialization of all aspects of our culture and lives, even our so-called leisure time, it is not an exaggeration to say that true democracy is dead and a corporate financial state has now arrived. If you can get your head around that, it’s not hard to see an ever merging global corporate system masquerading electronically and digitally as a nation called the United States. Or Japan for that matter. The corporation now animates us from within our very selves through management of the need hierarchy in goods and information. As students, even in such an enlightened institution as this one, you are being subjected to at least some sort of pedagogy of the corporate management of society for maximum profit. Unarguably your training will help many fellow human beings. But in the larger scheme of things, you are part of an institution, the American Psycho-socio-medical complex, and thus authorized to manage public consciousness, one person at a time. Remember that the entire pedagogy in which you are immersed is itself immersed in a corporate financial state. Even if some of what you do is alternative psychology, that is a reaction to the state, and therefore a result of it. It’s still part of the financialization of consciousness. And, I might add that none you expect to work for nothing.

This financialization of our consciousness under American style capitalism has become all we know. That’s why we fear its loss. Hence the bailouts of the thousands of “zombie banks,” dead but still walking, thanks to the people’s taxpayer offerings to the money god so that banks will not die. We believe that we dare not let corporations die. Corporations feed us. They entertain us. Corporations occupy one full half of our waking hours of our lives, through employment, either directly or indirectly. They heal us when we are sick. So it’s easy to see why the corporations feel like a friendly benevolent entity in the larger American consciousness. Corporations are, of course, deathless and faceless machines, and have no soul or human emotions. That we look to them for so much makes us a corporate cult, and makes corporations a fetish of our culture. Yet to us, they are like the weather just there.

All of us live together in this corporate fetish cult. We agree upon and consent to its reality, just as the Aztecs agreed upon Quetzalcoatl and the lost people of Easter Island agreed that the great stone effigies of their remote island had significance.

We are not unique

Strangely enough, even as a population mass operating under unified corporate management machinery, most Americans believe they are unique individuals, significantly different from every other person around them. More than any other people I have met, Americans fear loss of uniqueness. Yet you and I are not unique in the least. Despite the American yada yada about individualism, you are not special. Nor am I. Just because we come from the manufacturer equipped with individual consciousness, does not make us the center of any unique world, private or public, material, intellectual or spiritual. The fact is, you will seldom if ever make any significant material or lifestyle choices of your own in your entire life. If you don’t buy that house, someone else will. If you don’t marry him, someone else will. If you don’t become a psychologist, lawyer or a clergyman or a telemarketer, someone else will. We are all replaceable parts in the machinery of a capitalist economy. “Oh but we have unique feelings and emotions that are important,” we say. Psychologists specialize in this notion. Yet I venture to say that none of us will ever feel an emotion that someone long dead has not felt, or some as yet unborn person will not feel. We are swimmers in an ancient rushing river of humanity. You, me, the people in my Central American village, the child in Bangladesh, and the millionaire frat boys who run our financial and governmental institutions with such adolescent carelessness. All of our lives will eventually be absorbed without leaving a trace.

Still though, for Western peoples in particular, there is the restless inner cultural need to differentiate our lives from the other swimmers. Most of us, especially as educated people in the Western World, will never beat that one.  Fortunately though, we can meaningfully differentiate our lives (at least in the Western sense) in the way we choose to employ our consciousness. Which is to say, to own our consciousness. If we exercise enough personal courage, we can possess the freedom to discover real meaning and value in our all-too-brief lives. We either wake up to life, or we do not. We are either in charge of our own awareness or we let someone else manage it by default. That we have a choice is damned good news. The bad news is that we nevertheless remain one of the most controlled peoples on the planet, especially regarding control of our consciousness, public and private. And the control is tightening. I know it doesn’t feel like that to most Americans. But therein rests the proof. Everything feels normal; everybody else around us is doing the same things, so it must be OK. This is a sort of Stockholm Syndrome of the soul, in which the prisoner identifies with the values of his or her captors, which in our case is of course, the American corporate state and its manufactured popular culture.

When we feel that such a life is normal, even desirable, and we act accordingly, we become helpless. Learned helplessness. For instance, most Americans believe there is little they can do in personally dealing with the most important moral and material crises ever faced, both in America and across the planet, beginning with ecocide, war making, and the grotesque deformation of the democratic process we have settled for. Citizenship has been reduced to simple consumer group consciousness. Consequently, even though Americans are only 6% of the planet’s population, we use 36% of the planet’s resources. And we interpret that experience as normal and desirable and as evidence of being the most advanced nation in the world. Despite that our lives have been reduced to a mere marketing demographic.  Let me digress for just a moment, to tell you about how life is outside the marketing demographic. I live much of the year in the Third World country of Belize, Central America, a nation so damned poor that our cash bounces. True, it ain’t Zimbabwe, or the Sudan — there are no dying people in the streets. But food security is easily the biggest problem and growing by the day.

Yet, despite our meager and diminishing resources down there, and much government corruption, people are still citizens, not marketing demographics, not yet anyway. Citizens who struggle toward a just society. They have made more progress than the United States in some respects. For instance, we have: A level of free medical care for the poor, though we lack much equipment and facilities. Maternity pay if either you or your spouse are employed. Retirement on Social Security at age 60. Worker rights, such as mandatory accrued severance pay for workers, even temporary workers. Most Belizeans own their homes outright, and all citizens are entitled to a free piece of land upon which to build one. Employment is scarce, and that has a down side: Many folks waste a lot of valuable time having sex , perhaps because they have too much time on their hands. The Jehovah’s Witnesses missionaries are working hard to fix that problem.  Anyway, American and Canadian tourists drive by in their rented SUVs and you can see by their expressions they are scared as hell of those bare footed black folks in the sand around them. Central America sure as hell ain’t heaven. But lives there are not what we Americans are told about the Third World either. It’s not a flyblown, dangerous place run by murdering drug lords, and full of miserable people. It’s just a whole lot of very poor people trying to get by and make a decent society.

I mention these things because it’s a good example of how North Americans live in a parallel universe in which they are conditioned to see everything in terms of consumer goods and “safety,” as defined by police control. Conditioned to believe they have the best lives on the planet by every measure. So when they see our village and its veneer of “tropical grunge,” they experience fear. Anything outside of the parameters of the cultural hallucination they call “the first world” represents fear and psychological free fall. Yet, even if we think in that sort of outdated terminology, first, second and Third World, and most Americans do, then America is a second world nation. We have no universal free health care (don’t kid yourself about the plan underway), no guarantee of anything really, except competitive struggle with one another for work and money and career status, if you are one of those conditioned to think of your job and feudal debt enslavement as a “career.” High infant mortality rates, abysmal educational scores, poor diet, no national public transportation system, crumbling infrastructure, a collapsed economy, even by our own definition we are a second world nation.

Learning to love shiny objects

But there is a shiny commercial skin that covers everything American, a thin layer of glossy throwaway technology, that leads the citizenry to believe otherwise. That slick commercial skin, the bright colored signs for Circuit City and The Gap (rest in peace), the clear plastic that covers every product from CDs to pre-cut vegetables, the friendly yellow and red wrapper on the burger inside its bright red paper box, the glossy branding of every item and experience. These things are the supposed tangible evidence that the slick conditioned illusion, the one I call The American Hologram, is indeed real. If it’s bright and shiny and new, it must be better. Right? It’s the complete opposite of tropical grunge. Last week when I got back to the States I took a shower in an American friend’s new $30,000 gleaming remodeled bathroom. It felt like a surgical operating room experience, compared to wading into the Caribbean surf in the tropical dusk with a bar of soap. Like a parallel universe straight out of The Matrix.

Meat space versus the parallel universe

So how is it that we Americans came to live in such a parallel universe? How is it that we prefer such things as Facebook (don’t get me wrong, I’m on Facebook too), and riding around the suburbs with an iPod plugged into our brain looking for fried chicken in a Styrofoam box? Why prefer these expensive earth destroying things over love and laughter with real people, and making real human music together with other human beings — lifting our voices together, dancing and enjoying the world that was given to us? Absolutely for free.  And the answer is this: We suffer under a mass national hallucination. Americans, regardless of income or social position, now live in a culture entirely perceived inside a self-referential media hologram of a nation and world that does not exist. Our national reality is staged and held together by media, chiefly movie and television images. We live in a “theater state.”

In our theater state, we know the world through media productions which are edited and shaped to instruct us on how to look and behave and view the outside world. As in all staged productions and illusions, everyone we see is an actor. There are the television actors portraying what supposedly represents reality. Non-actors in Congress perform in front of the cameras, as the American empire’s cultural machinery weaves and spins out our cultural mythology. Cultural myth production is an enormous industry in America. It is very similar to the national projects of pyramid-building in Egypt, or cathedral-building in medieval Europe. And in our obsession with violence and punishment, two characteristics of a consensual police state reality, we are certainly similar to prison camp building in Stalinist Russia. Actually, we’re pretty good in that department too. Consider that one fourth of all the incarcerated people on earth are in U.S. prisons. U.S. citizens imprisoned by their own government.

Good guys and bad guys at the chariot races

In any case, the media culture’s production of martyrs, good guys and bad guys, fallen heroes and concept outlaws, is not just big corporate business. It is the armature of our cultural behavior. It tells us who to fear (Middle Eastern terrorists, Mr. Chavez in Venezuela, and foreign made pharmaceuticals), who to scorn (again the same candidates, along with Brittney Spears for her lousy child rearing skills). Our daily news is the modern version of Roman coliseum shows. Elections are personality combat, chariot races, not examinations of solutions being offered. None are offered.

What are being offered are monkey models. Man as a social animal necessarily mimics the behavior he sees around him, whether it be by real people or moving images of people. This eye-to-brain to mimicry connection does not care. Consequently, we know how to act and what the things around us are because television and media tell us. Television is the software, the operating instructions for our society. Thus, social realism for us is a television commercial for the American lifestyle: what’s new to wear, what to eat, who’s cool (Obama), what and whom to fear (that perennial evil booger, Castro) or who to admire (Bill Gates, pure American genius at work). This societal media software tells us what music our digitized corporate complex is selling, but you never see images of ordinary families sitting around in the evenings making music together, or creating songs of their own based upon their own lives and from their own hearts. Because that music cannot be bought and sold, and is not profitable. I think about that when the children and their parents sing and dance on the sand in front of my shack in Central America. We Americans are not offered that choice.

Managing mythology

So instead of a daily life in the flesh, belly to belly and soul to soul, lived out in the streets, and parks and public places, in love and the workplace, we get 40-inch televisions, YouTube, Cineplexes, and the myths spun out by Hollywood.  Now for a national mythology to work, it has to be accessible to everyone all the time, it has to be all in one bundle. For example, in North Korea, it is wrapped up in a single man, Kim. In America, as we have said, it is the media and Hollywood in particular. Hollywood accommodates Imperial myths, melting pot myths, and hegemonic military masculinity myths, and glamour myths. It articulates our culture’s social imaginary: “the prevailing images a society needs to project about itself in order to maintain certain features of its organization.” And the features of our media mythology are terrifying when you think about them. As a writer friend says, It is watching “Man on Fire,” with Denzel Washington’s tragic pose and his truthful bullets, and his willingness to saw the fingers off of Mexicans to get the information on time to protect us from The Evil. It is the absorption of that electronic mythology that allowed us to co-sign the torture at Abu Ghraib.

Incidentally, speaking of Abu Ghraib, I am a friend of Ray Hardy, lawyer to Lynndie England, the leash girl of Abu Ghraib. He has copies of thousands of other, far more grisly Abu Ghraib photos. Believe me, they picked the gentlest ones to release. Anyway, when the media and government people in power made that selection, they were managing your consciousness. What you know and don’t know. Keeping you calmer by withholding the truth. Rather like not upsetting little children so they will continue to quietly behave the way you want.

But, like children, the American public got bored with the subject of torture long ago, so we quit seeing the victims. Plenty of new evidence has been coming out for years since Lynndie’s famous pics from Abu Ghraib. But the short American attention span, created by our rapid fire media, says, “Move on to the next hologram please. Whoa! Stop the remote. Nice butt shot of Sarah Palin there!”

The result is that Americans cannot achieve the cathexis we need. Cathexis is the ground zero psychic and emotional attachment to the world that cannot be argued. It is “beyond ideological challenge because it is called into existence affectively.” Americans are conditioned to reject any affective attachment that does not have a happy ending. And in that, we remain mostly a nation of children. We never get to grow up. So we tell ourselves the Little Golden Book fairy tales — that we are a great and compassionate people, and that we are personally innocent of any of our government’s horrific crimes abroad. Guiltless as individuals. And we do remain innocent, in a sense, as long as we cannot see beyond the media hologram. But it is a terrible kind of self-inflicted innocence that can come to no good. We are a nation latch key kids babysat by an electronic hallucination, the national hologram.

The TV goldfish bowl

You may or may not watch much television, but the average American spends almost one-third of his or her waking life doing so. The neurological implications of this are so profound that they cannot even be comprehended in words, much less described by them. Television constitutes our reality in the same fashion that water constitutes the environment in a goldfish bowl. It’s everywhere and affects everything, even when we are not watching it. Television regulates our national perceptions and our interior ideations of who we Americans are. It schedules our cultural illusions of choice. It pre-selects candidates in our elections. By the way, as much as I like Obama, I fully understand he is there because he was selected by the illusion producing machinery of television, and citizens under its influence. It is hard to underestimate the strength of these illusions. TV regulates holiday marketing opportunities and the national neurological seasons. It tells us, “It’s Christmas! Time to shop!” Or “it’s election season, time to vote.” Or “it’s football season, let us rally passions and buy beer and cheer.” Or that America’s major deity, “The Economy,” is suffering badly. “Sacred temples on Wall Street make great sickness upon the land!” Or most ominous of all, “It’s time to make war! Again.”

It is fair to say that television and the American culture are the same thing. More than any other factor, it is the glue of society and the mediator of our experience. American culture is stone cold dead without it. If all the TVs in America went black, so would most of America’s collective consciousness and knowledge. Because corporate media have replaced nearly all other previous forms of accumulated knowledge. Especially the ancient forms, such as contemplation of the natural world, study and care of the soul. And I do not mean soul in the religious sense either. I mean the deeper self, the one you go to sleep with every night. The media have colonized our inner lives like a virus. The virus is not going away. This commoditization of our human consciousness is probably the most astounding, most chilling accomplishment of American capitalist culture.

Escape from the zombie food court

Capitalist society however, can only survive by defying the laws of thermodynamics, through endlessly expanding growth, buying and using more of everything, every year and forever. Thus the cult of radical consumerism. It has been the deadliest cult of all because, so far, it has always triumphed, and has now spread around the earth and its nations. Why has it been so viral, so attractive to so many for so long? How did it come to grip the consciousness of so much of mankind, from Beijing to Bangladesh? Thuggish enforcement accounts for part of it, of course. But it has succeeded too because it requires no effort. No critical thinking. Not even literacy. Just passive consumption. That the easy addiction to consumption is probably hard wired into us. Every one of us will go right out this door tonight and continue to play out our lives as contributors to ecocide and global warming, mainly because it’s easier. And besides, we are not offered any other real options, and we don’t know any other way. Nor can we ever know any other way without making a great effort.

How to make that effort? (Assuming you even want to.) As we said, consuming images, goods or buying your identity at Old Navy or a retro clothing shop takes no real effort or thought. Just money. Text messaging your whereabouts at the mall may be a technological wonder, but you’re still absolutely nowhere if you are just one more oral grooved organism in the food court at the mall moving in a swarm toward Quiznos. So how do you escape the programming of the food court, and, I might include, escape even those parts of this school that may serve more to indoctrinate than enlighten you? All pedagogy, even the best, is nevertheless about control. How does one escape such a total system?

In a word, service. Humble and thoughtful service to the world. It is heartening that we do have concerned Americans studying to alleviate the great suffering of so much of humanity. I have no proof of it, but it seems like earnest idealism is making a comeback since its decline following the optimistic 1960s. People and institutions such as this one are attempting to move American society forward again, heal us of our national sickness to the extent you can, after decades of regression, not to mention repression. Of course, to solve problems you must first identify them.  Let me say here that one of the most profound things I have learned from the Third World, perhaps the only thing I have learned, and as psychologists you’ve surely heard it before, is this: The diagnosis is not the disease. Which is why our prescribed treatment never seems to work in places like Africa. Or even in the Bronx or South Philly.

Even our most well intentioned thinking and study of the afflictions of Africa and Latin America, American inner cities or Appalachia, suffers from hubris, because they are necessarily the products of western propertized and monetized thinking that cause the problem. So now we study our victims with great piety. And supposedly teach them solutions to the problems we continue to cause for them. Western people studying globalization’s horrific effects, or rape in Africa, or world poverty are doing so under the assumption that such things can be dealt with through some social mechanistic means, through analysis and unbiased reason and rational value-free science. Or by a network of officially sanctioned agencies.  For years I have wanted to see the opposite take place. To see well fed, educated Americans learn from the poor of the earth. Do what Gandhi advised, let the poor be the teachers. Go among them with nothing, one set of clothing and no money, keep your mouth shut, and do your best not to affect anything (which is impossible, I know. But you can come, as they say, “close enough for government work.”)

Then just let the world happen to you, like they do in the so-called “passive societies,” instead of trying to happen to it in typical Western fashion. Not trying to “improve” things. Maybe practice milpa agriculture with Mayans on the Guatemalan border, watching corn grow for three months. Fish in a lonely dugout, sun-up to sun-down, in the dying reefs of the Caribbean, with only a meal or two of fish as your reward. Do such things for a month or two.  First you will experience boredom, then comes an internal psychic violence and anger, much like the experience of zazen, or sitting meditation, as the layers of your mind conditioning peel away. Don’t quit, keep at it, endure it, to the end. And when you return you will find that deeply experiencing a non-conditioned reality changes things forever. What you have experienced will animate whatever intellectual life you have developed. Or negate much of it. But in serious, intelligent people, experiencing non-manufactured reality usually gives lifelong meaning and insight to the work. You will have experienced the eternal verities of the world and mankind at ground zero. And you will find that the healthy social structures our well intentioned Western minds seek are already inherent in the psyche of mankind, but imprisoned. And the startling realization that you and I are the unknowing captors.

In conclusion, I would point out that the high technological imprisonment of our consciousness has been fairly recent. There are still those among us who remember when it was not so entrapped. A few of us still know what it was like to experience non-manufactured realities — life outside our mass produced kitsch culture. Particularly some aging Sixties types, who sought to pass through the doors of perception. Many made it through. But in my travels to places such as this one, I also meet a new breed of younger people, who get it completely. I meet them in the more advanced psychological venues such as Adler. And especially in the ecological movement. They seem to already know what it took me a lifetime to learn: that each of us is but one strand in the vast organic web of flesh and blood chlorophyll. All things and all beings are inextricably connected at the most profound level. Any physicist will confirm this. We are bound by its every wave and particle, all of us — the lonely night clerk at Motel 6 and the leviathans of the deep, the sleeping grandmother in New Haven, Connecticut and the maimed Iraqi child in Kirkuk. It can be understood by anyone though, simply by owning one’s own consciousness. And in doing so we find that ownership and domination are both temporary and meaningless. And that the animating spirit of the earth is real and within us and claimable.

The purpose of life is to know this. Einstein glimpsed it. Lao-Tzu knew it. So did St. Francis. But you and I are not supposed to. It would shatter the revered, digitized, super-sized, utterly meaningless hologram. The one that mesmerizes us, and mediates our every experience, but isolates us from universal humanness and its coursing energies. Such as love. Or mercy. Compassion. Existential pain. Hunger. Or the unmitigated joy of simply being alive one finds in children everywhere, even among the poorest. Most of the human race still lives in that realm. Blessed is the one who joins them. Because he or she learns that the truth is not relative, and that because the human mind seeks balance, social justice is not only inescapable in the long run, but inevitable. I won’t be around for that, but on a clear day if I squint real hard I can see down that road ahead. And on that road I can see the long chain of decent human beings like yourselves walking toward the light. And for your very presence on this earth and in this room, I am grateful. Thank you all from the bottom of my heart.

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