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08 Feb ' 01:06
Social Fractals and the Corruption of AmericaFebruary 8, 2012Social fractals and social control myths help explain the complete corruption of America. Correspondent Kathy K. recently elucidated a powerful concept: social fractals. We typically think of fractals--structures that are scale-invariant--as features of Nature or finance. For example, a coastline has the same characteristically ragged appearance from 100 feet, 1,000 feet and 10,000 feet in altitude. It is scale-invariant, i.e. its characteristics remain constant whether it is viewed on a small, medium or large scale.
This is how Kathy described social fractals:
"This dishonest, self-serving individual behavior is a fractal of what is happening in our society at large: dishonest and self-serving people are extending and pretending, and their complicity keeps the system going."
The concept of social fractals can be illustrated with a simple example. If the individuals in a family unit are all healthy, thrifty, honest, caring and responsible, then how could that family be dysfunctional, spendthrift, venal and dishonest? It is not possible to aggregate individuals into a family unit and not have that family manifest the self-same characteristics of the individuals. This is the essence of fractals.
If we aggregate healthy, thrifty, honest, caring and responsible families into a community, how can that community not share these same characteristics?
And if we aggregate these communities into a nation, how can that nation not exhibit these same characteristics?
If this is so, then how do we explain the complete corruption of America's financial and political Elites? What else can you call a nation that passively accepts financial predation, looting, robosigning, etc. by protected cartels as the Status Quo but thoroughly corrupt?
There are three distinct but highly interactive dynamics in America's social and financial fractals that have led to the nation's corruption. We can think of these dynamics as feedback loops: positive feedback is self-reinforcing, negative feedback offers restraint and opposition. From Wikipedia:
Negative feedback is used to describe the act of reversing any discrepancy between desired and actual output. A simple and practical example is a thermostat. Biological examples include regulating body temperature and blood glucose levels.
Positive feedback is feedback in which the system responds so as to increase the magnitude of any particular perturbation, resulting in amplification of the original signal instead of stabilization. Any system where there is a net positive feedback will result in a runaway situation.
These dynamics also share certain characteristics of the dialectic method in philosophy, a system of reasoning through arguments and counter-arguments (thesis and antithesis) to reach a synthesis or new understanding. The Socratic method is to show that a given hypothesis leads to a contradiction that forces the withdrawal of the hypothesis as a candidate for truth.
The social fractal element is individual behavior: the actions we choose based on our internal values, emotions, worldview and goals, and our belief in social control myths. This is a powerful concept brought to my attention by correspondent Diemos, who cited these examples:
The untouchables in India are told that they deserve to be treated as outcasts because of their karma from bad deeds done in a previous life. Of course, in reality, they are no more or less deserving than any other human being of a good life but as long as they believe that they deserve their station in life they are less likely to agitate for changes that will impact the wealth of the ruling class.
In the US we're told that an all-powerful, all-seeing, perfectly impartial free market gives everyone the wealth they deserve due to their own efforts. So if you're poor it's because you deserve to be poor and if I'm rich it's because I deserve to be rich. So you're more likely to accept your place in the Status Quo than if you believed that the division of wealth was more a function of an individual's political power and ability to participate in various crony-capitalist schemes.
In all cases a social control myth is an idea designed to affect the behavior of the people who believe it to the benefit of the people who are promulgating that idea.
I had a devil of a time understanding economics until I understood that 95% of what gets said in the name of economics is a social control myth rather than science. Economics is actually pretty straightforward to understand once you strip out all the propaganda, self-serving rationalizations, wish-fulfillment and outright misinformation that passes for analysis these days.
There are two key social control myths in America: one, that everyone is equal before the law, and two, that similar fundamental opportunities are available to all.
Using the Socratic method, let's see if these hypotheses are true or false.
When a select class of people are given unique opportunities unavailable to others of different ethnicities, religion or social class, then we recognize this as bias. Since there are laws against bias, then this violates both our belief that "everyone is equal before the law" and also our belief that opportunities in America are fundamentally open to all based on merit.
Now let's consider the U.S. tax code. The 70,000 pages of tax regulations are legal, and since they are in the public record then presumably they are open to all. America's tax codes seem to fulfill both hypotheses.
In other words, everyone should be able to find perfectly legal provisions in the tax code to match Mitt Romney's tax rates: Romney paid a 13.9% tax rate on $21.7 million in 2010, paying about $3 million. His 2011 estimates show an income of $20.9 million and a tax rate of 15.4%.
Since a self-employed person pays 15.3% Social Security tax on 92.35% of his/her income up to about $106,000, (and 15% income tax on the first $34,500, 25% on everything up to about $83,600, and so on up to 35% on everything over $379,150), then it seems Mitt Romney is in effect paying .1% Federal income tax in 2011, since the self-employed person has to pay 15.3% right off the bat, even before income taxes are levied.
According to our hypotheses, the tax code is equally open to all. Does the average citizen have the time and expertise to plow through 70,000 pages of tax codes? Clearly, the answer is no, so it's simply not true that the tax code is equally available to all.
Let's imagine a different set of values and governance. Let's suppose the tax law stated that the entire tax code must meet two requirements: it must be able to be read and understood by the overwhelming majority of citizens with a high school education in one hour or less.
The national labs (or equivalent impartial bodies) would be tasked with conducting a randomized sampling of 100,000 citizens to test each year's tax code. If 80% of the adult citizenry with a high school education (or GED) were unable to put the tax code into practice after an hour of study, then the code would be rejected and sent back to Congress for revision until it passed this simple, transparent standard for equality before the law.
Clearly, the tax code is both legal and completely skewed to the very wealthy and politically powerful. $100,000 is still a fairly significant contribution in politics, and if that contribution ends up yielding a tax break that gains the donor $1 million in lower taxes, then that donation earned a 10-fold "return on investment."
Only the wealthy can afford to hire Panzer divisions of tax attorneys to pore over the 70,00 pages and game the system to pay less than self-employed citizens pay in Social Security and Medicare tax, never mind income tax.
The first hypothesis is still vaild--the tax code is legal--but the second--that fundamental opportunities are open to all--is demonstrably false. Equal opportunity is revealed as a social control myth promoted by those benefitting from opportunities that are not available to the citizenry at large.
This is the definition of an oligarchy.
Now consider the vast quantity of fraud and embezzlement that took place in the upper reaches of American finance in the past decade and then ask how many people have been indicted, tried and punished for these crimes. Just as in a totalitarian society, only a few unlucky fall-guys have been scapegoated in show trials. The vast majority of those who committed fraud or acted as accomplices or co-conspirators have not even been investigated, much less indicted and convicted.
Thus the first hypothesis is also demonstrably false: it is simply not true that everyone is equal before the law in America.
We can propose two new hypotheses to replace the false ones.
1. When the system enables fraud, collusion, misrepresentation of risk, moral hazard (the separation of risk and gain) and embezzlement, then it also rewards them. When breaking the rules in a systematic fashion garners huge rewards in wealth and power while playing by the rules dooms one to lower returns on the same investment of labor and capital, then the system itself is thoroughly, totally, completely, hopelessly corrupt.
Since America has enabled financial fraud, embezzlement etc. on a systemic basis, America itself is thoroughly, totally, completely, hopelessly corrupt. There is no other logical conclusion.
2. When the rule of law is routinely bypassed, flouted, negated or simply ignored without triggering uniformly applied consequences, then the system is thoroughly, totally, completely, hopelessly corrupt. Since America's financial and political Elites have routinely bypassed, flouted, negated or simply ignored the laws governing mortgages, finance, insider trading, etc., actions that would lead to an average citzen's arrest, indictment and routine conviction, then we must conclude that America itself is thoroughly, totally, completely, hopelessly corrupt. There is no other logical conclusion.
There are thus two distinct problems. The system, though nominally legal, is corrupt. The financial and political Elites (the Power Elites, or the Plutocracy) as a matter of course are not bound by the same laws that control the non-Elite citizenry.
Is it any wonder than the average citizen has surrendered their autonomy, independence and will to resist in such a pervasively corrupt society and economy? No wonder the average American is busy extending and pretending, remaining passive, quiet and complicit in the corruption. Why put my slice of the swag at risk when everyone else is getting away with perfectly legal looting, illegal but "enabled" predation and unparalleled financial parasitism enforced by the Central State?
But hey, there's going to be quite a battle of gladiators in the Coliseum tomorrow, and free bread will be distributed before the entertainment extravaganza.
Social Fractals and the Corruption of America(February 8, 2012)Thank you, Maggie R. ($20), for your marvelously generous contribution to this site -- I am greatly honored by your ongoing support and readership. Thank you, Anthony B. ($25), for your splendidly generous contribution to this site -- I am greatly honored by your support and readership. -
07 Feb ' 11:33
Has Derivatives Deleveraging Fueled the Stock Rally?February 7, 2012A mad scramble to avoid insolvency as Greek default becomes likely may be driving the rally in equities. Deleveraging typically means selling assets to raise cash to meet margin calls or pay debts coming due. But there may be another twist to deleveraging that has fueled the manic market rally since late December. I am indebted to Peter C. of for explaining this dynamic.
To understand this non-intuitive dynamic, let's start with a simple example of how options work. If this is new to you, please stay with me, your head will not explode.... at least for awhile.
An option is a financial instrument which grants you the right to buy X number of shares of a company at Y price (the strike price). One option controls 100 shares. An option is either a put (a bet the price will decline in the future) or a call (a bet the price will rise in the future).
An option is "in the money" when the stock price is above the call strike price or below the put strike price. For example, if you own one call option on Netflix (NFLX) at a strike price of $100, then your option is worth $2,900 ($29 per share) as of today because Netflix is trading for $129 per share. (There is also a time value in options, but let's leave that aside in this example.)
So if you bought 10,000 options on Netflix (NFLX), whomever sold you the options is obligated to deliver 1,000,000 shares of Netflix to you (at the strike price of the option) upon expiration of the option.
If your option is "in the money" as in the above example, the specialist who sold you the options will hedge his position so he can meet the obligation. If your options are just barely in the money, he might buy 250,000 shares of Netflix to cover his future obligation.
As your option becomes ever more valuable, i.e. becomes deeper in the money, the specialist has to increase his hedge up to the full 1,000,000 shares that he is obligated to deliver to you upon expiration.
That purchase of 750,000 shares to cover his bet will drive the price of Netflix up.
Here is an important point about options and derivatives. In theory, the number of options should equal the number of outstanding shares. If there are 1,000,000 shares of a stock outstanding, then there shouldn't be more than 10,000 options contracts written and sold.
In the parlance of options, these puts and calls are "covered," meaning there are enough shares available to "cover" the options, i.e. when the option expires, there are enough shares to meet the delivery obligations of actual shares.
If a specialist sells options without holding the requisite number of actual shares to cover the options, then he will have to buy those shares as the delivery date looms. If the number of option contracts exceeds the number of available shares, then the rush to acquire those shares for delivery will spark a massive rally.
This is somewhat akin to the infamous "short-covering rallies" triggered when those who sold shares short have to buy shares to close their short positions.
Options and futures contracts are all marked to market at the close of every trading day. The price is thus transparent for all to see.
Derivatives are not marked to market. That sort of requirement is evil, evil, evil and anti-capitalist--or so we are told by the financial cartels who profit from selling derivatives.
Derivatives can be sold in whatever quantity can be fobbed off to credulous buyers. This is how the world ends up with 700 gazillion dollars in notional derivatives.
Consider the debt of a sovereign state--for example, Greece. Just to keep things simple, let's say there are $100 billion of outstanding Greek bonds. Back in the good old days around 2009, the risk of Geece defaulting on that debt was considered low. Nonetheless, prudent owners of the debt bought insurance against default. The insurance is a derivative called a credit default swap (CDS).
The contract works somewhat like an option, in the sense that if a default occurs, the seller of the CDS must cover their contract by delivering the value promised in the CDS to its owner. If no default ever occurs, the financial institution that originated and sold the CDS gets to keep the hefty premium.
Nice. Since there are no limits on how many CDs I can write on Greek debt, why not sell more CDS? In fact, why not sell more CDS than there are Greek bonds?
As in our options example, in the normal course of things the number of CDS equals the outstanding bonds. In other words, the owners of the $100 billion in bonds would buy $100 billion in notional CDS insurance against default.
If Greece defaulted and the value of the bonds fell in half to $50 billion, the sellers of the CDS would owe the owners of the CDS $50 billion. (This is simplified, but you get the picture.) That was, after all, the bet: in exchange for this hefty premium, if Greece defaults then we will make good your horrendous losses.
But a funny thing happened on the way to the derivatives market: wise guys realized they weren't limited to selling CDS to the owners of Greek bonds--anyone could buy a CDS on Greek debt. So why not sell $1 trillion in CDS against Greek bonds? That's ten times the premium.
Some issuers hedged their bet by buying CDS issued by other institutions. These other institutions are the "counterparty", that is, the party who pays off the CDS I bought from them so I can pay off the owner of my CDS. Thus the derivatives market for Greek debt is a daisy-chain of counterparties, all planning to use the proceeds from the CDS they own to pay off the CDS they sold.
It was a license to print money--until Greece defaults. Yikes, now what? Just as in the classic film The Producers, where 100% of the proceeds of the Broadway play were promised to ten different investors, the CDS schemers reckoned the odds of a Greek default were effectively zero--"the E.U. will never let a member state default."
Ahem. Until they do. In The Producers, the schemers devised a play so odious, so bad and so repellent that they felt extremely confident it would close after one night for a tremendous loss--and they would get to keep the 10X oversubscribed investors' money.
This was the same bet made by sellers of CDS on Greek debt--and on Italian, Portuguese, Spanish, Irish et al. debt as well.
Now that leaves the canny financiers in a pickle, as they owe various parties $1 trillion when $100 billion in Greek debt goes up in smoke.
Now we get to the deleveraging part. As I understand it, some of these CDS are written against various swaps or stock indices, meaning that the asset to be delivered upon default is ultimately a claim against stock indices, currencies, etc.
That means that those holding the CDS obligations have to acquire these assets so they can pay off their obligation when Greece defaults.
There is one more wrinkle. Many sellers of CDS protected themselves against any potential loss by buying a CDS originated by someone else. As noted in When Greece Defaults, the Credit Default Swap Dominoes Fall (February 4, 2012), this "can be likened to a pool of $100 bets leveraged off $5 in cash. If every bet is covered perfectly, then it's somewhat like $95 in bets being paid by passing $5 around--much like the famous email that depicts all debts in a small town being paid by the same $5."
But some players have issued more CDS than they bought as insurance, meaning that they will be unable to meet all their obligations. Everyone is depending on a host of counterparties to deliver, and now there is a growing fear that some counterparties will be unable to make good on their obligations.
That's how the dominoes topple. Prudent institutions aren't waiting around until the dominoes fall--they're buying the underlying assets so they can meet their CDS obligations. That's the only way not to topple into insolvency when the default causes CDS to be recognized as due and payable.
In this light, it's no wonder stocks have been rising. If even a modest percentage of CDS are tied to stock indices, then those deleveraging their derivatives positions must acquire the underlying assets. They can no longer count on all counterparties paying off as promised, and so they are raising cash and buying the underlying assets needed to make good their obligations.
The whole thing is a farce, just like The Producers. The moment the default is recognized, then all the CDS become due and payable, and it will only take handful of failed counterparties to bring the entire system down.
No wonder the Eurocrats and central bankers are twisting everyone's arms to accept a 70% loss--the alternative is a Greek default and the collapse of the banking cartel's profitable scheme. It is beyond absurd--what is a 70% loss but default? When banana republics default, their bondholders don't necessarily absorb a 70% loss. yet now, to "save" the despicably parastic shadow banking system and the "too big to fail" financial institutions, a default cannot be called a default: it is a "voluntary haircut."
Greece, please do the world a favor and openly default--right now, today. Declare a default and pay nothing. Force the shadow banking system to recognize a default and bring down the entire rotten heap of worm-eaten corruption.
At that point, there will be no reason to buy equities.
Has Derivatives Deleveraging Fueled the Stock Rally?(February 7, 2012)Thank you, Jan D.L. ($50), for your stupendously generous contribution to this site -- I am greatly honored by your support and readership. Thank you, Mike K. ($50), for your monumentally generous contribution to this site -- I am greatly honored by your continuing support and readership. Jeroen T. (2/12) Venkatesh P. Gunnar A. Ronald L. Vernon R. Tony M. ($9.85)
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05 Feb ' 23:42
What If We're Beyond Mere Policy Tweaks?February 6, 2012The nation's ills cannot be fixed by thousands of pages of regulation or more policy tweaks. Only a profound cultural transformation can address our problems. The mainstream view uniting the entire political spectrum is that all our financial problems can be fixed by what amounts to top-down, centralized policy tweaks and regulation: for example, tweaking policies to "tax the rich," limit the size of "too big to fail" financial institutions, regulate credit default swaps, lower the cost of healthcare (a.k.a. sickcare), limit the abuses of student loans to pay for online diploma mills, and on and on and on.
But what if the rot is already beyond the reach of more top-down policy tweaks? Consider the recent healthcare legislation: thousands of pages of obtuse regulations that require a veritable army of regulators staffing a sprawling fiefdom with the net result of uncertain savings based on a board somewhere in the labyrinth establishing "best practices" that will magically cut costs in a system that expands by 9% a year, each and every year, a system so bloated with fraud, embezzlement and waste that the total sum squandered is incalculable, but estimated at around 40%, minimum.
Does anyone really think that the lack of another centralized Federal fiefdom and thousands of pages of additional regulation is what ails sickcare? Of course not. In effect, we as a society have completely lost the ability to honestly admit a problem exists and that the solution is not to paper it all over with more regulation and insatible, ever-rising debt-based funding, paid for by our children, grandchildren, and their children.
Consider the National Security State, busily constructing rectangular mountains of office space to house its vast, unchecked, oversight-free Empire. Does anyone actually know what tens of thousands of highly-paid people are doing in all these sprawling fiefdoms of National Security? And I don't mean the Pentagon or the NSA--the buildings sprouting all over the tonier bits of D.C. and its suburbia are the metastasizing results of the "green light" given to anything remotely connected to GWOT--the global war on terror, the war that by definition can never be declared won or even ended, the war that always requires more funding lest one "event" slip through the cracks.
If nobody in the elected chain of command actually knows where all this "black budget" money is going, what are the odds it's being spent wisely and prudently? "No meaningful oversight" inevitably leads to abuse of budget and power. If we haven't learned that, then we are well on the way to financial and political self-destruction.
Consider the Glass-Steagall Act, at 37 pages in length, and the 2,319-page monstrosity of corrupted Federal power, the Dodd-Frank Wall Street Reform and Consumer Protection Act:" (Source)
Back in December, Nick Schulz helped put the size of the 2,074-page healthcare bill into some historical context by comparing its length to some previous bills that rank among the most consequential in U.S. history, like the 82-page Social Security Act of 1935 and the 74-page Civil Rights Act of 1964.
Now that Congress has passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, it might be a good time to compare the 2,319-page financial reform bill (245 pages longer than the healthcare bill) to the previous bills listed below (and see graph) that are considered among the most consequential legislative acts for banking and finance.
1. Federal Reserve Act (1913) 31 pages.
2. Glass-Steagall Act (1933) 37 pages.
Though few have delved into the ramifications of this monstrous power-grab, it seems that the Executive Branch has grabbed potentially unprecedented powers with little if any oversight by Congress--all in the supremely Orwellian pursuit of "consumer protection."
If a 37-page bill took care of the problem in 1933, why can't the same 37-page bill be re-instated? Why, indeed. The reason is that the bill impedes the flow of public funds to favored cartels and opportunities for financial looting by these cartels, and so a monster is created that nobody understands and which limits or simply overwhelms oversight by elected officials outside the Imperial Presidency.
The entire financial and political infrastructure is corrupt. Perhaps it is time to note that the most thoroughly, venally, pervasively corrupt nations on Earth all have abundant regulations against corruption.
Regulations don't stop or limit corruption, fraud and embezzlement by magic. Sickcare is beyond being "fixed" by thousands of pages of policy tweaks, limitations and regulations. The financial system is beyond being "fixed" by thousands of pages of arcane regulations that only serve to obfuscate the looting and predation while enshrining another vast Federal fiefdom that harvests the national income while accomplishing nothing of substance.
Regulation only functions if the culture and the society have a value system and a will to enforce it. The American people have lost those values and the will. Complicity reigns supreme. Instead we support going through the motions of adding layers of bureaucratic bloat, and listening to Soaring Rhetoric (TM) from bloviated politicos who promise us "prosperity," "recovery" and all the rest without any sacrifice or engagement.
Going through the motions never solved anything. 2,000-page regulatory thickets are one thing, and one thing only: purposeful obfuscation via complexity. ( America Is Just Going Through the Motions (November 19, 2010):
A profound realization hit me last night: America is just going through the motions now--of reform, of healthcare, of everything. America's leadership--both its elected and appointed officials, and its "shadow" Financial Power Elite leadership (the corporatocracy of crony Capitalist cartels and rentier/speculative parasites) are just going through the motions of financial reform. And the American public is resigned to just going through the motions of accepting the travesty of a mockery of a sham that is called "reform," too, even as they understand in their bones that nothing has been fixed and the next financial crisis has already been cooked into their future.
One of our few reliable voice of reason in the world of finance, Simon Johnson, has already laid bare how the the next financial crisis and inevitable bailout of the banking parasites will unfold. His article in The New Republic Way Too Big To Fail reveals how the "too big to fail" banks have shredded the wet paper bag of "reform" Congress went through the motions of conjuring up: they are quickly expanding globally, beyond the reach of any mere nation-state's grasp.
Let's be honest, shall we? There never was any fire for real reform of the financial sector. It was all rote, a foul, stupid play-act, a passionless pantomime of "caring" and fake-"progressiveness" displayed for propaganda purposes.
Real reform occurs when the political class of toadies, sycophants, leeches and cowards is forced by a near-universal public outrage to pass simple, powerful legislation and the budgetary resources to enforce that legislation. For example, the landmark environmental laws of the 1970s. Rivers in America used to catch fire before this Federal legislation; now they don't. There was a true passion and desire in the nation to clean up the industrial pollution that was destroying the nation's commons.
There was no real fire for financial reform in the politico class. All they had to do was wait out the public's outrage over TARP and then get down to the business of collecting contributions from financial players and their armies of toady-lobbyists.
So Washington went through the motions of "reform" and the regulatory agencies went through the motions of "enforcing" existing regulations. But nobody was indicted, no RICO suits filed on behalf of the defrauded, no billion-dollar penalties slapped on those who carted off tens of billions in embezzled, ill-gotten gains, and no perps forced into bankruptcy.
In other words, nothing got done except another layer of useless, overpaid bureaucracy was added to the bloated, overstuffed Federal payroll.
The exact same dynamic is visible in the "healthcare" (a.k.a. sickcare) "reform." 2,000 pages of mind-numbing slicing and dicing of the vast flood of national treasure that flows to the sickcare cartels, and nary a single word on the actual health of the American public, which continues to deteriorate on multiple fronts.
The "reform" is to add multiple layers of bureaucracy and additional costs on a bloated, out-of-control system in which 50% of the money is already wasted on fraud, needless procedures/meds and paper shuffling.
It was all about going through the motions of reforming a system everyone knows is beyond dysfunctional.
The painful truth is that we are far beyond the point where policy/legalist regulatory tweaks will actually fix what's wrong with America. The rot isn't just financial or political; those are real enough, but they are mere reflections of a profound social, cultural, yes, spiritual rot.
This is the great illusion: that our financial and political crises can be resolved with top-down, centralized financial reforms of one ideological flavor or another. It is abundantly clear that our crises extend far beyond a lack of regulation or policy tweaks. We cling to this illusion because it is easy and comforting; the problems can all be solved without any work or sacrifice on our part.
Our complicity in the corruption is never mentioned: our votes for kleptocractic politico toadies who promise us that our share of Federal swag will not be sacrificed, our interest payments to the banking cartel/oligarchy, our acceptance of bogus statistics, bogus "reforms" and ceaseless propaganda as legitimate, and lastly, our silence in the face of destructive deficits, lest our share of the swag be cut.
This is how once-great Empires end: toothless regulations are passed by bought-and-paid-for legislatures for the purposes of perception management, and a populace addled by constant entertainments and staged combats in the Coliseum listlessly pursues their "right" to bread and circuses of distraction.
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04 Feb ' 10:43
When Greece Defaults, the Credit Default Swap Dominoes FallFebruary 4, 2012A default by any other name is still a default. When Greece defaults, the inter-connected chains of credit default swaps will fall like dominoes. For your Superbowl half-time reading, here is a brief summary of the situation in Europe:
1. Greece is poised to default, the end-game everyone anticipated in 2011. It is not a matter of if but when.
2. That default will trigger credit-default swap contracts, derivatives known as CDS that protect the owner from events such as default.
3. This will implode the shadow-banking system and the visible banking system, as those who sold the CDS (financial institutions) do not have enough cash or assets to pay the owners of the CDS.
4. The general idea is that sovereign default is very unlikely, so you can sell protection (CDS) against that possibility for a low premium, and cover that bet by buying your own protection from another player.
5. If that player (counterparty) can't pay you off, then you can't meet your obligations on the CDS you originated and sold.
6. So the failure of one counterparty can trigger a systemic failure akin to a row of dominoes being toppled by the fall of one domino.
7. To avoid such a CDS-triggered collapse, the European Union and its proxy agencies (European Central Bank, etc.) are attempting to call a default by Greece something other than "default."
8. This will theoretically keep the first domino--a credit-default swap--from falling. In other words, if we call a default by some other name, then it isn't a default.
9. Those absorbing the losses caused by a Greek default (and let's stipulate that this references owners of Greek debt who bought CDS as insurance, not speculators who leveraged CDS at 30X the actual bond value) will want to cash in their insurance, i.e. the CDS they own against a Greek default. They have every incentive to demand a default be recognized as a default. If they accept the official plan to avoid calling a default a default, then all the losses will be theirs and none will fall to the counterparties who sold them the CDS.
10. How is this fair?
11. The official response of avoiding default is focused on self-preservation, not fairness, justice or the rule of law.
12. The system can be likened to a pool of $100 bets leveraged off $5 in cash. If every bet is covered perfectly, then it's somewhat like $95 in bets being paid by passing $5 around--much like the famous email that depicts all debts in a small town being paid by the same $5.
13. In the real world, somebody's bets and insurance will not be perfect and their obligations will exceed their cash on hand. In other words, they will end up with $3 and owe $5. They will default and the dominoes will start falling as everyone down the line doesn't receive their $5 counterparty payoff.
14. Empires tend to fall when the interests of their Elites diverge. We are at such a point in the global financial Empire.
15. "Extend and pretend" has "worked" for almost 2 years. If Greece defaults and it is recognized by even one player as a default, then the system will quickly unravel and cash/dollars will be king until the deleveraging runs its course.
This entry was drawn from the Weekly Musings Report #5.
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04 Feb ' 02:03
Counterfeit Value Derivatives: Follow the Bouncing Ball (Guest Essay) February 3, 2012This guest essay on derivatives was written by frequent contributor Zeus Yiamouyiannis. Here is how the counterfeit value derivative con works. Its a game of I pretend, you pretend, we all pretend, and the taxpayer will pay in the end.
1) Ill create an instrument, say a credit default swap (CDS), an unregulated insurance with no capital requirements, with a certain notional value. Notional value is just something I assign. It does not have to be attached to or backed by any real asset or actual money/principal, but I can pretend as if it is. (Notional amount.)
2) As a seller, I will just declare that this swap covers the full value X of this company, contract, etc. if credit event Y happens. I receive lucrative insurance premiums and fees for my unbacked promise. The CDSs value is based in nothing more than my promise to pay. I dont have to have adequate capital reserves on hand, but I can pretend as if I do perhaps with some mini-reserves based on objective-seeming risk ratios calculated by my mathematical models. (credit default swap.)
3) As a buyer, you can then buy as many of these CDSs as you want, even for a single default. If you are really sure something is going to tank you can insure it 30 times over (or a 100 or 1,000) and get 30 (or 100 or 1,000) times the return when it goes bust! In regulated insurance it is unacceptable to insure beyond the full replacement value of the underlying asset. Not so with CDSs. The seller has gotten 30x the premiums and the buyer gets 30x value in the event of default. As a buyer of this phony insurance you dont have a stake in the affected properties, but you can essentially pretend you do.
4) As buyer and seller of CDSs either one of us can assign our risks to a third party through another contract, and pretend as if we are covered in case our own game playing blows up in our faces. This allows us to retain even less reserve capital and spend freed-up funds on more high-risk, high-(pseudo) return speculation. (The monster that ate Wall Street.)
5) We can purchase and sell of these derivative contracts to each other at unlimited rates to generate massive volume and huge fees and profits. We can simply hyper-cycle risk and take our chunk each time.
According to the Bank of International Settlements, as of June 2011 total over-the-counter derivatives contracts have an outstanding notional value of 707.57 trillion dollars, ( 32.4 trillion dollars in CDSs alone). Where does this kind of money come from, and what does it refer to? We dont really know, because over-the-counter derivatives are not transparent or regulated.
With regulated economic markets, when an underlying real asset is impaired (i.e. the company in question is bankrupt, the mortgage has defaulted, etc.), market value is assessed, default insurance is paid up to replacement or full value, bond holders and stock holders make claims on remaining value and the account is closed. There is no need for bailouts because order and proportion of compensation has been established and everything is attached to the value of the underlying asset.
When the unreal, counterfeit economy intrudes, you now have a situation where a person can put in an unregulated, but recognized, claim to be paid a thousand times over in case of impairment. Say market participants have negotiated for a bankrupt company a 70% payback for bondholders and (36% payback for insurance claims), and I come with not one but rather 1,000 CDS claims demanding to be paid for each CDS.
Where does that money come from? Well if it were regulated insurance, I would have to be invested in the company in some way, my bond or stock payout would be limited by the actual asset value of the company, and my insurance payout would be limited as well. However, since I am unregulated and unrestrained, the money due me has to come from the CDS seller and my contractual agreements with that company (say AIG).
AIG could easily have sold 1,000 different unregulated insurance policies to the same person or a million CDSs to a hedge fund, and when AIG could not pay up, it was threatened with insolvency, under which both its regulated and unregulated insurance policies and investments would become impaired. In fact there is abundant evidence that hedge funds (i.e. Magnetar) did in fact multi-insure certain portfolios while simultaneously pressuring the portfolio managers to select risky investments to ensure that the portfolios would crash. This is the opposite of a traditional stake, and this is the disease that modern derivatives bringprofit from intentional market destruction.
This chaotic state of affairs and its cascading implications for other interlinked parties and counterparties (read too big to fail banks), essentially resulted in economic extortion to force a huge public bailout of the whole crooked mess (totaling somewhere in the neighborhood of 10 14 trillion dollars in giveaways, loans and guarantees starting in 2008 in the U.S. alone.) Instead of agreeing to the extortion temporarily to prevent collapse and then aggressively pursuing orderly investigation, prosecution, and receivership, regulators and world leaders have simply covered up the events and even rewarded the perpetrators.
No wonder the market goes up dramatically when there is talk about another quantitative easing (Fed bailout) or emergency rescue (government/taxpayer bailout). These financial game players already know that an open public spigot is on its way, pouring real capital directly into their pockets.
In regulatory actions and legal courts, unregulated insurance claims should simply be declared null and void when applied to real assets and real compensation. You have no stake, therefore you have no claim. Your agreement was with a third party that did not have adequate capital to pay for a contract with you. Take them to court. Or You have an imaginary claim for imaginary damage. Heres your imaginary money. Your deal was private and unregulated, then it should be settled in private between companies without public intervention or support.
Did that happen? No, because AIG had collapsed its unregulated private and regulated public functions and Congress had allowed it to do so with the repeal of the Glass-Steagall Act. Because the wall came down between regulated and unregulated activity, transparent and shadow markets, traditional and investment banking, this private fiat virus broke quarantine and the resulting contagion cannot be put back in the lab.
Because world leaders and their regulators blinked and did nothing, counterfeit private fiat (backed by nothing) has metastasized and infiltrated genuine public fiat (backed by countrys productivity if not by gold), and more and more actual money and productivity in the form of austerity is being thrown at a gargantuan and unrecoverable sea of counterfeit obligation.
How can you exceed 700 trillion dollars in unregulated derivatives alone? This is easy when market players are buying and selling from each other and when people can buy an infinite number of claims, insurances, and guarantees on credit events rather than assets. When banks are allowed to mark-to-model and then claim somehow that their back-and-forth trading and abstract multiplication of asset value is real, then all bets are off (or on depending upon which side of the fence your sitting).
Is it any wonder that the market for derivatives has grown another 100 trillion over the last two years? Well concoct value and youll pay us real money for it? Of course we are going to keep doing it! Why not another 100 trillion!
This probably is not going to stop until there is massive world-wide outcry and political change, a black swan event, or both. Lets hope the first gains steam along with some long-overdue accountability for fraudsters before these nefarious banks destroy the body politic with their hubris and greed.
by Zeus Yiamouyiannis, copyright 2012Recent related entries:
Fraudulent Debt = Counterfeit Money
Counterfeit Value Derivatives: Follow the Bouncing Ball (Guest Essay) (February 3, 2012)Thank you, Charles C. ($300), for your mind-bogglingly generous contribution to this site -- I am greatly honored by your continuing support and readership. Thank you, Andrew W. ($15), for your most-welcome generous contribution to this site -- I am greatly honored by your support and readership. Fraudulent Debt = Counterfeit Money(February 2, 2012)
Our Counterfeit Economy(February 1, 2012)
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30 Jan ' 23:23
Counterfeit Money, Counterfeit PolicyJanuary 31, 2012What is the difference between printing money and counterfeiting? There is none. Counterfeiting is illegal because it is the false creation of value. The counterfeiter takes low-value paper and turns it into high-value money, which is fundamentally a claim on the real productive value of the economy that issues the currency and recognizes it as a proxy means of exchanging that productive value.
Counterfeiting is illegal because the counterfeiter creates no additional value--he creates only the proxy for value. Creating real value--adding meaningful goods or services to the economy--is tedious, hard work. How much easier to simply transform near-worthless paper into a claim on actual goods and services.
If this is illegal, then would somebody please arrest the Board of the Federal Reserve for counterfeiting? The Fed has blatantly printed money without creating any real value to back up their added claims on productive value. Hence they are counterfeiting, pure and simple. A government based on rule of law would arrest these fraudsters and cons at the earliest possible convenience.
And while you're drawing up the indictment, can you also charge them with counterfeiting competence and policy, as they have demonstrated the Peter Principle par excellence: the Board has risen to its highest level of incompetence. Their counterfeit policies have wreaked incomparable damage on the real productive economy.
The essence of counterfeit policy--a fake policy that claims to be something it is not--is "extend and pretend." And the sole goal of "extend and pretend" is self-preservation and the preservation of the Financial Elite which has tightened its grip on the nation's throat as a direct consequence of Federal Reserve policies--notably "extend and pretend."
"Extend and pretend" extends the "too big to fail" Financial Sector's licence to mask its insolvency and its licence to continue issuing debt, leverage and derivatives under false pretences, i.e. that the risk and market value of these instruments are transparent. They are not.
In effect, the banks are also counterfeiters, as they are issuing debt--a claim on future productive value--without adding any actual value to the economy.
Thus the Fed and the Financial Sector are both diluting the base of actual real value with ever-expanding claims on real productive value by printing money and issuing debt. If an economy creates 100 units of productive value, and issues 100 units of currency as a proxy claim on that value to be used as a means of exchange, then there is a 1-to-1 correspondence with the money claim on productive value and the actual value.
If someone prints another 100 units of money and starts buying assets with that money, then they are claiming 1 unit of money still equals 1 unit of production though they have debased the currency so that it actually takes 2 units of money to represent 1 unit of productive value.
This is a con of the first order, which is why counterfeiting is illegal. If counterfeiting is illegal because it is a con, a fraudulent claim on real goods, services and assets, then how can money printing by the Fed (a private bank, mind you) be legal?
It can only be legal in a kleptocracy ruled by a Financial Elite bent on political and financial dominance, a Plutocracy whose wealth is all skimmed from the productive economy via ever-expanding issuance of money and debt.
When corporations and the State are one, we call it fascism. In the U.S., it has taken the form of financial fascism, and the Federal Reserve and Federal agencies (Treasury, Freddie Mac, FHA, etc.) are the handlers and enablers of this kleptocratic financial fascism. They add no value, they only steal value from those who create it.
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30 Jan ' 06:25
One Dam Metaphor for the 2012 Global Financial SystemJanuary 30, 2012What do you do when flood waters threaten the dam? If you're the Federal Reserve, you close the floodgates and let the water rise. Metaphors have an uncanny ability to capture the essence of complex situations. Here is one dam metaphor that distills and explains the entire global financial system in 2012. The way to visualize the current situation is to imagine a dam holding back rising storm waters.
The dam is the regulatory system, the rule of law, trust in the transparency and fairness of the system and the machinery of perception management. All of these work to keep risk, fraud and excesses of speculation and leverage from unleashing a destructive wave of financial instability on the real economy below.
As legitimate regulation and transparency have been replaced with simulacra and manipulated data, the dam's internal strength has been seriously weakened.
Depending on how you date various rivers of financialization, water has been piling up behind the dam since either 1982, 1992 or 2000. In this metaphor, the water is comprised of multiple sources of destabilization: rising money supply, debt, speculation, leverage, fraud, shadow banking and lax regulation.
Common sense suggests that water rising to dangerous levels would trigger an official response of opening the floodgates to relieve the pressure. Unfortunately for the real economy, common sense has nothing to do with the official response of central governments and banks. Their entire raison d'etre (reason to be) is self-preservation and the preservation of the financial Elites that set the context and policy of the State and central bank.
In effect, the State and central bank recognize that it is highly dangerous to let any water out, lest the toxic waste of fraud, speculative incentives, excessive leverage, etc. corrode the spillway and cause the entire dam to give way.
The official rationalization for keeping the gates closed even as the water is rising to the very lip of the dam is that the flood water released might harm the real economy downstream.
The truth is less savory: letting any water out might reveal the vulnerability of the entire system to collapse and the complicity of the official State agencies and central bank in the decades-long process of piling up too much debt, leverage, fraud and speculation in the first place.
To avoid the exposure of their own complicity and incompetence, the officials would rather risk systemic collapse of the dam. The global exercise of masking the true risks in the system can be summarized as "extend and pretend," and for the the past four years, officials have promised that closing the floodgates and keeping all the toxic debt, leverage and fraud safely behind the dam is the "solution" to rising floodwaters.
That "solution" was temporary, and 2012 is the year that the water reaches the lip of the dam and starts spilling over. The only question for those in the real economy downstream is whether this spillage will be enough to relieve the mounting pressure or whether the dam will suddenly give way.
If the rivers of toxic debt, leverage and fraud continue flowing into the system, then the only way to relieve the pressure is to release more of the debt, leverage, risk and fraud than is entering the system. "Extend and pretend" does nothing to limit the inflow of toxic debt, leverage, fraud, etc., nor does it release any bad debt or shut down the sources of toxic flodwaters, i.e the shadow banking system and the Financial Elite perpetrators of fraud.
Will the dam of extend and pretend hold another year? Perhaps, but I suspect the toxic waters have corroded the spillways of trust and resiliency to the point that any official attempt to relieve the pressure will trigger the dam's collapse.
Either way, the dam collapses.
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28 Jan ' 08:04
Has Housing Really Bottomed?January 28, 2012Massive intervention by Federal agencies and the Federal Reserve have kept the market from discovering price and the risk premium in real estate. That sets up a "catch the falling knife" possibility for impatient real estate investors. A substantial percentage of many households' net worth is comprised of the equity in their home. With the beating home prices have taken since 2007, existing and soon-to-be homeowners are keen to know: Are prices stabilizing? Will they begin to recover from here? Or is the "knife" still falling?
To understand where housing prices are headed, we need to understand what drives them in the first place: policy, perception, and price discovery.
In my December 2011 look at housing, I examined systemic factors such as employment and demographics that represent ongoing structural impediments to the much-awaited recovery in housing valuations and sales. This time around, we're going to consider policy factors that influence the housing market.
Yesterday while standing in line at our credit union I overheard another customer at a tellers window request that her $100,000 Certificate of Deposit (CD) be withdrawn and placed in her checking account because, she said, Im not earning anything. The woman was middle-aged and dressed for work in a professional white- collar environment -- a typical member, perhaps, of the vanishing middle class.
Sadly, she is doing exactly what Ben Bernankes Federal Reserve policies are intended to push people into doing: abandoning capital accumulation (savings) in favor of consumption or trying for a higher yield in risk assets such as stocks and real estate.
It may strike younger readers as unbelievable that a few decades ago, in the low-inflation 1960s, savings accounts earned a government-stipulated minimum yield of 5.25%, regardless of where the Fed Funds Rate might be. Capital accumulation was widely understood to be the bedrock of household financial security and the source of productive lending, whether for 30-year home mortgages or loans taken on to expand an enterprise.
How times -- and the US economy -- have changed.
Now the explicit policy of the nations private central bank (the Federal Reserve) and the federal governments myriad housing and mortgage agencies is to punish saving with essentially negative returns in favor of blatant speculation with borrowed money. Official inflation is around 3% and savings accounts earn less than 0.1%, leaving savers with a net loss of about 3% every year. Even worse -- if that is possible -- these same agencies have extended housing lenders trillions of dollars in bailouts, backstops and guarantees, creating institutionalized moral hazard on an unprecedented scale.
Recall that moral hazard simply means that the relationship between risk and return and has been severed, so risk can be taken in near-infinite amounts with the assurance that if that risk blows up, the gains remain in the hands of the speculator. Another way of describing this policy of government bailouts is profits are private but losses are socialized. That is, any profits earned from risky speculation are the speculators to keep, while all the losses are transferred to the public.
While the housing bubble was most certainly based on a credit bubble enabled by lax oversight and fraudulent practices, the aftermath can be fairly summarized as institutionalizing moral hazard.
Policy as Behavior Modification and Perception Management
Quasi-official pronouncements by Fed Board members suggest that the Feds stated policy of punishing savers with a zero-interest rate policy (ZIRP) is outwardly designed to lower the cost of refinancing mortgages and buying a house. The first is supposed to free up cash that households can then spend on consumption, thereby boosting the economy. With savings earning a negative yield, consuming more becomes a tangibly attractive alternative. (How keeping the factories in Asia humming will boost the American economy is left unstated.)
This near-complete destruction of investment income from household savings yields a rather poor return. Plausible estimates of the total gain that could be reaped by widespread refinancing hover around $40 billion a year, which is not much in a $15 trillion economy.
There are real-world limits on this policy as well. Since the Fed cant actually force lenders to refinance underwater mortgages, millions of homeowners are unable to take advantage of lower rates. From the point of view of lenders, declining household incomes and mortgages that exceed the home value (so-called negative equity) have lowered the creditworthiness of many homeowners.
As a result, the stated Fed policy goal of lowering mortgage payments to boost consumer spending has met with limited success. Somewhat ironically, the mortgage industrys well-known woes -- extended time-frames for involuntary foreclosure, lenders hesitancy to concede to short sales (where the house is sold for less than the mortgage and the lender absorbs a loss), and strategic/voluntary defaults -- may be putting an estimated $80 billion in free cash that once went to mortgages into defaulting consumers hands.
The failure of the Feds policies to increase households surplus income via ZIRP leads us to the second implicit goal, lowering the cost of home ownership via super-low mortgage rates, which serves both as behavior modification and perception management. If low-interest rate mortgages and subsidized Federal programs that offer low down payments drop the price of home ownership below that of renting an equivalent house, then there is a substantial financial incentive to buy rather than rent.
The implicit goal is to shape a general perception that the bottom is in, and its now safe to buy housing.
First-time home buying programs and FHA (Federal Housing Authority) and VA (Veterans Administration) loans all offer very low down-payment options to qualified buyers. This extends a form of moral hazard to buyers as well as lenders: If a buyer need only scrape up $2,000 to buy a house, their losses are limited should they default to this same modest sum. Meanwhile, lenders working under the guarantee of FHA- and VA-backed loans are also insured against losses.
The Feds desire to boost home sales by any means available is transparent. By boosting home sales, it hopes to stem the decline of house valuations and thus stop the hemorrhaging of bank losses from writing down impaired loan portfolios, and also stabilize remaining home equity for households, which has shrunk to a meager 38% of housing value.
As many have noted, given that about 30% of all homes are owned free and clear, the amount of equity residing in the 70% of homes with a mortgage may well be in the single digits. (Data on actual equity remaining in mortgaged homes is not readily available, and would be subject to wide differences of opinion on actual market valuations.)
Broadly speaking, housing as the bedrock of middle class financial security has been either destroyed (no equity) or severely impaired (limited equity). The oversupply of homes on the market and in the shadow inventory of defaulted/foreclosed homes awaiting auction has also impaired the ability of homeowners to sell their property; in this sense, any remaining equity is trapped, as selling is difficult and equity extraction via HELOCs (home equity lines of credit) has, for all intents and purposes, vanished.
The Feds strategy, in conjunction with the government-owned and -operated mortgage agencies that own or guarantee the majority of mortgages in the US (Fannie Mae, Freddie Mac, FHA, and the VA), is to stabilize the housing market through subsidizing the cost of mortgage borrowing by shifting hundreds of billions of dollars out of savers earnings with ZIRP.
Since roughly 60% of households either already own a home or are ensnared in the default/foreclosure process, then the pool of buyers boils down to two classes: buyers who would be marginal if not for government subsidies and super-low mortgage rates, and investors seeking some sort of return above that of US Treasury bonds. The Fed has handed investors two choices to risk a return above inflation: equities (the stock market) or real estate. Given the uneven track record of stocks since the 2009 meltdown, it is not much of a surprise that investors large and small have been seeking deals in real estate as a way to earn a return.
Recent data from the National Association of Realtors concludes that cash buyers (a proxy for investors) accounted for 31% of homes sold in December 2011. Even in the pricey San Francisco Bay Area, where median prices are still in the $350,000 range, investors accounted for 27% of all sales. Absentee buyers (again, a proxy for investors) paid a median price of around $225,000, substantially lower than the general median price.
This data suggests that bargain properties are being snapped up for cash, either as rental properties or in hopes of flipping for a profit after some modest cleanup and repair.
Price and Risk Premium Discovery
There is one lingering problem with the Fed and the federal housing agencies concerted campaigns to punish capital accumulation, push investors into equities or real estate, and subsidize marginal buyers to boost sales at current valuations. The market cannot discover price or establish a risk premium when the government and its proxies are, in essence, the market.
By some accounts, literally 99% of all mortgages in the U.S. are government-issued or -guaranteed. If any other sector was so completely owned by the federal government, most people would concede that it was a socialized industry. Yet we in the US maintain the fiction of a free market in mortgages and housing.
To establish a truly free and transparent market for mortgages and housing, we would have to end all federal subsidies and guarantees/backstops, and restore the market as sole arbiter of interest rates -- i.e., remove that control from the Federal Reserve.
Everyone with a stake in the current market fears such a return to an open market because it is likely that prices would plummet once government subsidies, guarantees, and incentives were removed. Yet without such an open market, buyers can never be certain that price and risk have truly been discovered. Buyers in todays market may feel that the government has removed all risk from buying, but they might find that they caught the falling knife; that is, bought into a false bottom in a market that has yet to reach transparent price discovery.
So, the key question still remains for anyone who owns a home or is looking to soon own one...how close are we to the bottom in housing prices?
In Part II: Determining the Housing Bottom for Your Local Market, we tackle that question head-on. Because local dynamics inevitably play such a large role in determining fair pricing for any given market, instead of giving a simple forecast, we instead offer a portfolio of tools and other resources for analyzing home values on a local basis. Our goal is to empower readers to calculate an informed estimate of "fair value" for their own markets -- and then see how closely current local real estate prices fit (or deviate) from it.
Click here to access Part II of this report (free executive summary, enrollment required for full access).
This article was originally published on chrismartenson.com.
Has Housing Really Bottomed?(January 28, 2012)Thank you, Paul L. ($250), for your stunningly generous contribution to this site -- I am greatly honored by your steadfast support and readership. Thank you, Lee V.D.B. ($20), for your extremely generous contribution to this site -- I am greatly honored by your ongoing support and readership. What's Priced Into the Market Uptrend?(January 27, 2012)
Between Various Rocks and Various Hard Places(January 26, 2012)
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25 Jan ' 11:21
The New American DivideJanuary 25, 2012The widening divide between the Upper Caste and everyone below is not just of income and wealth--it is also cultural and values-based. A recent Wall Street Journal article entitled The New American Divide by demographer Charles Murray described a widening cultural divide between the "haves" (the upper middle class, roughly the top 20% managerial/creative class) and the "have-nots," what many would call the lower middle class and working class.
Murray chose to focus on Caucasian Americans to avoid all the issues and emotions of ethnicity, but I think we can apply many of his class-related observations to ethnic minority populations in the U.S. as well.
This article (based on a forthcoming book) is important not because it encapsulates this tangled subject, but because it offers a well-researched first step to a much broader spectrum of issues that the author touches upon in passing.
The cultural divides the author cites is symptomatic of powerful financial and social forces that operate well below the surface of everyday life. I don't claim to have "answers" to these issues, but I find it remarkable that the author ends up concluding that community has been displaced by the Savior State, and the ultimate solution is to return to a life based on community rather than handouts and subsidies from the Savior State.
This aligns with my own conclusions stated in my books.
I think there is much that was left out of his carefully apolitical exploration of class in America and much left out of his general explanation for the widening divide betweem the "haves" and the "have-nots."
I think he is correct in fingering Savior State "free money" as the primary cause of the dissolution of working-class America's communities and households: with welfare, Section 8, food stamps, Medicaid, etc. then working-class women no longer need a husband to afford children, and men either drop out, become financially dependent on someone else, enter the "war on drugs"/prison complex or "work the system" to avoid working altogether.
He is also correct in pointing out the self-sustaining feedback loops created by Savior State support and Power Elite membership: both groups' children grow up in worlds where welfare or Elite status and perquisites are the expected norm. In this profound way, people grow up in completely different Americas, and these culturally inherited mindsets are very difficult to pierce and change.
What he delicately avoids exploring is the reality that the Status Quo works very well not just for the top 1% but also for the top 20% that forms what I call the Upper Caste of American society: the technocrat, managerial, creative class that does the heavy lifting for the top 1% who own most of the assets and income streams.
The bottom 80% is employed as service workers/debt serfs or bought off with bread-and-circus welfare to keep them quiet and passive. The system doesn't have to work for the bottom 80%, it just has to sustain them at a level that doesn't spark revolt.
The housing bubble was a gigantic scam foisted on the top layer of the working class and the lower layer of the middle class as a "sure-fire way" to join the speculative financial frenzy that enriched the top 1% and their enablers, the Upper Caste technocrat class. When the bubble burst, so did fantasies of living the Upper Caste lifestyle without the hard slog to a meaningful university degree and long hours slaving away for Corporate America to join the Upper Caste.
This notion that America no longer works for the bottom 80% (I would even say the bottom 90%) is something that standard-issue pundits like Murray cannot speak to or even admit. His "solution" is ultimately for the 80% to get on with life as an underclass and make the best of living in an economy which serves their interests only enough to avoid open insurrection.
Murray, a media-pundit in his field, studiously avoids the role of mass media in the creation of the divide. He touches briefly on the fact that we all once watched the same TV shows, a unifying cultral factor, but only because they were the only shows on TV. What I see, and what I believe research supports, is a vast chasm between the media the Upper Caste consumes and what the "have-nots" consume.
The really creative class is too busy to watch much TV or many films, or while away time texting and talking on cellphones. Rather, they create the context and content for these media and devices, and do so by avoiding addiction to their own creations--much like drug pushers never sample their own wares.
The managerial Upper Caste have all the devices and services, but their workload limits the amount of time they have to consume "entertainment" and communicate with text, twitter, email, etc. for amusement. But it is not just a matter of time constraints; they are highly conscious of the fact that consuming media and "entertainment" in quantity does not further their career. What provides the elitist sheen they desire to "fit in" to the upper tier of their caste?
The signifiers of membership in this High-Caste status are leisurely foreign travel in prestigious cities or exotic areas and foreign postings, study abroad, the ability to speak a foreign language, tasteful art in the home and office, facility with corporate-speak, participation in High-Caste cultural events such as the symphony, art-house foreign films, theater, an association (however flimsy) with an Elite university or other respected institution, pursuit of costly sports such as skiing, boating, etc., and last but not least, a network of associates and "friends" (real friendship being an increasingly rare commodity in America) who can be mentioned in conversation as owning/participating in these same high-caste signifiers.
The working class, on the other hand, is a voracious consumer of all media and entertainment; the TV is often left on 24/7 in working-class households and merely muted at night, and an iPod or internet radio is always providing a soundtrack to every activity, while Facebook (i.e. Global Channel of Me) can be a near-obsession, interrupting or taking precedence over all other activities, including, it seems, sex. Texting is constant, and social success is measured by signifiers such as the latest film on bootleg DVD, high-quality street drugs, large collections of films and music (i.e. media) and in rural areas, fishing and hunting trophies.
As correspondent Chuck D. recently observed, the divide extends to money management: the High-Caste class is deeply interested in investments and view high-earning investments as signifiers of status while the working class only sees the spectrum of consumption.
When High-Caste politicos like Al Gore or Mitt Romney attempt to cross the divide and mimic working-class signifiers, their attempts are either comical, wooden or downright painful. They live in a completely different America from the voters they are clumsily appealing to.
In some ways I have a bit of experience on both sides of this divide, having been lucky enough to graduate from an Elite prep school, snag a (non-Elite) university degree and gather the requisite bits of foreign languages and travel.
On the other hand, I worked in the construction/building field for many years alongside both deserters from Corporate/Central State America and working-class guys for whom construction was a relatively high-paying avenue to a middle-class life, if they saved their money (unfortunately not the norm).
There are two other critical long-term issues not addressed in the article:
1. The "mancession"-- the trend toward an economy that values the "female" skills of communciation, cooperation and education, while the "male" virtues of a strong back and a physical-world skill have steadily lost value. This is a very complex set of issues, but we can "state the obvious" by noting that the decline in factory/manufacturing work has apparently hurt males more than females, who have shifted to retail, healthcare, pink-collar and government work more readily than working-class males.
2. The ladder from the lower classes to the Upper Caste--upward mobility--is crumbling. Many commentators have noted that the gateway of upward mobility has narrowed. Yes, anyone can "make it in America," but making it America requires an increasing number of cultural knowledge bases and values--the very values and knowledge bases that are eroding in the classes below the top 20% Upper Caste.
While Murray describes the complex and knotty issue of declining marriage rates and soaring out-of-wedlock births, the larger question is what is powering these trends. Are men simply no longer needed as breadwinners, or are they being "selected out" for other reasons? Could the mass media once again be a critical if unspoken factor, as it has presented malehood as little more than an extended adolescence without end and fatherhood as a role for bumbling losers?
Yes, it's easy to "blame the media" but once again we must start by asking who is absorbing thousands of hours of this politically convenient (i.e. distracting and deranging) "entertainment" and who avoids it like the plague. How can ceasless propaganda not influence those who watch it daily for hours on end?
As many oftwominds readers have noted, Step 1 in liberating oneself from propaganda is to stop watching broadcast TV.
This divide speaks very directly to the core problems we face, which are not simply financial or political but cultural.
The New American Divide(January 25, 2012)Thank you, Dolores S. ($20), for your excellently generous contribution to this site -- I am greatly honored by your support and readership. Thank you, Simon C. ($50), for your wondrously generous contribution to this site -- I am greatly honored by your steadfast support and readership. -
24 Jan ' 18:19
What Have We Learned in the Past 13 Years?January 24, 2012We have learned nothing since 1999 except the Central State and Central Bank will intervene in the market to bend price and risk to serve the Status Quo. If we learn nothing, then we deserve to lose. This is not a popular concept in America at this point in its history, when monumental errors are denied, excused, rationalized or quickly absolved by those who committed them.
As a small-fry investor, when I veer away from my discipline and system, I predictably lose money. As I sift the ashes of the trade, I always remind myself: if I learn nothing from my studies and experience, then I deserve to lose.
What exactly has America learned since January 1, 1999, 13 years that included two stupendous financial/credit bubbles, two hot wars and an explosion in public and private debt? If we examine the policy changes and institutional changes since the 2008 global financial meltdown, then we have to conclude that we've learned a very few things:
1. We've learned that the way to "repair" the catastrophic damage of a financial bubble bursting is to inflate another financial bubble in another asset class.
2. Systemic incentives will be put in place for everyone to speculate in the new bubble, with two important caveats: the Financial and Political Elites will get to play the game with moral hazard, i.e. their gains will be private and their losses socialized, and second, these Elites will not be governed by the rule of law; blatant systemic fraud and embezzlement will be ignored or forgiven.
In other words, some are more equal than others when it comes to the founding precept "everyone is equal before the law."
3. The Central Bank (the private Federal Reserve in the U.S.) will sacrifice purchasing power to lower interest rates and flood the economy with liquidity, i.e. nearly-free money for Power Elite speculation and leverage to inflate the new asset/credit bubble.
4. The Central State will address all post-bubble problems by borrowing and squandering trillions of dollars to prop up the Status Quo and transfer Financial Elite losses to the public/taxpayers.
5. These "solutions" are part of a broader strategy of "problem-solving" that can be summarized as "doing more of the same." If doing more of the same doesn't work, then do even more of the same until you resolve the "problem" by bending the market to your will.
6. To create the perception that the Power Elites have actually solved the structural issues rather than just paper them over, then minor "reforms" will be passed that tweak the parameters of the Status Quo without actually changing the power structure: who owns most of the national wealth and income stream, and who controls the political process that diverts an increasing share of the national income stream to State fiefdoms and corporate cartels.
We can find an analogy to these "lessons learned" in a spoiled teenager who refuses to study and is failing but discovers that cheating can "save the day" with much less effort than actually learning. We as a nation have learned how to cheat, and now we think that learning how to cheat and create the perception that we've actually learned something can be substituted for making the necessary sacrifices to actually learn something.
When the cheating controls the marketplace to prop up asset prices and mask systemic risk, then we are in effect giving ourselves "straight As" even though we have torn up the test, i.e. how our policies work in a transparent, open marketplace.
Thirteen years of cheating have created a dangerous confidence that we can keep cheating by controlling the market forever. The problem for the Central State and Central Bank is that socializing the market via cloaked intervention is qualitatively no different than direct command-economy control as practiced by the former Soviet Union: the real market cannot be destroyed, it can only be pushed underground.
This is why the black market flourishes in command economies.
In the U.S., the market has been manipulated and suppressed but there is no black-market outlet for reality. As a result, the market will reassert itself in the one market that is allowed, overpowering the State and Central Bank manipulation.
What we have learned in the past 13 years is the market can be suppressed and controlled forever by a dominant State and Central Bank. But markets cannot be suppressed forever, any more than risk can be eradicated, and so that lesson will have to be unlearned.
The spoiled teen can get through high school by cheating, but eventually he/she will have to navigate reality without the benefit of having learned anything except how to cheat.
What Have We Learned in the Past 13 Years?(January 24, 2012)Thank you, Robert G. ($25), for your most generous contribution to this site -- I am greatly honored by your support and readership. Thank you, Brian K. ($100), for your stupendously generous contribution to this site -- I am greatly honored by your steadfast support and readership.
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