The Ponzi Scheme in Plain Language - How It All Came About
There is a meltdown.
And it's not as simple as just mortgages in default, it's the insane derivatives from these mortgages packaged and sold to the tune of trillions to cluesless global investors by Wall St and the entire Mortgage Industry in a quasi-criminal ponzi scheme that is causing the meltdown.
To get to the part about footing the bill, we need to first understand how we come about owning it.
This NPR transcript should clarify once and for all about the workings of the pyramid scheme and how it all started. The interviews with the players in the scheme are particularly stupefying...the SEC not only let these people get drunk, they handed them the car keys to the global pool of investment, the savings of billions of around the world:
http://www.thislife.org/extras/radio/355_transcript.pdf
We are bickering over whether to give Paulson-Bernanke $1 trillion carte blanche. The media and our politicians are not doing their job in telling it as it is - they've been asleep at the wheel or worse, partying in a drunken coke-addled stupor with Wall St.
Pls. rec'd or better, link your blogs to this NPR transcript if you find its contents worthwhile.
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Again, the link:
http://www.thislife.org/extras/radio/355_transcript.pdf
September 24, 2008 1:58 PM | Reply | Permalink
It's a DONE DEAL, they're going to pass this $1t bailout, the first of many to come, at 10 am tomorrow.
September 25, 2008 5:53 AM | Reply | Permalink
No one is giving us a good estimate of the *real* global cost of collapse. If this NPR program is to be believed, this Titanic appears to be carrying some $30 trillion, or half of the Global Pool of Wealth?
I suspect the ramnifications is not just for Wall St or Main St, it's a global seizure - there are already several bank write-offs and runs in countries from the Europe to Asia. I'd be stunned if the $1 trillion goes merely to prop up Wall St., the situation is getting more dire by the day, but this $1 trillion is but a drop in the global bucket.
I wonder if there is another credible source with a good estimate?
September 24, 2008 2:41 PM | Reply | Permalink
This is a key point that people are missing. People are in a panic, but they fail to realize that there's no guarantee that $700B does anything to change this.
September 25, 2008 1:40 AM | Reply | Permalink
Exactly. It's about the same thing as giving money to Al-Maliki to walk around the streets of Baghdad giving out 8000 a pop to try to calm people down. It is the same approach.
We need a systematic, methodical solution.
September 25, 2008 11:32 AM | Reply | Permalink
there is- the free markets. According to free market theory, new firms should enter the market that are not sandbagged by these bogus assets on their balance sheets. There is still profit to be made in lending and borrowing.
The 700 billion should go to jump starting new financial institutions with new rules and regulations that prohibit transactions with these "toxic" assets. In this way, the economy can move along with the new firms while the old firms can try to transition in to the new regulatory regime or exit the market.
September 25, 2008 12:10 PM | Reply | Permalink
Exactly...there are sound foreign banks from Germany to Dubai who will be happy to start loaning to sound US businesses. Nothing wrong with allowing the weak corrupt players to fail. In fact, that's "free market".
September 25, 2008 1:09 PM | Reply | Permalink
I have not been listening very closely because I've been so busy but I did hear that report and I've heard bits and dribbles here and there and read little bits too. All of which confirms that it is global. I feel sorry for the peasants with cash crops in poor countries. They always have, historically, been hit the hardest because theirs is the most precarious of existence.
Thnks for the post.
Rec.
September 24, 2008 2:47 PM | Reply | Permalink
Evainne, you're welcome, I hope more of us get to see the bigger picture - for all the media saturation, most of us do not know what's at stake here, we're not told the plain truth, and I suspect it's intentional, sad to say....hope the NPR transcript has legs.
September 24, 2008 3:05 PM | Reply | Permalink
I suspect the bigger threat that Paulson et al. are facing is the M.A.D. option of these same countries dumping thier Treasuries (their reserves) if they had been defrauded by Wall St. and something is not done, these banks and SWFs will be facing the wrath of their own depositors and voters. That would mean a few more trillions of debt to be redeemed. That, I think, may be the greater crisis they're talking about. It'll tank the USD to.....wow...I have no idea.
These countries would include China, Russia, Japan, Australia, Taiwan, Europe, etc.
September 24, 2008 2:58 PM | Reply | Permalink
I'd agree this is the bigger threat. Someone noted that when FDR came in, the US was a creditor nation. Not now. 49% of total global capital inflows in 2007 went into the US (compare to 25% of oil usage.) An interesting piece by Brad Setzer shows (though with time lags) how foreign private money has fled the US (i.e. capital flight), while it looks like foreign central banks/gov'ts have come IN. The piece is here.
Oh yeah. Forget about measuring the trillion or whatever. When you add in the other bail-outs, all the money injected quietly into the banks/markets, not just in the US but internationally, we're already well into the trillions. Ain't NO way to measure this puppy. And here's the dilemma. IF a deal is put together which DOES stave off a potential Depression... it's money well-spent. Because the cost to the US of a Depression would be measured in many trillions of $. It's just those "if's" that are a bit bothersome, eh?
September 24, 2008 3:37 PM | Reply | Permalink
That's a fantastic site, and the comments with other links, priceless - a stealth bailout...I can believe that. It's cooked, a done deal, and we're being retroactively informed of our decision to award the Treasury and the Fed carte blanche for the $1 t already drawn. The mystery of the oil price drop and the recent dollar strengthening seems clearer now, the debts are collapsing at a faster rate than the Feds are able to get the spigot to run. I doubt though that the black holes and supernovas are canceling eachother out. There are bits and pieces of evidence, data and information here and there, hopefully, someone will put it all together for the big picture. Maybe ShadowStats will have something on the M3. The $1t is but the bill for the first course, there's the entree to come.
September 25, 2008 2:01 AM | Reply | Permalink
Absolutely fricking brilliant link, Qwerty. This should go top of the pops. A couple of things to add.
1. That poor sod who took out this loan. Just remember that 40% of all the loans taken out were by people who owned but didn't live in the homes. Fast money piled into cheap apartments, nbew housing developments, etc. On top of that 40% were people who borrowed with the intent to flip. It's a whole new set of ugliness - fast money locals in many cases, and then fairly innocent renters now getting the shaft.
2. While a lot of people are still coming to terms with the residential mortgage crisis, the SAME thing extends across masses of other loans. Commercial buildings, but also... car loans, credit cards, etc. And pyramids are built on these too. The rot went far deeper than just housing.
3. A third aspect is that trillions of $ out there are held by foreigners - China, Japan, the Saudis & the Middle East. As the story says, these guys needed homes for their money, right? Well, a lot of them have gone racing off into oil/gas, metals/minerals & food - causing enormous destabilization & damage. And they're not going to STOP running. Think about this. where are they parked today? where tomorrow? They can run a currency up the flagpole, then rip it down within hours. The tendency within the US is slowly but surely turning towards blaming these foreigners. But the key thing is being left unstated. That they already SOLD something to the US, which bought it because it was cheap. The War in Iraq, tax cuts for the rich, cheap cars/toys/food/energy/clothes, everything at Walmart, all those electronics Big Box stores. The rot ran deep.
4. But the same consumer/financier/politician-run scams didn't just infect the US. Anywhere in the world that people had money, it ran - it's just that the American shopper/politician got to the mall first, stayed longest, pushed the biggest carts, and flashed the most plastic.
Ugh. This story's got a lot more to come. And I really don't think ANYONE'S gonna like the ending.
September 24, 2008 2:59 PM | Reply | Permalink
Quinn, thanks for the rec. If the NPR is to be believed, the $1 trillion isn't going to plug this global abyss either....
Agreed, it's going to get a lot uglier, the true picture is still obfuscated, the lawmakers are not squaring with us, where's this $1 trillion going exactly?
September 24, 2008 3:14 PM | Reply | Permalink
Qwerty, this is a request to any readers who know FINANCE to explain their best sense of the wider impact a trillion $ invested will have. I'm into economics, not finance, but I suspect that just as a lost $ is leveraged & causes wider negative impacts, so too may a $ invested (in boosting assets or buying debt) supports a much larger amount.
September 24, 2008 5:21 PM | Reply | Permalink
Quinn, that's the crux - nobody knows how this $1t is going to be used, or if it would stop the global house of cards from collapsing, or the size of this collapsing house of cards, or what's at stake here, what this means for the larger economy in precise terms, what this does to US Treasuries or the dollar. No transparency, no coming clean other than "Wall St got drunk", no reckoning. Lots of ???? and no answers.
September 25, 2008 12:59 AM | Reply | Permalink
This is the big picture. It's not just bullshit derivative financial products. The fundamentals of our economy aren't strong. They're worse than weak and the bill is now due.
September 25, 2008 1:49 AM | Reply | Permalink
I guess when they call this the Credit Crunch, it means the rest of the world freezing the credit lifeline and calling in their loans, right when the US finds itself in the first innings of a major recession. Would they be printing "money" at escape velocity like Weimar Germany to pay off the debts?
This thing is unraveling at a frightening speed. In what form will it hit us on main st?
September 25, 2008 2:11 AM | Reply | Permalink
Who knows? There's still real value somewhere down there, but how far down? I thought that this blog did an excellent job of making the correct points, with some help from John Bogle and Kevin Phillips. The salient fact is that we don't really make anything useful anymore. Our "prosperity" in recent years comes not from any kind of tangible value, but rather is buttressed by debt. Well, that's come to a stop.
This represents nothing less than the death of a large swath of our economy. All of this financial magic isn't coming back. $700T wouldn't change that. The question is, "What's left?"
September 25, 2008 2:30 AM | Reply | Permalink
DF, another great site, thanks! If the finance sector is the most dominant pillar of our service industry, what does it mean when it's collapsed?
Minyanville is another site I've followed, their Shock & Awe edition has some useful links back to history - "to know where we are, we've got to understand how we got here":
http://www.minyanville.com/articles/MER-GS-Bernanke-lehman-Paulson-bac/index/a/19140
Here's another take by a much loathed neocon columnist of the Asia Times, but he gets it right this time:
E pluribus hokum or
When the gamblers bail out the casino
http://www.atimes.com/atimes/Global_Economy/JI23Dj06.html
September 25, 2008 3:19 AM | Reply | Permalink
Actually, we have lived in a False Economy for a very long time, and deferred the true cost of things, until now the whole stack is crashing down on our collective heads.
September 25, 2008 11:35 AM | Reply | Permalink
Rec'd for the information.
I know there are a lot of "interlinks" (thanks, Dubya) in the financial system. I still think this boils down to whether we have our bottle of castor oil now - or a gallon of it 10, 20, 30 years down the road.
I do believe in the ability of a free market to correct itself. It still needs to be regulated, natch, but I believe that bad businesses need to be allowed to fail. As with political power vacuums, the survivors will swoop in to fill the breach.
Maybe I've got it wrong. But I can't think of a large bailout we've done that has actually served to make the company more profitable and the people better off.
September 24, 2008 3:07 PM | Reply | Permalink
eastside93, it's surreal how most people think it's about mortgages gone bad, if only that were so, the fix would have been simpler and easier. I'm flummoxed by the scale of the wealth destruction, and I'm not sure what this global financial meltdown and possibly stand-off would lead to. Are loans and debts being recalled by countries from Europe to Asia? Is most of the world aware that a great chunk of their wealth has evaporated? It would mean major paralysis and a pandemic to come.
September 24, 2008 3:23 PM | Reply | Permalink
The more I learn about how deeply leveraged a lot of countries are in this, the more afraid I get. A few days ago, I thought this was largely an American problem. The potential to pull down a good chunk of the G-8 in this quagmire is frightening.
I had no idea so much of this paper was held by foreign entities. I guess I should have figured it out when Deutschebank and Barclays got in on the AIG bailout.
September 24, 2008 4:32 PM | Reply | Permalink
Eastside. Yes, any individual bank that bought US banks or which operates in the US will want to be on an even footing. But those are individual firms.
It's important to note that other countries are not so much lining up to be part of the bail-out as they are BAILING OUT the US. It's massive - hundreds of billions in purchases & flows - and it's coordinated through their governments & central banks, and they are doing all they can to make sure the US doesn't go down. Because the collateral damage will be enormous.
That fact is so staggering that almost no one can take it in. America is supposed to be the one doing the bailing out & supporting of other countries, right? And THAT has to be the single most damning fact of the Bush Administration & the whole line of GOP fools with their "philosophy." to have taken a nation from Sole Superpower status to a point where they have to call these other nations to keep the cash flowing.
September 25, 2008 1:26 PM | Reply | Permalink
Rec'd, but put on the Aggregate thread QWERTY.
September 24, 2008 3:18 PM | Reply | Permalink
Good idea, thanks!
September 24, 2008 3:25 PM | Reply | Permalink
FYI, I got here from the aggregate thread. Thanks for that feature, clearthinker, and thanks for this link, qwerty. The most useful I've followed for a long time.
September 25, 2008 1:27 AM | Reply | Permalink
Am I, quinessentially, seeing double? :)
September 25, 2008 2:20 AM | Reply | Permalink
You are, though I believe the Mighty was here before the Esq. And thus, he got the album cover, while I got the.... tubes. In short, I represent the taxpayer, while Mighty represents.... well, nuff said. ;-)
September 25, 2008 1:17 PM | Reply | Permalink
Nice link, thanks Qwerty!
In the event you have not stumbled upon it yet, Time has a fairly sober cover piece about the meltdown by a couple Forbes reporters. It echoes the same themes.
Short version? Imaginary money is bad. Imaginary money hidden behind imaginary, incomprehensibly complex abstract products is worse.
This is why I enjoy a private chuckle at the expense of those who see fit to lecture me about the virtues of the infinitely complex capitalist system.
September 24, 2008 6:23 PM | Reply | Permalink
Roo_P, thanks for another good link. I'd only take issue with the article's premise that Wall St. in its global incarnation didn't know the destruction potential of this Frankenstein - they all knew. There's no such thing as a free lunch but they stuffed themselves knowing that Main St. (in the US and all over the world) will pick up the tab. In fact, they already have. Didn't the CEOs cash in their stock options at the height of the feeding frenzy? Buffett himself called these derivatives financial WMDs in 2003. There was time to prevent this from going nuclear, but no one minding the ship did.
The ones perpetrating the fraud have already rewarded themselves. At the top, they have cashed in hundreds of millions. Lower down the food-chain, a lot of others new to the job market make 5 - 10 million before they hit 30, so what if they all they lose their jobs? There's no downside, it's a no-brainer.
Unless these are classified as white-collar crimes, and the average white-collar criminal embezzled peanuts compared to these players, there is virtually no guarantee that history will not repeat itself over and over.
September 25, 2008 1:26 AM | Reply | Permalink
Incidentally, McCain possibly suspending his campaign is making me very, very nervous. Granted, it means Obama's almost a shoo-in, and McCain's campaign has been a farce, but he has some very powerful and wealthy backers. He's not stupid, and he is hungry for the WH. Is McCain spooked by this crisis, and by what aspect of it?
September 25, 2008 3:55 AM | Reply | Permalink
Qwerty,
Let me strongly recommend this link. Like most people, I have only an ordinary layman's murky grasp of what has happened here. This is the best straight-forward, not highly politicized explanation I have found anywhere.
September 25, 2008 10:34 AM | Reply | Permalink
They're not giving us the full story, not how we got here nor where we're headed.
It's obscene how Main St has been fleeced all 3 ways - as home buyers struggling first with skyrocketing prices and then saddled with a huge debt and plunging assets, as savers who entrusted their nest eggs to the banks and investment funds, and finally as the buyers of last resort of toxic Wall St derivative waste. I'm convinced the increasingly frenetic boom-bust cycles are orchestrated to destroy general wealth and assets in order that the wealthiest elite may swoop in to buy assets at firesale prices.
Rinse, cycle, repeat.
September 25, 2008 1:29 PM | Reply | Permalink
The NPR link was great. Thanks and recommended.
BTW: Because my wife would rather listen than read and since I wanted to pass the info along, I backed-out and found the audio link. The streaming version is free, but there's also a purchasable download for archive and scroll down to 355 (May '08)
September 25, 2008 11:48 AM | Reply | Permalink
A couple of words got stripped in the editing, but the links should still function.
September 25, 2008 11:50 AM | Reply | Permalink
That would be the original This American Life recording you found, I'm so sorry I forgot to include the audio link in the blog. Thanks for posting this.
Coupled with the George Bush spelling and grammar, I'm a pretty crappy blogger. :D
September 25, 2008 12:52 PM | Reply | Permalink