Enough Naivety Already.

 

NO INDEPENDENTLY THINKING PEOPLE, NO PRESSURE.

***

NAIVETY RULES:

Obama signed his second enormous “stimulus” made of enormous tax cuts for the hyper rich. Both on tax cuts for the hyper rich and in war, Obama has expanded considerably G. W. Bush’s policies.

It is a plutocratic trap: there is not enough credit to pay for it, and it does not build anything. Instead, the money for the rich thus created will keep on fleeing the USA. As the moment arrives when the interest on the debt will be even larger than the (near) trillion dollars for the “Defense” department, the plutocrats will turn around, and request savage cuts in what they view as the American welfare state. The plutocrats are the masters of the narrative of reality in the USA.

Krugman wrote an editorial “Wall Street Whitewash” starting with “When the financial crisis struck, many people — myself included — considered it a teachable moment. Above all, we expected the crisis to remind everyone why banks need to be effectively regulated.  

How naïve we were.”

Indeed. Potentates have no interest to advertize how they steal everybody. As long as there is no pressure from the street, things will not change for the better. Understanding will only decay.

Plutocracy is only afraid of the street (a well known fact throughout Europe, hence the demonstrations there). Pressure in the street is not fashionable in the USA, ever since it was savagely, subtly, and everywhere repressed. Americans are basically scared.

The average American is pretty well programmed by the hyper rich, even on the emotional level. The average American feels that “cool”, the emotion of having no emotion, is the superior emotional set-up, and that Very Serious People do not believe there ever was anything such as a conspiracy. Conspiracies do not happen in the USA. All Very Serious People know this. Being endowed with a modicum of gravitas, or culture, is to know that too.

Krugman, and others, have observed that facts and semantics are being reconstructed by the (so called) republicans to claim that the government caused the financial crisis (when actually it is lack of government which did). The republicans decided to banish from now on words such as “deregulation”. Hence deregulation in finance could not have created any problem, since “deregulation” does not exist.

The Reaganosaurs try to foster the feeling that the government is bad, thus it should be terminated (except where it serves them with enormous profits). Presumably everybody should buy weapons to re-establish order, and tanks to drive around the potholes. As the rich would have bigger weapons, private armies and flying machines, they would dominate the situation: a more technologically advanced variant of the feudal order established during the Late Roman empire.

The Obama tax cuts for the rich ought to help that way. In the next stage, his republican ‘friends’, and Wall Street ‘friends’ will propose to Obama savage cuts in government. At this point Obama will be trapped, because he will have to chose between losing the last democrat willing to vote for him, and doing once again, what his very rich friends want him to do.

The same situation happened in the late Roman empire. The Obamas of the time were Christian emperors who had delayed too long cracking down on the feudal rich. Of course they were themselves the ultimate potentates, so they had no moral standing to criticize their fellow plutocrats, and that was, then, as now, an important part of the crisis. (When the Franks replaced the Romans, the wealth and power differential between the richest and the poorest, was incomparably less than in the Late Roman empire.) Let’s try to demolish a piece of the bankers’ lying narrative. Contrarily to what they pretend,

***

FINANCIAL DERIVATIVES CAUSED THE CRASH OF 2008:

In particular, real estate loans did not cause the crash. As I will demonstrate below in several ways, they were too small to do so. Instead speculation in derivatives caused the crash.

Hyper wealth has made a disingenuous discourse brazenly asserting that the subprime loans created the financial crisis. This is completely false, as can be demonstrated by a few observations, and basic mathematics.

There are 55 million homes in the USA. Let’s suppose very generously fifteen million were paid, once again very generously 100% with subprime loans, and that every single one of these loans was a total loss. Since the median price of a home peaked around $200,000, and went down 30%, we get a loss on each loan of $60,000. On 15 million homes, the total loss in dollars is (15) (ten to the power six) (6) (ten to the power four) = (90) (ten to the power ten) = 900 billion dollars. In other words, less than a trillion dollars.

However the government of the USA given to the banks five trillion dollars to the banks (and so called shadow banks, financial establishments endowed, like banks with money creating ability). (This is according to the Special Inspector General, Neil M. Barofsky; most of the help to banks has no been given through TARP, but through direct loans and Quantitative Easing.) Thus most of the loss of banks is not attributable to non performing loans.

Another way to look at the discrepancy is that, if the housing market in the USA keeps on going down, its nominal loss of value will reach 10 trillion dollars in 2011. But that includes all homes, including many without mortgages. Actually mortgages in trouble, in one sense or another total less than ten million, with presumably less than 2 trillions of nominal losses between them (simple math!). Since the housing market is down less than30%, we get a maximum loss, once again, of less than a trillion dollars. There is a severe discrepancy between one and five.

Looked at it another way, when insurance companies such as AIG lost money (cost to taxpayers around 200 billion dollars to pay for AIG’s contracts and obligations), what does it have to do with subprime loans? Nothing. It has to do with something we are generally told by noble economists such as Paul Krugman, as having nothing to do with an underlying market, namely, derivatives. in the case of AIG, the derivatives were Credit Default Swaps.

The situation is even more blatant in Europe, since home loans are neglectable there relative to the economy. Instead European banks engaged in absurd risk taking to claim fake profits for an instant, and stuff themselves with bonuses (the clamp down on bonuses of the EU on january1, 2011 should help to prevent such abuses in the future.)

People such as nearly all politicians, having little knowledge of derivatives, mathematics or economics, are nominally in charge of deciding everything about derivatives.

***

WHAT IS MONEY?

I agreed with Paul Krugman’s editorial on the “Whitewash”, but I went deeper, harping on my usual theme of money creation. Money is basic to economy and finance, but it is not clear what it is.

Krugman recently pointed out that there has been remarkably little relationship between the standard monetary aggregates and the inflation rate.

But here’s an even more basic question: what is money, anyway? It’s not a new question, but I think it has become even more pressing in recent years.

Surely we don’t mean to identify money with pieces of green paper bearing portraits of dead presidents. Even Milton Friedman rejected that, more than half a century ago.”

Not knowing what the basic notion a theory is handling is common. having despaired of establishing clear and definitive foundations, mathematicians discovered that they could establish a lot of very useful basics as Category Theory, although it mightily rests in the air.

 

Physics has he similar problem with mass and energy. They are both, besides being supposedly equivalent, fundamental to General Relativity and Quantum Field Theory. But their definition is completely unclear (gravitons interact with themselves, so gravity breeds gravity, and QFT is plagued by quasi-infinite energy in any volume of space, in any of its official versions).

However, there is a difference between economics, physics and mathematics. I claim there is an absolute solution to the problem of defining value in economics, and, thus, money. But this is besides the point of this humble little note.

I sent the following comment to the New York Times, expanding on Krugman’s Whitewash article. Curiously, it was not published. It is just a variant on a theme that I have harped on repeatedly, the last time two weeks ago. But nobody seems to have picked it up yet, so I have to keep on repeating myself (although my complaints on Obamacare were joined in a universal chorus within a year, I am still waiting for a similar global howling against public financing of private profit as common and usual money creation!)

***

Bank “deregulation” was the annihilation by Secretary of the Treasury Summers, under president Clinton, of Franklin D. Roosevelt’s work. Summers had actually started his devastation campaign under Reagan, causing the failure of the Savings and Loans. Now he has somewhat changed his spots, but such was his master work.

FDR had analyzed carefully what ailed the American economy. He decided to prevent banks from speculating. Why? Because private banks were given the fiduciary duty of CREATING money. They create it through debt.

Creating money was the prerogative of the state, for several millennia. When private banks realized that they could speculate with the money that they were free to create, they discovered they had found a process for free money that they could inject into themselves in an exponential loop.

FDR, who was not interested by riches, having them already, saw that this infernal exponential was not compatible with the republic, so he outlawed it explicitly, thus accomplishing both justice and fame as a knight of civilization. Summers, who has already made a small fortune with derivative manipulating firms (eight million dollars the year Obama selected him) saw that offering the gift of that infernal exponential to the financial plutocracy, would made him much richer and influential. Different people, different ambitions.

Private banks did this lend to themselves in the 1920s, causing the crash of 1929-1930 (stocks were bought sky high by banks using their infernal free money process, and then went down more than 90%; some of the financiers connected to said banks, like Joe Kennedy, pulled out in time, building huge fortunes).

In the 1930s, many banksters stole the money, and ran away. Millions of simple souls were robbed of all they had. That is why Roosevelt closed all banks the day he became president (a fact Obama does as if he did not know that it happened). Banks were progressively reopened under strict conditions of operation (no more speculation, and the banks were forced to lend money not to themselves, but to the economy).

In the last two decades, derivatives and shadow banking (insurance companies, investment banks, etc.) have been allowed to join that free money machine, that exponential bandwagon. This is the so called “deregulation”, and the plutocrats are now going to claim the concept has no merit, because it does not exist.

This ability, for the banks to create as much money, that is debt, as they wished, allowed them to push prices of what they speculated in. Because they lend to themselves with money they claim to have, although they do not have it, they can push the prices up, and make real money before the crash, or so they hope. In all markets, from oil to real estate. The best place to have maximum leverage was the “derivative” market. Lehman Brothers (strictly speaking an “investment bank”, thus part of “Shadow Banking”) used 50 to 1 leverage (it lent 50 times the capital it truly had). For small periods of time, sometimes as small as nanoseconds (“high frequency trading”), bankers claim profits, and then give themselves bonuses.

But sometimes, the leverage follies were more tangibles, as in Spain. International airports were built from scratch, in the middle of nowhere. The country is now covered with ultra modern public transportation (not clearly always profitable).

The dysfunctioning of finance became obvious in 2008, as nearly all markets crashed. Common people and taxpayers were left with the bill. For example the collapse of Lehman Brothers was paid for by taxpayers. But the top managers of Lehman, including its head, Mr. Fuld, left with billions.

Overall, a giant crisis is still under way, as the money creation machine has been confiscated by the private money creating industry, and they are using their giant means to corrupt the entire process, starting with the cognitive functions of society (including its semantics).

Obama and top democrats have understood nothing to this cancer, and European socialists are not doing any better.

However, the European Union has limited bankers bonuses cash to a small fraction, as I already said. Repetition is the mother of education.

The rest of the bonuses awarded by the bankers to themselves will be changed, by law, into stocks held 5 years, which should make bankers think twice about strategies leaving taxpayers with bankrupted banks, at least within 5 years.

This is effective immediately, and a singular contrast in effectiveness with the democratic Congress, its democratic Senate, and the democratic president of the USA, who put back in place a system similar to the preceding one they were themselves enjoying, namely with the wolves watching over the wolves (the so called independent Fed is stuffed with private bankers, at least in its most important local branches such as New York).

***

A PARTIAL SOLUTION; LET FAT LOSERS LOSE, AND NATIONALIZE THE MESS :

The European crackdown on bonuses is just a beginning. More drastic solutions exist. Namely what is called discreetly the “restructuring of debt“. The problem is that private companies, banks, cannot be repaid, often for loans they ultimately made to themselves (X loaned to Y, which loaned to Z which loaned to X). A lot of the money disappeared into bonuses, and corruption (such as fat checks to the “agencies” in charge of evaluating credit worthiness).

The Great Fire of 1666 in London was stopped when, after several days of a mighty, but hopeless struggle, the Navy was allowed to dynamite houses.

This sort of analogy has a honorable past: Adam Smith used fire regulation as an analogy to bank regulation.

The equivalent now is to restructure the debts, that is to tell the private lenders (the banks), that they will not make all the money they hoped to make (because taxpayers and citizens, and their children, do not want to pay them anymore). In practice it will often force banks, and shadow bank holding companies, into bankruptcy, because most of their money they still claim to have, has already disappeared in bonuses and corruption.

Then the only way to mitigate the situation will be to nationalize the bank operations (hundreds of banks were nationalized during the saving and loans crisis under Reagan and Bush Senior, so it’s not communism, nor new; the UK has nationalized giant banks in the present crisis).

The Bush-Obama solution has been instead to pay for nationalizations, and then to give all the money back, and the keys, to those same managers, exploiters, banksters, and counterparties who had stolen so much money, that they had driven what they managed, contracted, or conspired with, into de facto bankruptcy. (Technically only Lehman was allowed to go bankrupt, because trillions of dollars were credited by the government to all the other banks in a timely, and secret manner.)

***

MALWARE VERSUS WELFARE:

As most of the disposable money goes to banksters, not enough is left for even keeping infrastructure going. This shows up in the educational system (American children are out of school in the early afternoon, and, when at school, between swallowing two “soft” drinks, are mostly fixated on sports). It also shows in the aging of the physical infrastructure of the USA:

As Krugman says: We’re becoming shabbier by the year.” Entire American cities, which were cheaply made in the 1920s and 1930s with glorified chicken houses, ought to be rebuild with modern durable housing. They are highly energy inefficient, creaking, deformed, and pervaded with mold. They would not be considered fit for human inhabitation in Europe. Malware versus welfare, that is the question.

Ruling is most comfortably done by ruling the minds. That means imposing a narrative. An example is that Obama’s narrative that he could not make any progress in his first two years, as long as he could not persuade… the opposition (which would have been completely impotent, but for Obama waiting for it, literally and figuratively). This is what being a bipartisan meant.

Hence the semantic and cognitive shifts of the last few weeks. Krugman describes that pretty well in ‘Springtime For Hypocrites’: …”all the concern about the deficit was a front for opposing anything progressives might want, to be dropped as soon as debt was being run up on behalf of conservative goals.

The “conservative” goals of conserving increasingly shabbier housing, roads, trains, schools, health care and transportation, while conserving expanding profit margins, is ambitious in its own way. And that sort of “conservation” can last a long while, as the history of France (say) during the 18C showed: a needed revolution can be delayed by several generations, as established order dominates the narrative of what reality is supposed to be. “Conservative” is so nice a word as to be misleading. Exploitative and plutocratic is more like it. But Krugman needs to keep on looking as a Serious Person, or he would not be as influential as he is, and would be deprived of his pulpit at the New York Times (or even Princeton!).

Right now, as the real economy in the West is being starved of money, and investment, one can also see the minds increasingly robbed of the means to understand what is going on. That is even worse. By the Fifth Century, all what the Roman people cared about was sports (riots between supporters of various teams of charioteers caused dozens of thousands of dead in Constantinople alone).

Plutocracy ultimately robs minds: that is the way plutocracy has always ruled. In the long run, nothing else will do to keep plutocracy going. Why? Under plutocracy, the socio-economy and civilization always decay, on the largest scale.

An inkling of that encroaching mental corruption: when the Secretary of State of the USA, Clinton, orders her ambassadors to steal (source: WikiLeaks, but not denied by the government of the USA). This is more than a violation of international conventions, it’s a deliberate violation of civilization, as was the refusal to prosecute all and any of the malversations under G. W. Bush (such as the official re-instauration of torture).

So the cognition and logical levels will keep on decaying, at least in the USA. Europe is a different matter, as one may hope that it realizes that is plutocracy which was behind Nazism. One may hope that Europe remembers that plutocracy killed well above 60 million Europeans, in one generation. One may also hope that Europe remembers that peace is an acquisition one fought over, not a gift of the gods.

Pluto has no gift for the many, except hellfire. As far as the gods are concerned, there are way too many people already, and they have been insolent too long.

***

Patrice Ayme

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5 Responses to “Enough Naivety Already.”

  1. Roger Henry Says:

    Again today you parse, with excellent detail, the economic and financial disaster the US has visited upon itself.
    Your response to Frank Richs column in NYT was also a keen observation.
    Your understanding of plutocracy and the role it has played in civilizations through out history is un- paralleled in any of the readings I have been able to access. My own meager knowledge of world history and European political history is a source of embarrassment . I’m not sure that if I had studied these things in the US in the last 30 years I would know more than I know now.
    I appreciate your careful defining of words, phrases,and common terms that so many writers cast about with abandon, assuming the reader has achieved some universal understanding with the writer as to their meaning. Words are the vehicles that carry thoughts, conceived in one mind to be deposited in the mind of the receiver of that communication. It is important they be carefully defined.
    As far as protesting in the streets, I feel our Orwellian technology employed by the government will continue to suppress any of it.
    Until,US debt levels reach a point where our debt can no longer be sold to pay the military no meaningful protests will arise. The betrayed veterans will then lead the protests in the streets.

    Like

    • Patrice Ayme Says:

      Dear Roger:
      Thanks for all the compliments! I actually have a piece heavily laden with history coming up (in connection with the Afghanistan war). Good point about the veterans. This is an Orwellian age, but it’s also an awareness age. It was also thought that British youth would never protest. British youth was long imprinted on the feelings that British cool, toughness and higher aspirations put above street protest, French style. In many other European countries the same feelings were also imparted.

      But now many countries are protesting, French style, and demonstrations have been much more severe there than in France (including in the UK). Everybody has learned that popular protests worked. Even ICELAND (population: 300,000) street protests, and a bit of burning stuff around the PM’s residence, made the EU (population: 500,000,000) retreat and negotiate (terms of Iceland’s surrender were mitigated).

      The meta idea that People can protest directly, in a democracy, not just in Iran, may even reach the American population…

      Another factor in American quiet is that energy prices have not exploded (yet). If they do, if they did, the USA would plunge. The European countries have enormous taxes on energy (they are 90% of the cost in France), and thus a huge safety reserve: France could function just the same with crude oil costing 5 times more.

      One thing, though: democracy would resist to anything in places such as France and Britain (they were battle, and war tested). But in the USA, one can see on TV commentators calling for the murder of Assange (which would be unlawfull in the EU, as it should). Democracy has never been more fragile in the USA.
      PA

      Like

  2. Roger Henry Says:

    Your last sentence could not be more true. Please forgive my pessimism, but I fear that, like the democracy protesters on Tinnaman Square who were run down by Chinese tanks, Julian Assange will be rolled down by the plutocratic military/industrial complex of the USA. In the name of patriotism, of course. Pity the child who points out that the emperor has no clothes.

    Like

  3. JR Says:

    D’accord sur cette analyse mais je ne suis pas un spécialiste: il n’empêche que les emprunteurs réels, ceux qui sont devenus temporairement de petits propriétaires aux USA, ou ceux qui bénéficient encore d’un emploi public à la charge de travail insignifiante en France, ont bien profité au départ de l’aubaine! Reste à identifier les autres profiteurs de la Crise!
    Bon courage,
    Jacques

    Like

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