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Thursday
Jun022011

Too Big to Fail or Too Stupid to Stop - Screw banks/not people

This morning, amidst news of Moodys cutting Greece's debt rating to Caa1, I came across a phrase I wish I'd thought of first, reading through a friend's morning commentary. The phrase? "Too Stupid to Stop". 

According to Bill Blain, Senior Director at Newedge in London, and self-professed Euro skeptic, "'Too Stupid to Stop' is based on politicians behaving as rational maximisers of their electoral objectives." He was referring to the real reason behind all the bank-demanded bailout loans for austerity measures throughout Europe.

In the United States, that mantra can be extended to include appointed officials, like Treasury Secretary, Tim Geithner (still not admitting our record debt increase came directly from the $4 trillion worth of Treasury issuance and other forms of assistance extended to our banking system since late 2008, as we endure his stomach-churning 'show-begging' to the GOP for a debt cap raise) and Fed Chairman, Ben Bernanke (ditto). It also, of course, applies to congress people whose political survival depends on corporate and bank contributions and financial support, the ones that believe the Dodd-Frank bill changes anything.

Rather than considering how governments have systematically done, and continue to do, the wrong (as in immoral, unfair, and uneconomically sound) thing by trying to preserve banks, any politicians possessing the ability to think independently (an oxymoron, I know) should be asking themselves instead, how clever they could be about closing them down. Take a cue from Iceland.

But, the 'Too Stupid to Stop" behavior, prevents this from occurring. 

Bill and I used to work together at Bear Stearns in London during the 1990s, before the Euro came into being. Then, arguments in favor of its inception were more about how it would lead to a 'much-needed' consolidation of political-economic control, rather than an engendering of widespread economic well-being to more European citizens, which didn't even enter the realm of political discussion.

Fifteen years, marked by global currency crises, a US recession caused by energy and telecommunications fraud, a bank fostered global Depression, and a persistent strategy to gouge citizens to pay for the sins of bankers, later -  nothing has changed.

What Greece should do is default. Not as a sign of economic weakness, but as a sign of protective strength befitting the notion of Democracy that the country is credited for having brought to the world. Default as an act of much-needed financial defiance and independence from the insatiability of banks.

Last year, Greece's bailout was fashioned in order to make foreign banks and their investors 'whole' on their investments in Greece. It had zero to do with strengthening Greece's local economy or its citizens' financial futures. Indeed, it was designed to further trash the Greek economy, to chain the country to untenable loan conditions that required selling assets at discount prices to pay off new and old debt, while callously condemning its population to decreased average wages and increased unemployment rates, particularly amongst the nation's youth.

Rather than telling those banks that were out the money - THEY HAD RISKED to begin with, to take the free-market, s**t happens, hit, all sorts of austerity measures were attached to the $157 billion bailout loan. They hurt citizens immediately in terms of reducing pension and other social-economic benefits, and hurt them ad infinitum by forcing ongoing fire sales of their national assets which resulted in job losses. The same banks on the hook for lending money to Greece during Phase 1 of the massive global leveraged bet gone wrong, demanded repayment for their risk (otherwise their investors would be upset). Now, they have a greater opportunity to scrounge (read: extract fees) for new deals via brokering European and global firms swooping in for fresh kill, amidst the remains of Greece's assets, such as communication and energy infrastructure.

And yet, rather than say - screw you - to the ECB and the IMF, and all the mega-banking conglomerates that signed off and received fees on deals and debt gone wrong, rather than say - you know what? - we owe a debt to OUR CITIZENS, not the banks that bet against them, and we don't like the terms of this arrangement, Greek politicians are saying - screw you citizens. Again.

Greece is set to present a brand new austerity plan on Friday calling for a FASTER pace of privatization, and more tax hikes on its citizens - just to be able to pay off bondholders and the risk incurred by international banks. This won't end well. If Greece does get a second bailout package, everyone will discover that absent a strategy to revive the local economy, the package will incur further pain, and at some point there won't be any national infrastructure left to sell, and unemployment will skyrocket further. A few bondholders will be happy temporarily because they DON'T CARE whether Greece succeeds or the ECB and IMF keeps creating debt to prop debt (like we do here in the US as a matter of economic policy), same difference. A few banks won't have to write down their losses for the same reason, and a few global corporations will have bought some more assets at rock-bottom prices in a country whose citizens won't be able to afford the payments that will be counted upon to price the related securitization deals. And Greece will be screwed even more.

The better plan would be to disband the Too Stupid to Stop mentality. Screw the banks. Sadly, it's a self-fullfilling downward spiral of incompetence - in Greece, Ireland, Portgual, Spain, Italy, and the United States where the Fed is gearing up for some verison of QE3 in the wake, ironically, of Euro-pay-the-banks, indenture-the-citizens, chaos.  

I have a feeling meanwhile, there will be a lot more Greeks protesting in the streets come Friday. 

 

 

 

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Reader Comments (36)

While I agree with everything in your wonderfully intelligent post, it may be pertinent that a number of the present Greek politicians are former Goldman Sachs people (and several other financial types)?

There is a retired engineer/scientist type, over in Australia, Dr. John Goldberg, who did some very interesting research into the underlying financing of infrastructure public-private partnerships in his country.

Three items from his summary exactly illustrate what is behind the vast majority of securitization/credit derivatives type deals -- and certainly the ones which have been in the news, whether they be Magnastar, GS or the others.

Paying equity dividends with virtually no cash flow available.

The introduction of large spurious amounts of debt capital of unknown origin to
augment cash flow, and the drawing down of fictional amounts of capital from
reserves.

The use of dual entries to disguise the non-amortization of project debt.

Just these three explain those public-private partnerships financed by the big boys in Greece, and Spain and Slovakia, and Australia, and America, and so on and so forth.

June 2, 2011 | Unregistered CommenterJamesW

"I have a feeling meanwhile, there will be a lot more Greeks protesting in the streets come Friday."

And I know with absolute certainty that the same will eventually occur here in the US once the second bottom falls through.

Once that happens, it's going to get very ugly, very fast.

June 2, 2011 | Unregistered CommenterLarryP

Excellent Nomi, your point about Tiny Tim (and virtually everyone else) not recognizing the massive spike in US gov't debt was mostly due to the $4Tril out of the US Treasury! Say that 2008's US Treas balance sheet showed $8Tril, we expanded that by 50% in the bailouts! Most of the remaining increase is from the endless Wars of empire and a downturn in tax revenue.

It is a death spiral; the Fed has to monetize the new debt, furthering devaluing the dollar. Inflation further crushes the meager productive economy. Austerity won't alleviate much spending, but will devastate the people. If interest rates are increased, there goes any new purchases of larger goods which require financing.

I'm with you Nomi, the hell with the too big to fails. We need a radical program, ala the "Newest New Deal" ala Lyndon LaRouche or Webster Tarpley. Re-enact Glass-Steagall and other good regulatory legislation of the '30s. Seize the Fed under the "trading with the enemy" precedents. Liquidate the too-bigs as they are zombie institutes. If the Fed can create $20+ Tril in credit for the too-bigs, imagine that $$$ in viable long-term investments in infrastructure and the productive economy. Lets grow ourselves out of this mess with a real economy, not a casino econ!

Finally, Greece is in a hopeless situation, 5000 years of culture and a nation are doomed. That $157B bailout is over 50% of their GPD. They can never repay that, so their hard assets (land etc) will likely be stolen. If they try to default or say screw you, then they will get the Iraq or Libya treatment under the pre-text of "greek terror," thru false-flag operations.

June 2, 2011 | Unregistered CommenterMopar21277

yes - I really don't get why its not more obvious, it's not like $4 trillion is a little number, it really is conscious avoidance and decepton.....our public debt about doubled, period. and it's not even like one could argue it was used for any useful purpose, most of it is fully accounted for and sitting on the Fed's books, right there in weekly-reported daylight.

June 2, 2011 | Registered CommenterNomi Prins

The term I am using is "debt saturation". Debt is everywhere, permeating everything, and despite what was the mantra of many during the past two decades . . . debt does not equal wealth.

Greece should default ASAP. The sooner they do, the sooner they begin to repair. Those that wait the longest will have the most difficulty - including the USA.

Greece may be the current poster child of debt, but it has plenty of company.
Greece is the metaphor, not the contagion.

June 2, 2011 | Unregistered CommenterLLAlbert

Agreed....

June 2, 2011 | Registered CommenterNomi Prins

Once fiat paper hit, money became Symbol-Fact (both). ... Whoever backs the currency, OWNS it. Right now it is backed by the faith, hard work, sweat, tears, joy etc. of the American people, or elsewhere the people of Greece, which is all that backs it. ... But *instead as soon as the bankers print and loan it, THEY own both the *principal and the interest on the loan. They should only own the interest for the service they provide. But as soon as they print and loan it, they *own it. ... THAT'S why they refer to debt as an "asset". Got to loan it, before the principal exists, to be *owed to the printer (the bank).

In other words others have hijacked the currency. Fiat money is always printed out of thin air for loan, whether backed by gold or not. So Private bankers in the past could only print whatever they ALREADY owned, for (risky) loan, since backed by gold they the bankers (presumably) owned. ... However a currency doesn't have to be backed by anything but the tax pool i.e. the commonwealth, the whole nation, which is the case today. ... In Fact, then when the money is printed for loan WE THE PEOPLE OWN IT, i.e. the loaned *principal (is owed to us via our elected government). WE are the only ones who make the 'currency' and all loans possible, in the first place, now. We're the ones backing it, the commonweal. Nothing else backs the currency but the tax pool.

Right now what's happening is a charade, but a very real one, since our government is *owned by the present system. I haven't yet read your book 'Jacked' ... I believe, is the title. If so, probably it goes into this? It's a very hidden and probably dangerous subject, because right now the u.s. is in fact an unwitting, slave nation based on the present monetary system that's been 'jacked' but which we subsequently have to live under.

*Otherwise, we should just elect bankers every two years, and term-limited to that duration. Ok, Nomi it's your turn to be elected banker, get rich for the next two years. Then maybe it will be my turn to be elected banker next. ... All that your depositors have to put in your bank, once you're elected 'banker', is say $10K ... now you can immediately print & loan $90K ... keeping 10% i.e. namely the deposits on reserve AND that $90K principal is owed to *You plus the interest. ... Later your depositors may have put in $1-Million. Wow, immediately you can print & loan $9-Million and that 9-Million principal plus interest is owed to *You. And this is just conservative stuff, conventional fractional reserve banking. But you're banker for 2 Years!!! And whatever they owe you after your term is over...is STILL owed to you. You just can't make any more loans, since you're not banker anymore. Someone else got elected for their two years. (I hope it was me.) ...

No, seriously the people OWN the principals on all loans today made by bankers, is the reality...but we have a fantasy now...it all belongs to those whose name is BANKER. Why? It's kind of comical that the 'govt.' is the debtor. Right? Someone turn the tables, systemically.

Finance was once the junior partner to commerce, today it's vice versa, given the present system. But worse...it's also enslaved the people, whether they know it or not. ? I'm not an expert...correct me if I'm wrong and where I'm wrong. I was involved a bit with investment banking and credit enhancements etc. but possibly not at your level at Goldman. I don't know.

My dogma is that whoever backs a currency owns it. -?- ... -?- So they own the principal on all loans.

If the banker is lending his own money backed by gold, he owns the principal and interest.

If the banker is printing for loan money Not his own, since when printed out of thin air it's only possible because backed by the people, he only owns the interest on the loan, but the currency itself the principal is backed by and so BELONGS to the people? ... Otherwise this u.s. is Not a nation, and is a great plantation of unwitting slaves. Correct? ... And those investment banks that went bust lately are slaves as well...they're merely nearer the top or the mass'eh. ... Now mass'eh gots to give some billions and billions of cookies, so d'ey remains loyal. He givin mo' ah' dah people's money... since not his own... but he can give it, he d'ah mass'eh. He dah' Mass'eh.

June 2, 2011 | Unregistered CommenterAlbert Samuelson

Systemic failures everywhere.

The answer?

More system !!!

June 2, 2011 | Unregistered CommenterKeith

Despite the politicians’ and financiers’ positive assurances, it is difficult to think that there were any genuine expectations of Greece being able to pay back in the first place. I think that Max Keiser refers to the situation, among other, as a “hostile takeover of a country” which actually makes sense. It is a raid on a country (with the help of willing collaborators from the inside), using financial weapons of mass destruction; a brilliant plan really.

A few words on the genius of our elected/non-elected leaders. Olli Rehn, the EU’s economic and monetary affairs commissioner, recommended (the article, from 1 June, can be found on Bloomberg) that solutions to the Greek dilemma are to be found from the example of Belgium and Eastern Europe Countries.

I dare not even speculate what is brewing under the lid of the latter’s economy, but let’s look at Belgium. It is one of the most indebted EU countries, with debt at around 100 per cent of GDP and a deficit of ~4 per cent. Considering that Belgium hasn’t even had a real government for a year now, is this really the “solution” Greece should adopt?

As to the politicians, they say we have to pay to avoid “a domino effect” of economic collapses (which seem to be round the corner anyway) but not only that, they say that, surely, we will get our money back; if everything fails then at least as collateral – probably as ice cream carts, hot dog stands, and a heap of pictures of the Acropolis. I remember seeing, when the US invaded Iraq in 2003 (again), that there were some people rejoicing that this way they will get cheap oil. Well, they got the oil alright; it only came with a higher price-tag. Something similar will probably happen here: as usual, we will end up paying even more.

Moreover, what is the logic behind the idea that Greece could improve its economic situation after all of its assets are stripped away? There is the saying that “...teach a man to fish and you feed him for a lifetime”. How is that going to work when he is being robbed of his fishing rod, house, pants, boat, fishing water and so on? Again, difficult to see any real intention to actually help Greece.

So what is new? Well, historically, the kings and manorial lords stole from their “subjects” – while the banking class stole from the kings. However, that activity was bound by the limits of the kingdom, or the estate. What we have now is a truly global form of feudalism, where nation-state borders don’t apply anymore. On the other hand, we can also look at it from the viewpoint of progression of slavery: in the old days there was the “honest” 1) forced slavery which gave way to 2) the capitalist wage-slavery (with the so-called “freedom to choose”) which is being replaced by the present 3) debt-slavery (without the “freedom to choose”). Maybe at some point we will revert back to the good old original.

June 3, 2011 | Unregistered CommenterA. Kadlcík

Yes, it is a raid with financial as opposed to physical weapons - a debt-slavery - as you say. The troubling thing is that in all likelihood, Greek leaders will choose to further in-debt the country, while selling its assets, thereby reducing any repayment ability. There has to be an end to that, and it will be ugly. From an investor standpoint and bank-friendly policy though, they have short-term cover - whether Greek repays debt or the ECB/IMF repay their debt with new debt or things get so bad they exercise their default swaps, they will somehow get paid. And unfortunately, with the external pressure, this situation can only deteriorate in the short term. It's an outside speculator game with real internal consequences. Even if Moodys downgrade implies Greece has a greater chance of defaulting, that's merely another stake in this game for those 'playing' Greece.

June 3, 2011 | Registered CommenterNomi Prins

Great post!

And a great article with bearing on why the word always gets jumbled:

http://www.nakedcapitalism.com/2011/06/bribes-work-peterson-institute-donations-turning-nominally-liberal-foundations-to-the-right.html

Deficit and deficit spending absolutely tied to monetization of the banksters' debt and military war spending -- which goes back to the banksters and the oil cartel.

June 3, 2011 | Unregistered Commentersgt_doom

something came in today from "square picture" -?- which while deleting spam got deleted by me. If this was from here, please resend. If not forget this message.

June 3, 2011 | Unregistered CommenterAlbert Samuelson

Mizz Prins - you continuously, regularly amaze.

"Strategic Default" - what Greece (and others) should do, my opinion (that I tried to voice yesterday and got sighed at alot).

Here's how I would play it if granted "King of Greece" status for a few minutes:
IMF/ECB: take this loan at x+2% to pay us back the x+1% loan we gave you last year.
Greece: No.
IMF/ECB: then pay us back the x+1% loan without our help (help=bigger loan, higher rates).
Greece: No, thank you.
IMF/ECB: You have to pay us back, we have BONDS!
Greece: I guess you'll have to sell them out in the "free market" then. We cannot and will not pay you anything.
IMF/ECB: But, you have to.
Greece: Or, what? We "have to" should have an "or else" or it is not really a "have to."
IMF/ECB: Or else... or else... we go caps on yo' Greek asses: YOU HAVE TO.
Greece: We heard the Americans like to vault "troubled assets" (like Greece's bonds), call America and ask the FED to TARP your Bailout Bonds.

...like that, be strong Mr. Greece, be the first, tell the IMF they should have paid AIG to insure that debt...

Or, tell them you purchased food with those loans and fed the people - and you'll send back as much of the principle (pure unadulterated Grecian Crap) as possible if they'll just send a tanker ship to pick it up.

Strategic Default. Thanks again for posting N.P., your reasoning, sense and smarts are a bright light in a very dim/dark/dumb era.

June 3, 2011 | Unregistered CommenterDW

exactly :) .... Just say no

...thanks, but no thanks.... but you're welcome to enjoy our Islands..

June 3, 2011 | Registered CommenterNomi Prins

Interesting information found in this article. According to it “...European leaders are negotiating a deal that would lead to unprecedented outside intervention in the Greek economy, including international involvement in tax collection...“

It is said that if a country doesn’t have the power to control its monetary system, that country cannot be considered to really be sovereign. (Such is the case of the US as the Federal Reserve in not a federal institution; the US government doesn't "coin money and regulate its value". Also, such is the case for EU countries as well since they are heavily influenced by the ECB which is equally non-federal as the Fed. Then again, it even cannot be as the EU is not a federation proper.) However, if even the power over taxation is taken away, what are we left with? Would Greece qualify as a protectorate, or perhaps a dominion without a self-governance, or simply “that place where we formerly went for a vacation"?

Anyway, regarding the Greek leaders, here is an interesting article which sheds some further light on the potential “willingness” to help their own people. (I really recommend reading it, or at least glance through.) Actually, who are politicians’ people? Not the regular citizens but, rather, other politicians and financiers. The Greek leaders have certainly shown willingness to help them.

June 3, 2011 | Unregistered CommenterA. Kadlcík

Yeah - it's such a truly sad situation - why not just institute indentured servitude and be done with it....

Fed acts as front man for DC's economic policy, that's why it's such a protected private body - it's the printing factory and the dumping ground for debt, it legitimizes and facilitates bad decisions. Imagine if it also collected taxes ...

interesting the potential treason charge against Greek Prime Minister, Papandreou - he did technically short his own country on insider knowledge collusively (by market construction) with non-Greek entities, or at very least it's akin to insider trading....explains the lack of honor though

June 3, 2011 | Registered CommenterNomi Prins

"Take a cue from Iceland.?"

What did Iceland do that was different than Greece? You neglect to say in the article?

June 4, 2011 | Unregistered CommenterDavid

Holy Wow!!!!!

Now this is the way it's done:

http://www.winknews.com/Local-Florida/2011-06-03/Tables-Turn-Deputies-and-movers-show-up-at-bank-to-seize-property-for-homeowner-

Seize the frigging banksters' property.

June 4, 2011 | Unregistered CommenterJamesW

Iceland has had two referendums so far, the most recent on April 9th, in which Icelanders voted 'no' to compensating $5 billion to British and Netherlands banks for losses incurred during the crash of Icesave accounts due to the crash of another Icelandic bank, Landsbanki. The British and Netherlands banks are moaning because they supposedly "repaid their nationals" (code for bailed out our banks and their investors for taking risk) and want Iceland to repay them.

That said, the matter now goes to a bs European committee created to monitor Iceland, and out of the hands of its population, but still, better than no fight at all.

http://www.france24.com/en/20110410-voters-referendum-no-icesave-compensation-uk-netherlands-bank-collapse-iceland#

It should be said that in the world of Vegas type casinos, no one walks in expecting the house to repay their losses, it's just in the realm of international finance that this seems perfectly fine, even if international finance caused their own losses.

June 4, 2011 | Registered CommenterNomi Prins

What I think makes Iceland an interesting case is not really the fact that they said no – well not the politicians but the people – but because of two other things. (Refusing to pay for someone else’s continuous irresponsible action should be considered as the perfectly normal and rational thing to do and not as something exceptional or unheard of...)

The first important thing is that – as Nomi mentioned – the case is not closed yet as both Holland and the UK have sued Iceland in order to be compensated for their own bailouts. (Again, Iceland doesn’t have a moral or legal responsibility to do so.) If this kangaroo court finds Iceland responsible and orders it to cough up the dough, it would set up a very ugly precedent. Seriously, it would make the mafia look like a church choir.

One big difference between Iceland and, say, Greece is that the latter did take loans which should be paid back. (Of course, considering how the whole process evolved and that it basically has to pay back something which the lending institutions can create out of thin air, there is very little moral responsibility to repay. Then again, who knows how many laws were actually broken during the process by the financiers as well as the politicians so that even the legal obligation should really be non-existent.) However, what Iceland is expected to “repay” is something it never borrowed nor agreed to back up. It is a basic highway robbery performed on a country level.

The second thing is that whether or not Iceland is ordered to pay, the mere expectation to do so raises a serious question about the whole banking/finance industry and its relation to society and government. If the government – well the taxpayers really – is supposed to foot the bill every time something goes wrong, regardless of the government’s actual responsibility and involvement, then wouldn’t it make much more sense to abolish private banking and turn it into a purely state owned and operated institution? If such an institution did something wrong then it could be justifiably argued that the government is responsible with minimally a moral obligation to compensate.

Many still argue that the finance/banking sector should be private and that a return to a gold standard (or something similar) is the best solution. But my question is, how is gold, silver or anything else, supposed to solve anything if the underlying premises and principles remain the same? If the financiers can hold the world hostage now then, surely, that wouldn’t change one bit in the future; gold standard or not? And with fractional and interest based lending, wouldn’t that eventually lead to a new collapse as the debt would start to outpace the gold-reserves?

June 5, 2011 | Unregistered CommenterA. Kadlcík

In your book It Takes A Pillage - the title begs the question, to do what? I guess one answer is to wake folks up. Which begs the next question, to what? I guess it's the fact they don't own their own money as a nation.

In Chapter 5 titled We Already Have a Bad Bank: It's Called the Federal Reserve, on page 100 you use the old quote--regarding how the whole charade got started--of Meyer Amischel R.'s: "Let me *issue and control a nation's money, and I care not who writes its laws." ... The point being now that that's reality and now that we're off the gold standard, the u.s. and no nation internationally with exceptions like China, or Libya, or prior to our invasion - Iraq, or also I guess Afghanistan, and of course Cuba (perhaps there's a few others) still as exceptions to the global banking system, and which own their own money.

Well paper money and teletronic accounting etc. is always done out of thin air no matter what backs it, gold, the people's tax pool etc. Prior to 1971 and Nixon's Breton Woods agreement to take the u.s. (the world's reserve currency) off gold, and so every Western nation followed suit, at least bankers were lending our money but it was theirs also since it was backed by (presumably) their gold. Sure the big banks could cheat and say they had more gold than they did, and at the same time strictly enforce the gold standard on their competitors, the smaller banks. But at least what they could print was anchored more or less by what they had in gold on reserve.

Nixon resigned over Watergate but if anything should have brought him down, it was giving the store away to the banks. Because leaving the old system in place, except no longer tied to gold, then every time money is printed out of thin air for loan, really the whole principal is owed to the American people since only THEY are backing it and their backing the new money floated is what makes it possible to do this (not gold) in the first place. How then is, that money the principal plus understandable interest for these private banks' operating expenses and profits as a legitimate business etc., how then instead is all of it that's printed, principal and interest owed back to the banks? Just because they're called "banks"?

When the investment banks went bust and the bailouts occurred who received $13Trillion dollars of new floated money? And why? You had a site mentioned in your book on page 226 that was tracking that, if it's even possible. Did it all or much of it go to the folks who own the private Fed? ... Secretary of the Treasury Paulson claimed in asking for so much money for 'bailouts' via TARP etc., etc. claimed it would go to Main Street to get folks on their feet again. It didn't. And yet it's Their money.

You see a relative few people called 'bankers' are printing money for loan out of thin air and keeping it all (not losing any of their own money), so when it's lost it's really the people's loss, the people's money, as we the people are the only ones backing it. And yet when the banks lose it or the investment side of banking loses it gambling, they claim they have to print more [i.e. for themselves]. It's ridiculous. Sure Glass-Stegal should not have been repealed, but they set up shop in London to get around that long before G-S was officially repealed. The point is since the money is only backed by the people then all of those debts are owed to the people via their elected representatives or govt., not to private banks who merely printed it pell-mell since it's not theirs it's other people's money namely the nation backing it.

I would like someone anyone to tear this apart and re-inform me or us as to how this is not the case? It's not like the banks or the Fed lost any of their own funds. Then to add insult to injury or more injury to injury when they lose the people's money which they keep all of it in this system both principal and interest for themselves during the bubbles, soon as they lose some of the people's money when bubbles burst, the people are asked to give them "permission" to print more not for the people but for themselves.

Sorry for being so long winded. If we're going to wake up to something, thanks to the most recent pillage of us peasants (i.e. the people), by the nobles [today bankers] isn't the fact that we back our own money as a nation, but yet both the principal and the interest fly away to private parties, strange? If that's not really a slave system, (assuming this isn't torn to pieces and the countervailing facts revealed here), then what is a slave system? Maybe a non-profit think-tank should be formed by us at this site, accepting donations: "Folks In Favor Of Righteous *Principals: They belong to whom they belong" ... Too late probably but would we have qualified then for some of the TARP, Et Cetera Funds?

On the other hand if this is so, then everyone is not waking up much, but still dancing around this root cause saying to themselves or thinking out loud, gee I wonder what's wrong, and to their credit (pardon the pun) pointing out a lot of the symptoms which can also lead to the facts or the root of the issue. Which is terrific. We all go around the learning curve.

June 5, 2011 | Unregistered CommenterAlbert Samuelson

I believe one of the selling points to the gold standard is, it would put a lid on the banks from creating debt from nothing.

June 5, 2011 | Unregistered CommenterMrJones

Well, I believe the only way for gold to prevent the creation of money out of nothing is to actually use it physically. However, this wouldn’t solve all the problems.

Let’s take the idea, for instance, that putting money in a pile should increase that pile by itself, an idea supported by the banking class and perhaps by even a large part of the society. One of its justifications is that by, say, lending that money the lender is taking a risk for which he should be compensated. Ok, so let’s see what happens in a gold-based economy, where money transactions (loans, for example) are supposed to be rewarded by interest.

If a lender lends 100 (of physical gold money) at, say 5 per cent total interest, the borrower should eventually pay the lender a total of 105 (100 original loan and 5 interest). The repayment of 5 gold money of interest will cause few mainly negative effects.

If the total amount of money in a given economy remains constant, i.e., in a zero-sum game scenario, anyone’s gain is someone else’s loss. So, while the lender will be richer someone (one or many) will be poorer. If this cycle is allowed to continue for a longer period of time, the result will be that the money will be sucked out of the economy; the lender will have all or most of it while the rest will have nothing or very little. Such an economy is unsustainable in the long run.

This can be counterbalanced to a certain extent by continuously increasing the money supply – in order to enable the profits of the lender while preventing the impoverishment of the rest. You can do this with paper money or any other type which can be easily produced. (Such a continuous increase has its own potential problems but these are not important in this example.) However, gold would be an extremely bad choice for this as it comes in a very limited supply. Not to mention the production of gold may not be controllable at all by a given economy: who controls the gold, controls the economy. We see the same situation even with “worthless” paper-money – Greece is not in real control of its economy and as a result is being held hostage by those who do have the control. The idea of constantly increasing the amount of physical gold money, then, is a dead end as well.

A temporary solution to these two problems would be to pay back a loan (or at least its interest) with a new loan – again, something which is happening even with paper-money. I won’t delve much into this since the idea of solving debt by taking more of it is completely broken, that is if we want to build a healthy economy.

Now, a combination of these three options is possible – as is also the case presently – but, again, it is no use: combining or multiplying broken solutions does not make them any less broken. While these may influence the point in time when a crash will happen, they cannot prevent the crash itself.

What we presently are experiencing with the economy – the problems that is – won’t go away by switching to gold. At least that is how I see it...

June 6, 2011 | Unregistered CommenterA. Kadlcík

I agree gold is not the answer.

Quote of A. Kadlick: "This can be counterbalanced to a certain extent by continuously increasing the money supply – in order to enable the profits of the lender while preventing the impoverishment of the rest. You can do this with paper money or any other type which can be easily produced. (Such a continuous increase has its own potential problems but these are not important in this example.) " -end quote

This is what we do now, with the exception that instead of the commonwealth or commonweal being credited with repayment of the principal, and the banks as a legitimate instead of as a "magical" business being credited with repayment of the interest, (as I understand it) the banks i.e. I would imagine a few bank holding companies as well as the individual banks are credited with the repayment of both the *principal and the interest. However since that newly created money is based or backed by the commonweal's tax pool (making the printing of it possible in the first place, since backed by the nation's goods and services) why should a relative few people keep it all? When money is printed in the present system for *loan it is we the people who are taking the risk and yet all we are credited with is debt, and if the loans are repaid the asset then is credited to a few, those who printed it.

To make it individual, if I'm your personal banker and you have me living in your home, and you knock on my door and say 'I'm sorry, I'm very, very sorry, but I need to borrow more money.' ... Well, I curse at you for effect, and get out my money printing machine, and then hand you over the few thousand dollars you need. (You see I don't really own it, till I loan it.) So now you owe *me both the principal and the interest on the money created, minus the expenses of my living there. Later your wife says to you, who died and made him banker? And you confide: well Congress gave him the franchise and he owns them too. ... The point is I just lent you your money as a member of the commonwealth which makes my being able to print it possible in the first place. Maybe it's proper that you have to pay back both the principal and the interest, however it's not proper that I get to credit the whole amount to me. I should be crediting the principal back to the commonweal or the whole, and only keeping the interest to pay for the paper and the work involved with printing it up and deciding if you were a good credit risk, to the nation who's taking the risk and whose money I'm lending.

Perhaps the tangible reason this lopsided system is broken finally is on account of the profound imbalance of wealth in the hands of a very few due to the present accounting of repayments of both principal and interest to a relative few and quite literally no money or equity in the countries on the hook which is just about all of them (especially us, u.s.) ... Just as in mother Nature for example an absolute balance is not possible since reality is living, dynamic, and so imperfect not frozen on some pedestal; on the other hand for the same reason an approximate balance is *requisite. ... But when it's so lopsided as inevitably under the current accounting [system] things have become, there's no point making loans in reality, since the vast majority or the whole commonweal doesn't have funds in their 'account' anymore to pay it back. It's a question of balance, is how it looks to me. ... Right now clearly what we really have is a system - publically financed, yet privately owned. And as a result of the current accounting system, the public has so little money remaining, what's the point of lending them more? Except it's not the public but the [system] at fault. So I hope this discussion and exploration here continues. I'm just thinking out loud. What *appears to thinking and speech in a free society should be fairly addressed. Otherwise no point pretending we're "free". It's called the conversation of western civilization and it should be diverse, not suddenly monolithic like it usually becomes in the east and middle east. Johnny Carson was the great Karnak, and Ed McMan his congress, but that's a joke in the West, or at least it was. What do we now take it seriously? If so there's another problem.

June 6, 2011 | Unregistered CommenterAlbert Samuelson

Wow. This is really such a great discussion about the essence of money in our current system and how debt has gotten so fully out of control with very little on the horizon to indicate this situation will change any time soon, all Congressional debt cap ceiling misplaced banter, not withstanding.

Wrt gold, the price was manipulated by the Fed when it was the standard back in the 1920s after the first post-Fed crash. That said, the Fed also went on a little known Treasury buying scheme as the Treasury department tried to issue debt to keep the most powerful banks afloat - the beginnings of the out-of-whack situation we have today, but a precedent nonetheless was set. Similarly, it was the biggest banks - Morgan, Nat City, BT, that had the most access to Fed help, then as now, which perpetuates in more volatile times, the creation of more debt and printing of money to sustain the financial system. Only difference was magnitude - then, the magnitude was somewhat controlled because of the gold backing, and now and since Nixon, it's not, by any means, in increasing degrees.

I think, as banks got more creative, even with the gold standard around - at least, as mentioned, gold acted as a kind of barrier to debt creation, and also a certain global check and balance. Since we have gone so far away from the notion of real assets underlying massively leveraged debt, it would take a great deleveraging coupled with a global gold standard, were it to happen, to put the genie back in the bottle so to speak.

I fear though, that at some point if that conversion were to even get off the ground, there would not be enough gold in the world to subsidize the massive debt load, at which point the banks/markets/Fed etc. would just ignore the possibility of there every being a remote chance of an alternative and gold could lose its shadow currency luster and plummet. This is not to say, we shouldn't have an asset-based standard like gold, or that gold shouldn't be considered an alternative to fiat currency, the dollar does not deserve to have, even the buying power, it does by any means - but that we're in a phenomenally bad position from which to get to it.

June 7, 2011 | Registered CommenterNomi Prins

Speaking of debt, in some truly hideous conversations with neighbors and people in the street, I realize must people are completely discombobulated by the misinformation from what passes for a media today.

The best way to illustrate the debt creation/profit stream is to feature the man who complains the most about the deficit and has for decades sought to eradicate Social Security, Medicare/Medicaid, and offshore as many American jobs as possible, Peter G. Peterson and the world's largest private equity firm he co-founded, the Blackstone Group.

Between 2005 to 2007, the top ten commercial and investment banks in North America made leveraged loans in the amount of $633.8 billion to private equity LBO (leveraged buyout) funds for a total of 956 deals.

These "leveraged loans" were based upon securitized debt, financial instruments created and generated by the banks from debt (previous loans, commercial loans, auto loans, student loans, corporate loans and subprime loans -- and it's important to understand that subprime derivatives [which a portion of the loan amounts were derived from] constituted a drop in the bucket of total credit derivatives).

So, debt created at that point, was utilized by the banks for LBO funds, which would be used to create ever greater mountains of debt. As an example, when the Blackstone Group did an LBO on Danish telecoms operator, TDC, in 2006, they put down only 10%, while taking out loans for the remaining 90% against their LBO target corporation, TDC. (In other words, their target, TDC, was also their collateral for their debt!)

Because of this, there was an estimated 12% reduction in Danish tax revenues due to that major LBO in Denmark by Peterson's Blackstone Group. Therefore, Blackstone created debt against that company, and further created more debt for the country and taxpayers of Denmark by that leveraged buyout purchase of theirs.

So there was debt creation by the banks in those structured finance leveraged loans to the PE LBO funds, and further debt creation against their targeted takeover companies, and further tax reduction (i.e., more debt creation) from their LBO-type of takeovers.

To add even more debt, many of those PE LBO targets were across the healthcare sector (and consider the extraordinary number of types of companies falling into that sector: clinics, medical instrument companies, R&D labs, hospitals, medical personnel, etc., etc., etc.); thus dramatically raising the price of healthcare sector costs in North America and elsewhere.

To further add to the healthcare sector costs, there was considerable hedge fund speculation across the spectrum of the healthcare sector (there were an estimated 90 specific healthcare hedge funds during that period, plus general hedge fund speculators as well). Some of these major hedge funds are owned by the top banks (JPMorgan Chase, Goldman Sachs, B of A, Citigroup, Morgan Stanley) and some are financially interlocked with the top banks, as well as a few independents.

Thus, we see how, just between 2005 and 2007 (according to GAO analysis of Dealogic data from a GAO report on private equity) two primary cost drivers in healthcare: hedge fund speculation and private equity firm LBOs, which was simply an item in the lengthy string of debt creation.

And then that debt is socialized, i.e., shoved onto the public as exploding deficits and involved in increased deficit spending (with dramatic reduction in the tax base), further exacerbated by Peter G. Peterson, and his fellow debt-financed billionaires screaming for a reduction in the deficits which they created, profited from, then shoved onto the public!!!!

And it was from debt they derived their fortunes, a most ill-gotten form of gain, which they will never pay back.

I hope this made some sense of the matter?

June 7, 2011 | Unregistered CommenterJamesW

Oops! Forgot to include a link displaying that healthcare increase:

http://publications.milliman.com/periodicals/mmi/pdfs/milliman-medical-index-2011.pdf

June 7, 2011 | Unregistered CommenterJamesW

They also have the exclusive luxury of "Fractional Reserve Banking", the "Eighth Wonder of the World". So this fiat currency, which always returns to it's intrinsic value-ZERO- is not only being created by the FED ala QE-to-oblivion, but the banks are creating money out of thin air, lending money that does not exist. Talk about rackets. The Serfs are waking up, and the Nobles are a bit anxious, as they bloody well should be. It is criminal, and we are in a fiscal-geopolitical-political-economic vortex, on the precipice the likes of which Lenin, Mao, Stalin et al could only dream of. The Soviets may have supposedly "lost" the Cold War (read Golitsyn to understand that mirage), but the West has a cultural rot that, like gangrene, has and is infecting the works. To turn this "Mother-of-all-Titanics" around, from the brink, will be like the ship being in a lake slightly larger- impossible.
What the present requires is pain, courage, moral fortitude, character, etc.- all that is profoundly lacking in "the powers that be". Back in the 90's, there was a cartoon in the NYT's showing a ship- intended to be like "The Titanic", but instead was named "The U.S. Economy"; the caption read "Even God could not sink this ship." Pride/arrogance etc. goeth before destruction. We the People (at least in America) have allowed the most manipulative scoundrels to hood-wink us, we have sown the wind, not we are reaping the whirlwind. This will take a miracle- since many of them see themselves as "gods" of their own making, they more accurately could be considered "fallen angels". I am an optimist by nature, but a realist- it is too late.

June 8, 2011 | Unregistered CommenterAmans Patriae

To continue the idea why gold is not the answer. My earlier post could be summarised as follows: Gold cannot solve anything as long as other things remain as they are. A gold or other asset backed currency cannot prevent the speculation we are now experiencing, only the physical use of gold, silver, etc. can do it – though that wouldn't do much about interest based lending. However, speculation, fractional lending, etc. are only one part of the problem. I think that the question about the type of money (paper, gold, or even old shoes) is only of minor importance. Much more important are questions like: 1) do we want to continue with the idea that money should be able create more money all by itself (or even worse, debt creating money) and 2) who should be in control of the economy (monetary policies and so on).

As to the first point, well, money being able to create even more money demands ever increasing money supply which devalues the profit which adds pressure to increase the profits even more (and in anyway possible) which leads to an increased money supply and so on. After few cycles a crash follows, for such a system is unsustainable; regardless of what type of money is used.

The second point: those who control the economy ultimately benefit from it. Presently the control and benefit lies in the hands of the bankers. It is safe to say that unless you are a banker yourself, you will most likely be not at all happy about the current situation. So, if the society as such is to benefit, and not a small privileged class, who should control the economy? Well, the society of course. This means that the economy should be controlled by the people.

Now, even if we had direct democracy, there would be an administrative body to put the will of the people into effect. Therefore, the alternative to the present system is a government/state/city controlled economy; especially when the system we have now is broken both morally and technically. I also doubt that we could find even historical evidence which could somehow show that the private banking system ever benefited anyone else except the bankers. Furthermore, state controlled economy, especially regarding monetary policy, lending and so on, does not in any way prevent private entrepreneurship; it should be actually more viable as instead of paying ever increasing taxes to finance national debt, that money could be used to support the businesses. As long as money is not scarce (as in the case of paper) each government/state/city can potentially be in control of its economy; such is not the case if gold was used.

Some further things. Nomi wrote: “This is not to say, we shouldn't have an asset-based standard like gold, or that gold shouldn't be considered an alternative to fiat currency, the dollar does not deserve to have, even the buying power, it does by any means...” Well, if gold (or anything else) becomes the next currency – physically or in an asset-based sense – it will not remove the “fiat” part of a currency. Even with gold, the government would need to authorise/sanction it which means that any government sanctioned form of payment (and collected as taxes) is necessarily “fiat” currency.

As to the buying power of the dollar (or euro, yuan, etc.), regardless how we value it currently, it is all based on faith. For example, things like food, shelter, and clothing have a need-based value in the sense that we absolutely need it to survive; this is what money generally lacks. We cannot directly substitute food or shelter with paper money as it simply does not have the qualities we need. The fact that currently we can basically do so anyway is made possible because we simply believe in it: we believe in the conversion from one to the other. Faith is needed with gold as well, as it also lacks all the things we actually need in life. So, whether paper, gold, gold-based paper, etc., all of it would essentially be faith based fiat currency.

So, not only do I think that a government/state/city controlled system is the best option - as long as that governing body is a "shorthand" for the people - but also that it should be based on "cheap" money as is the case with paper (or some other abundant material). Money which is based on a scarce material pushes the control of the economy into the hands of those who control that material.

June 8, 2011 | Unregistered CommenterA. Kadlcík

Today we are facing the greatest threat to our way of living, threat for our kids’ future. The banks, together with our government brought America to its knees and we have to stand up together and demand justice!
There are two Registers of Deeds who are demanding answers from MERS, BofA and the rest of them. They need our help. The truth shall prevail: http://tinyurl.com/3qsu87x

Also, here is my open letter to Attorney General Miller: http://tinyurl.com/3h5kfy9
We can and we must fight back! The Banks performed the biggest financial/mortgage scam in the history of the world and they MUST be prosecuted!

June 9, 2011 | Unregistered CommenterSenka

And when the second bottom hits in a few months, just watch how fast the United States becomes a police state.
They are geared up for it already. The government will unleash the hounds, from Blackwater to the local cops to the national guard.
The Democrats are asleep at the wheel and the Republicans love it.
Stock up the pantry and hold on to your shorts.

June 17, 2011 | Unregistered Commenter2020Whalen

Caught you on NPR recently, along with that guy from American Astroturf Network, Douggie the crazy whackadoodle.

Boy oh boy, was he ever spouting some disinformation on the economic meltdown.

I guess for every one hundred times they have him on, they have to have on a Nomi Prins, or Prof. James Galbraith at least once.

We should be hearing you on that sham network a lot more......

June 17, 2011 | Unregistered CommenterJamesW

Thanks James, I felt kind of alone out there at moments.

And, as added to the police state notion, the new scary thing I just discovered, is that the IRS, contingent on a ruling to come this summer from an US Tax Judge in Arizona, may disqualify documentary making expenses, because to her, creating documentaries is a 'hobby' for 'education and expose purposes', there's a pending suit about this, but if it goes the way of the judge's initial comments, it could bankrupt many documentary makers, and make writers, artists, sculptors - really any kind of artist - at risk for back expenses if the IRS doesn't deem them making enough money from their pursuit. it's like taxing truth and expression. thought police stuff.

June 17, 2011 | Registered CommenterNomi Prins

And just who elected that 155 vote SOCIALIST majority which just sustained G-Pap's traitor regime? I believe it's that selfsame rabble of gov't employee unionists who are out in the Athens streets wailing about the banksters and their rackets. A plague on them all.

June 21, 2011 | Unregistered CommenterCompassionateFascist

Greece voted for "austerity measures"...,they express interest in paying there creditors.

I guess this is not suprising, with the U.S flexing its miltary muscle all in the name of promoting demcracy...Maybe it might be understandable the the Greek politicians decidedto cooperate,lestthe U.S and Baraka Obama decided that Greece is a rebel nation home of Al-Quaeda, and there leadership must be replaced.

June 29, 2011 | Unregistered CommenterDavid

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