Meet the Real Villains of the Financial Crisis—the CRA [Community Reinvestment Act], “Affordable Housing” and the US Government

Abstract: The government was directly responsible for the Depression of 2007, a process that is only half finished at this date.  Interestingly, the New York Times has an opinion that blames the government for much of this mess. We are mired in debt to the extent that is cannot be accommodated in our budget or even maintained at its current unacceptable and unsustainable levels without more deficit spending. Goldman Sachs is singled out for abuse and political grandstanding by Congress as they made profits and are the biggest investment bank left standing after the downturn. Most of this interaction between government and the banks is rooted in the leftist intolerance for capitalism. The leftists proclaim that they have better ideas to run governments and continually spend too much and throw their nations into massive debt problems as we see in the EU with the cases of the U.K., Greece, Italy, Portugal, Ireland and others. The respective governments of these nations, all left or far left, spent way too much money and now are struggling with the resultant debt which they cannot address even with massive tax increases. There is no way to check this process and the debts will continue to pile up until such nations, including the US, default on their debts. That will bring more chaos.

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[I offer extensive quotes in this blog so that the reader can view the exact language and can be confident that nothing was taken out of context or that nobody was misquoted. The easiest way to take in the salient points is to read the emphatic points in the quotes and then peruse my comments. Comments on my comments are always welcome: ryckki@gmail.com.]

Capitalism v. Socialism or Success v. Failure.

Unfortunately, we live in a divided world where there exists a massive crevasse predictably constructed and carefully maintained almost wholly by political rancor. The divide is the gap between the ‘rich’ and the ‘poor.’ The gulf between these factions provides both relief for some and a political thrust for others to close the space and engender ‘equality[1]’ for all by some promised sharing in wealth. We have evolved from humble beginnings where wealth was managed only by swinging clubs and sailing rocks and arrows, clan wars and the constraining concept of food spoilage time and the weather. In this trek from unsophisticated hunter-gatherer societies to the early beginnings of capitalism the gap has continually widened. This process proceeds on an international scale. Very few governments can play the game and balance these two attributes; most governments fail.

The gap is a natural consequence of how societies interact as there are two strongly opposing theories of society that cannot coexist: capitalism and socialism. Hybrid blends are a small exception. Capitalism is an entity that forms spontaneously in all societies however primitive or advanced where sharing and trade are necessary to allow a existence much beyond starvation and successful wealth accumulation however modest such as agricultural plots, rice paddies or following wild game. Capitalism provides a positive group leverage whereas socialism offers the opposite. Capitalism always forms spontaneously in the form of a pyramid[2] where a few  at the apex must make difficult decisions and assign jobs and duties that are spread around the local community not according to any notions of equality but to fill the necessary slots of the mechanism that produces food, shelter and protection. Food and other commodities in excess of the current needs of a given community are offered for trade with other similar groups and thus markets and trade are established. Efficiency is enhanced for all groups. Sharing commodities in markets allow separate and 0therwisle unrelated groups to participate in constructive trade and improve their respective lots.  Thus capitalism moves forward by placing the proper individuals in various key positions in the organization based primarily on skills. This argues directly against the left-wing political nostrum of equality where anybody should be able to do anything in a modern society. The idea that anybody can do any job leads to incompetents being placed in positions of power where they can wreck havoc and destroy societies. Our Congress is such a place where incompetents are particularly safe. Their full time job is to get reelected. For many, their part time job is to attack capitalism.

The capitalist mechanism demands material success for the group and tangible outcomes for the members of the group because failure frequently means starvation, loss of assets or worse. Those who fail to provide what is required in a capitalist system fall from power and are replaced by those more fit to do their jobs. The opposition observation and general argument to this is the socialist position where cooperation among the masses provides enough wealth for everyone in the system and is more equitable and this is attained by enlightened leadership. There is no discrete penalty for failure in the socialist system as some failure in the society controlled by elitists simply means that blame is to be placed elsewhere and particularly upon those who have wealth and that assessment is the necessary and sufficient proof that there was foul and unfair play in the economic system. Capitalism refines leadership and provides funding and other social processes while socialism tends toward stagnation, oppression and corruption. The difference is almost always related to the efficiency differential between the two systems: socialists have the wrong people in charge and the wrong plan for the economy among other detracting attributes. The current test for the efficacy of socialism rests in the outcome of the current financial panic in the EU over Greek debt. Here, we have the wrong people in charge of a cluster of societies that are spending too much on various social projects and are ignoring their debt responsibly. The silly notion that the ‘rich’ can always be taxed at higher and higher rates to pay for the social programs is at the very core of their failing system. High taxation[3] stifles economies and that leads to failure. This theory is elegantly expressed in the Laffer Curve[4][5] that shows there is a particular tax rate for maximum tax revenue and another for the highest growth and efficiency in the economy.  Since taxes are the only source of power for the left this theory which supports ‘supply side economics’ is summarily rejected solely on a political basis. It works but reduces the power of elitist governments that believe they can provide a better society with higher taxes and elitist decision making.  The current crash[6] and probable disintegration of the European Common Market and European Union is proof that the elites have no long-term ability to run societies.

The current struggle now presents itself as a political war between those who can generate wealth and those who must tax that wealth for their existence. This leads to the enviable outcome where those who are unskilled in the management of wealth become elevated to a class of decision makers based on a political process where they are chosen by those whose skill spectrum is limited. Thus, using the nostrums of ‘sharing’ and ‘equality’ many incompetents perturb the capitalist system and damage local societies in wealth terms. The predictable outcome of this is a disintegration and subsequent reassembly of the capitalists into different groups and perhaps in different locations in an attempt to escape the clutches of incompetents and to start all over again. Two natural processes then compete in this aftermath: political forces again attempt to promote incompetents to positions of power over money, assets and business markets and finally win on a numerical voting basis and the system eventually crashes again. There is no reasonable expectation that this cycle of construction and destruction will ever cease. The stark realities of the results of the USSR and People’s Republic where they ran command economies and were abject failures in this endeavor are not sufficient to prevent socialists from taxing nations to the point of collapse. This tends to convince us that failure is acceptable to the left for any economy as long as they can retain political power. Leftist politics mostly means economic failure.

We can cite dozens of examples in South America, Asia, Africa and the Caribbean as case studies to prove this point. The local  pyramids form, are refined and become successful then the hoi polloi view the proceeds with covetous eyes and demand part of the proceeds usually in the form of taxes that eventually become too high hence oppressive and confiscative and the system crashes again. This system could work to the benefit of all if the lower classes could provide suitable workers to make goods and provides services for commerce, but politics frequently prevents this. The workable leadership lies in the business camps as history has shown and political leadership has not been shown to be beneficial to all in most societies. It is the bad political decision that frequently crashes the system, forces unemployment and promotes war and disease. The only time when these opposing systems appear to work cooperatively are places where government and business are separated by some firewall and capitalism takes the lead in its own venue while providing profits to run the government and necessary military factions of a society. This hybrid is difficult to establish and few countries other than China have managed this feat to date. If firmly established, this quasi-Fascist[7] model may change societies and generate the maximum possible wealth and security for all citizens in the group if balanced properly.  This experiment is being run on a massive scale and very successfully at this time compared to other systems in Europe and the US. We shall see.

Destruction in our economy from leftist programs

We are now in the process of watching incompetents destroy our US economic system and this is the point of this blog.  We are spending and borrowing very much more than we can ever pay back. Debt can always be deal with by the left as illustrated by the way Obama dealt with GM an and Chrysler: clean out the stockholders and then cut away the secured bond holder’s right to first claims on the corporate remains during bankruptcy proceedings. This is a politically instituted default and is know as cleptocracy [theft of citizen’s wealth by government]. The government purloined assets from it citizens and nationalized the remains of an auto company because the workers were unionized, Democrats, and had supported Obama during his political campaigns. Quid pro quo.

We begin discussion in this essay with the pedestrian scheme of blaming the opposition for the Depression of 2007 and since this was superficially triggered by a financial crisis then the banks and more exactly the investment banks must be the culprits since they were driven by greed and a conspiracy to cheat the poor out of their deserved rights and future. There is only a bit of truth in this notion. But, the politics of this theme are wildly successful in the politics of the l0w class.

The Depression of 2007 was initiated by a collapsing real estate asset bubble that formed not only in the US but in many places in Europe.  Our global economy works such that trading in real estate is fast and profitable in certain areas.  Speculation can be identified by merely looking at the time property owners hold their properties and if they live in them. The driving forces were easy credit, very low interest rates [Greenspanism[8]] and speculation over housing for decades in some cases. This social contagion can be defined as the process whereby growth is encouraged by government directly funding house purchases, maintaining low interest rates and setting very low to zero level mortgage requirements to buy those houses. Thus, when people could not or would not pay their mortgage payments then these mortgages, subsequently bundled into groups as investment instruments, became ‘toxic’ assets. Mortgage defaults continued to grow and that meant that toxic assets were growing in toxicity and banks would not trust each other in the credit markets so they froze up. The Libor rates[9] for inter bank loans shot up. The process was magnified by the fact that although the banks and lending institutions knew their buyers with low credit standing would not be able to afford those homes they had the convenient outlet of shedding their liability by sending these phony real estate instruments to Fannie Mae and Freddie Mac in discount.  This risk dumping process amplified the bubble as more mortgage money was generated and this outcome was the result of a vote-for-substance [quid pro quo] bet by politicians whereby they could trade votes for ‘affordable housing.’ Congress set this up as a social program for the ‘poor.’ A bursting asset bubble vacates the intrinsic equity of the asset hence erases wealth within the bubble so home equities contracted and the credit based on such equity collapsed and so did consumer spending from this source. Thus, GDP plummeted as consumption is 2/3 of the GDP.[10] A typical case would be some person with a $400,000 home [earlier market price] that was now worth only $300,000 [as the bubble bursts] but sustained with a $350,000 mortgage. This is called being ‘under water.’ Such negative turns in a speculative investment prompts flippers to walk away from the mortgage and let the bank do what it wants with the wreckage.  The house value may actually plummet further later on if the bank does not protect the house from looters who want copper tubing and wire and appliances and other fixtures get in and loot the place.  Government attempts to fix the problem with forced principal and interest adjustments leads currently to refinancing recidivism rates of credit-poor people at 70%.[11] Such a failure and waste of printed money is no deterrent for the left to proceed with more projects of this sordid class. Such is also highly predictable as this is one of the very weak spots in the leftist economic theories and governance.

After the crash, the hunt was on for the guilty who could only be capitalists and more particularly banks who made fortunes in the downturn and Goldman Sachs was the first point of the attacks.  In markets where there are millions of willing buyers and sellers the political attack by Senator Carl Levin[12] was to tell the world that Goldman made money off short positions and failed to tell their long customers that they were actually betting on a downturn. This is nonsense and crass political theatre as all brokers and traders are awash in buyers and sellers for every single product they sell and at any given instance the same equity or other financial instrument is being sold long or shorted on the same day and all might be customers of Goldman or any other investment bank.  Note that people like Franklin Del Ano Raines[13] and others who ran Fannie Mae into the ground are not on the Senate hot seat although they along with Barney Frank and others conjured up and orchestrated  this ‘affordable housing’ scam that now results in some 3-7 trillion dollars in worthless mortgages now rotting in Fannie Mae and Freddie Mac.  The scam was fueled by the CRA [Community Reinvestment Act][14][15] that created mountains of bad debt by forcing banks to give away free houses to the uncreditworthy low class in exchange for their votes under penalty of prosecution by the government. You were supposed to wipe out the evil process of Redlining[16]  and replace it with Greenlining.[17]Minorities must have loans [free if necessary] so they can participate in the American Dream. This is known as ‘affordable housing’—you, the average taxpayers, cannot afford this but the illegal aliens and criminals and ‘poor’ certainly can if it is free.  The thrust by the left now is to ‘suspend’ foreclosures and use some bank or government money [what else from a socialist?] to fix the problem:

An absurd plan to help homeowners who are about to lose their homes:

 “The best way out of the current mess that avoids a taxpayer rescue is for lenders to modify loans.”[18]-- Pia Lopez, Sacramento Bee.

“But the role of loans for people who don't qualify for a lower-cost, prime loan should be to provide them with a loan so they can build a credit history and refinance into a conventional loan with better terms when their credit improves.”[19]—Pia Lopez, Sacramento Bee.

See how easily the money from the banks should flow to rescue the unfortunate from their financial problems! This is the song and dance of the far left intercalated with racism.[20] We can loan them money so they can establish credit!  Notice that the banks have to absorb the loss here. Stick it to the greedy banks and if that doesn’t work then loan them the money to pay their mortgage payments with government backing. This is a classic example of leftist socialist thinking.  Lopez must have forgotten that the banks were bailed out by taxpayer’s money just to survive. Where are these loans originating from? The printing of money??

The point of this exercise, going back two or three decades was to, in Obama’s words, “spread around the wealth” and terminated with the usual consequences: incompetents or other people who receive free assets or money cannot always handle the process properly and spend it away and then default. The object of the left is to blame the banks and then secure loans to restore the victims to their homes for another try. Thus the far left socialists in Congress and Obama wasted trillions and now the hunt is on inside Goldman Sachs to find the culprits who made billions off an obviously crashing real estate bubble of political making. This is standard leftist politics: if you have assets above the median then that is proof that you gained it unfairly and probably used racism along the way so you should give it back.  The government wastes trillions so they go after transactions on the billion dollar level as a diversion. Most professional racists are liberal Democrats.

The standard process of finding any and all ways to exact wealth from those who have it and

“spread it around for the poor” is being illustrated in the current and terminal collapse of Greece, Portugal, and soon Spain and probably even  the U.K.  It matters not whether the money was spent on housing, health care, rent, food, drugs, education or other the point is that the left believes that they can tax and spend and that the ‘rich’ will pay for this. It seems not to matter to anybody, at least for now, that the definition of ‘rich’ in the defined terms of just who will pay taxes to cover these phony programs extends well below the median income of $32,000 in the US. This number for the ‘rich’ was elevated by Obama and Biden during the contest. They promised [read lied] that nobody earning under $250,000 would see a penny of extra tax.[21] As the cutoff point that determines who pays federal taxes continues to reach its tentacles down past the median then ‘the poor’ will be subject to taxation to pay for these follies. If the entire pile of wealth of the ‘rich’ was confiscated it would propel the government on its egalitarian course for only about 90 days at this rate.

This process is unfolding in California[22][23][24][25][26][27] now as they face endless yearly deficits of 20+ billion dollar or more with the extra excitement of find ways to fund their 500 billion dollar pension funds that were a payoff to government workers and teachers for their votes. This deficit will grow until either spending is cut drastically or when they default or perhaps it will happen simultaneously.  There is no known scenario by which California can recover form this as they are increasingly more anti-business in their legislation and outlook and only invite the inevitable default. There hopes then rest solely upon Washington for gifts as they cannot finance a loan. There is a strong parallel between the mentalities of the politicians in California and Greece as they both have the same affliction. Both are going broke and refuse to cut spending.[28] New York, New Jersey and Michigan are in similar positions in debt. These entities are almost entirely controlled by leftist elites.

This debilitating debt process is not exactly a new story as we saw the horrible outcome of the French Revolution, the Russian Revolution, Cuba, the People’s Republic during the Great Leap Forward and many other examples of how the far left can grab tangible assets and money and spend it in inefficient ways and bring whole continents down to poverty levels. The prediction circuits were wired in and the red lights blinking for us all to see all the way back to the 1890s and somewhat before that era. But, history’s events are not a deterrent to overspending and poor economic choices.

But, why should we expect any other outcome? It is a fact that the far left cannot manage the efficiency[29] of any government or society in a manner that is financially sustaining. There are no highly efficient socialist or Marxist experiments except for the cases of China and the parasitic variants of Switzerland[30] and Sweden, who finance their socialism by participating in the dirty gun business or the dirty money business or both. The far leftists employ slick stooges and Sooth Sayers like Keynes[31] or Paul Krugman[32][33][34][35][36][37] to give credence to their spending and taxation.  Keynes’s  true economic position is always truncated to show that government spending can produce full employment, stability and prosperity and this salient extraction and abridgment of the truth is being tested in the EU now as Greece collapses and will soon be tested in California or New York or both as they crash.

But, again, why should we expect any other outcome? The battle between the rich and poor and capitalists and socialists has been raging on for several centuries. To be quite blunt, we can expect that the temporary good times enjoyed by the poor as the far left wastes time and assets and talent actually provides a spate of enjoyment because when the poor are left to their own devices they tend to create their own form of poverty though ignorance, sloth, crime and drug addition. Why not have a little fun until the curtain on this intermezzo comes crashing down?  And, what do they have to lose in the long run? Not much.

The time course of the fun times is shortened drastically when poverty in mass quantities is imported to stuff ballot boxes in favor of socialism and massive leftist government spending. California’s far left majority stems, in a large part, from their enormous illegal alien population who vote for benefits, participate in benefits  and form the power base of the Democrats in that state.  The process works even better when invading illegal aliens push up living standards and taxes and those capitalists who cannot make sufficient profits in such a hostile environment move to a different state, switch their manufacturing off shore or quit. The exit of productive citizens subject to state taxes both lowers the tax revenues and increases spending on social programs which encourage deficit spending and shortens the time when they will go into default. The far leftist plan, of course, is to spread the taxes around to all US citizens so that national taxes can be focused back to states in financial trouble thus defeating the purpose of flight. But that does not necessarily fix the debt problem. Until a severe wealth tax is set up there is no way to tax the ‘rich’ if they refuse to make profits and just leave he country or invest in tax free bonds or other options.

But, that attitude does not put bread on the table and keep the lights turned on.

Then, we look closer at the excuses and explanation of this process using the New York Times:

“But the transaction at the heart of the S.E.C.’s complaint [fraud against Goldman Sacs] is a microcosm of the entire credit crisis. That is, there are no good guys here. It’s dishonest and ultimately dangerous to pretend that Goldman is the only bad actor. And the worst actor of all is the one leading the charge against Goldman: our government.”[38]--Meet the Real Villain of the Financial Crisis By Bethany Mclean Published: April 26, 2010 [Emphasis is mine in all quotes.]

This is a politically mixed message. How the government can be at fault as seen from the pages of the Walter Duranty Papers [39]  is a mystery until we probe further.

“Yet, in the end, it comes down to this: Goldman Sachs, ACA Capital, IKB Deutsche Industriebank and even the rating agencies never had any duty to protect us from their greed. There was one entity that did — our government.

But it was the purported regulators, including the Office of the Comptroller of the Currency and the Office of Thrift Supervision, that used their power not to protect, but rather to prevent predatory lending laws. The Federal Reserve, which could have cracked down on lending practices at any time, did next to nothing, thereby putting us at risk as both consumers and taxpayers. All of these regulators, along with the S.E.C., failed to look at the bad loans that were moving through the nation’s banking system, even though there were plentiful warnings about them.”-- Meet the Real Villain of the Financial Crisis

And, this surges to the crux of the problem. Any yoyo with a 4^th grade education might perceive that lending money to somebody with the surety that they will never pay it back would rebel at this process. Recess time in my school was a place to get a good future grounding on the use of money and the propensity for borrowed money to ever get paid back in my county.  Students who played and lost marbles in ‘keeps’ marble games would want to borrow and promise to ‘pay that debt back’ the next day if they lost. Such transactions resulted in hurt feelings, some fist fights and some strict rules against entering the games without marbles. Play could not continue without marbles in hand. Most of the promises were false.  Kids would go home and complain to their parents that they needed another bag of marbles because they lost theirs in a game of skill. The same process happened in the game of tops where you won a top by knocking it out of the ring. Not everybody has skill in marbles or tops or investing or home economics.  The credit rating is the best indicator of who can pay off their debts and who cannot so we wonder why the US government subsidized those with poor credit and even illegal aliens with public monies. The IQ test [see The Bell Curve[40][41][42]] is similarly the best indicator of performance in college or the workplace. It was for the votes. Quid pro quo.  It was just for the votes and power.

And more blame:

“More important, it was Congress that sat by idly as consumer advocates warned that people were getting loans they’d never be able to pay back. It was Congress that refused to regulate derivatives, despite ample evidence dating back to 1994 of the dangers they posed. It was Congress that repealed the Glass-Steagall Act, which separated investment and commercial banking, yet failed to update the fraying regulatory system.

It was Congress that spread the politically convenient gospel of home ownership, despite data and testimony showing that much of what was going on had little to do with putting people in homes. And it’s Congress that has been either unwilling or unable to put in place rules that have a shot at making things better. The financial crisis began almost three years ago and it’s still not clear if we’ll have meaningful new legislation. In fact, Senate Republicans on Monday voted to block floor debate on the latest attempt at a reform bill.”-- Meet the Real Villain of the Financial Crisis

This is remarkable and essentially unparallel heresy leaping off the pages of the most dedicated leftist tome every published outside of Moscow or Peking.  Given the performance of Congress we cannot expect that any ‘reform’ will lead to anything more than more government and useless taxes on business that will keep unemployment high.

The NYT concludes:

“Come to think about it, shouldn’t Congress have its turn on the hot seat as well? Seeing Goldman executives get their comeuppance may make us all feel better in the short term. But today’s spectacle shouldn’t provide our government with a convenient way to deflect the blame it so richly deserves.”--Meet the Real Villain of the Financial Crisis

This last splash of sour grapes is not convincing or predictive of what the future of our business adventures might be. The people at Goldman are the ‘best of the best’ and they have their counterparts in Asia and even a few spots in Europe. Goldman’s traders are free agents and they can work their magic anywhere on the globe they must go as their skills are highly in demand. Goldman could fold up shop in a heartbeat and the pieces instantly and spontaneously reform in distant parts of the world and the processes could continue without Congressional antagonisms or the exorbitant taxes now imposed on business in the US. This is a global economy and many nations are trolling for talent and capital and offer fewer strings, less red tape and much lower taxes.

The salient fact here is that, agreeing with this article, government orchestrated this asset bubble with questionable intentions given the methods they used and that investors saw an opportunity to bet against the government folly to make money. This happens daily in the Forex currency markets.  We should bet that Greek bonds will be safe?? This happens in the bond markets daily. This is like the game of marbles as some players make major mistakes or lack the talent to compete. There is nothing indecorous about betting against a loser.

This trend toward destruction by the leftist elites will continue on until either they lose at the polls or the economy collapses and they cannot influence the chaos. We must brace ourselves for the next episode from the Depression of 2007. This will be a new experience in debt management for us all.

rycK [a 5^th generation Californian in exile]

Comments to: ryckki@gmail.com

The Preposterous Notion of ‘Fixing’ the Derivatives Market and Other Follies.

Abstract: Our current government believes, or so they say, that they can fix financial and economic problems with policy and oversight, mostly using taxation. Some eight centuries of research show that this is actually a proposal that flies in the face of veracity. Government decisions hatched in the Obama administration  appear to be based almost entirely on partisan policies where the entire political game is contingent  upon searching for new ways to restrain capitalism while  acquiring as much of the wealth from this source as possible. The general thrust is to equalize income for the masses even if it requires a total destruction of the capitalist structure of a given economy. This is based on the old, tired Marxist notion of redistribution of wealth. This essay investigates the methods used to nationalize General Motors and the current political attack on Goldman Sachs and then concludes with the stark financial realities of the existing derivatives market.  The notion that some government can control a $600 trillion derivatives market is so far divorced  from realism that we must be both amused and fearful that they will attempt something in the near future toward this objective. Government meddling into markets always yields the same result: higher taxes or prices and less efficiency.  Shortages almost always follow an episode of government perturbation of the free markets. We need to realize that the derivatives market is comprised of millions of willing buyers and sellers. Buyers think they are buying something of value. Who is our government to question that? Whenever we build something there suddenly appears a pack of howling populist or Marxist radicals clustering around to tax it or destroy the process and replace it with government. I don’t see any important exceptions to this rule in our current government officials.  Our elected officials, speaking for the most part now to those in power, are incompetent and greedy radicals that will say or do anything to get at our money.

Our society seems to tolerate politicos who dominate certain sectors of our society and generally attempt, in their words, to offer a stable system of laws, the running and regulation of banks, currency and other benefits. Most of the success in politics is grounded by some form of naiveté, and like-minded misplaced trust from the politically uneducated masses and is based on broad promises to the lower classes. Most governments tend to be of the authoritarian type where orders are handed out by some central committee or a close ensemble of trusted cadres that surrounds some dictator or satrap and the citizens are expected to eagerly comply with orders. It is apparently a sorry attribute in human behavior to wish for somebody to hold tightly to your collar and guide you through the rough elements of life. Governments can grow in size and power according to several mechanisms such as protracted war, famine, regulation of commerce, imperialism, religious conflicts, conquests and other factors and resist truncation at all costs. The new recompense for unreasonable expansion in the size of government will be debt and defaults.[1] Singular events that perturb the society such as financial crises are particularly interesting in that they seem to be easily converted into dynamic wellsprings of new and bigger government. The public grovels and twists their hats in the presence of their devoted leaders while begging for relief from some problem; they get only promises. The general observation is that when a financial crisis occurs and the currency or other important  economic vector turns down then such events signal a change in political direction from left to right [or the converse] is indicated by the votes from angry and disappointed people who respond to this effect. George Bush was chased out of office and his party decimated from the 2007 financial crisis which he handled very poorly. As for the voters, “prosperity is right around the corner” they are promised. Or in our current political maelstrom the notion that “I have a plan to fix the economy” encourages change from either or both contestants.  When times turn hard the voters tend to vote for the opposition in frustration and ignorance, two attributes which characterize most of our citizens.

The voters tend to bend according to personalities and not fact-based realities of the economy; they are easily controlled and their views strongly influenced if we watch the approval rating polls after some speech. Peasant societies, in which the bottom level people in that system have much in common with our current voters, are universal in our long recorded histories and are seemingly best controlled by feudal or authoritarian systems. The necessary jobs are simple and fairly easily regulated in peasant societies and are not skill intensive. Unemployment was rarely a problem. Those who couldn’t cope merely starved and were no longer a problem. Feudal lords and overseers could control vast amounts of land, water and food with little force. The workforce was mostly immobile and tended to regenerate itself limited only by the food supply and certain diseases. The feudal system of Europe lasted more than a millennium and was very stable in terms of the resident populations being controlled by their lords and ladies. That control and stability has faded away. Some of our biggest nations, such as the US and U.K. posses an intrinsic and major peasant mentality deeply rooted in the broad voter’s psychological composition. Translated, this means that many of our voters are political morons and, as such, are valued assets in any political contest and parallel the Soviet’s notion of the ‘useful idiot.’ The ignoranti can be mounded into convenient lumps like Silly Putty.

The advent of the Industrial Revolution, which eliminated the feudal system, placed the new powers in the hands of individuals who could generate wealth from business operations in stark contrast to the earlier wealth-transfer systems that used inheritance and land control to pass along power structures, land and wealth to the next generation. Here, capitalism[2] advanced rather abruptly, as measured in social time units such as generations, and became the dominant creator of power and influence because the ability to make money transitioned from a small collection of heirs to a broad segment of the society who produced a few entrepreneurs. Thus, a new pyramid was created with entrepreneurs seated a the very top of the pyramid.[3] The first offspring, the main vector in continuing on with wealth and power of many nobles, were not able to compete in the free markets with others of lower birth in an arena where cognitive skills were worth more than mere family tartans and standards. Much of their workforce migrated to the cities in quest of money, fun and drink and left landed nobles to their own fate. Thus power in the form of money and capital displaced the previous leadership and land models and pushed the emphasis in new directions.  Clever individuals no longer need authoritarian overseers. They could now do their best without constraints.  There was, then, virtually no limit to how much wealth and power could be accumulated by those individuals with industry, essential cognitive skills and some luck. The system had changed forever.

The accumulation of wealth in the hands of a few is always an economic, military and political problem, but reasonably no more of a problem that was extant in the feudal system.  It is currently more of a problem when those few are the politicians who ostensible replaced the nobility.[4] Sometimes this balance appeared to get out of hand and certain governments needed to control business and extract taxes to spread around the profits and address some needs of society that could not be fixed in the feudal system.  After all, there was new and abundant wealth being created from capitalism. Socialism in some form or another was an attempt to control the distribution of the wealth of capitalism and make it more equitable or to pretend to provide the nonexistent ‘equality’ to all.[5]  This effort failed, as we should have expected,  and the politicians shifted the political emphasis to equal ‘outcomes’ rather than the pure ‘equality’ theorem that is rendered impossible by the natural distribution of cognitive skills. People are clearly not equal. The process of controlling the capitalists led to some fateful interactions frequently resulting in the disintegration of whole business sectors or portions of governments. It is fair to say that there must be some level of cooperation between the capitalists, usually few in number, and politicians with even fewer attributes in advanced business skills, and this interaction is both necessary and sufficient to stabilize the society. Capitalism is what drives our world economy. Attempts to stamp out capitalism have summarily failed[6] and resulted in famine and economic disasters wherever attempted. The hybrid forms of capitalism—socialism controlling businesses such as Nazism, Peronism,[7]  and Marxism in the form of modern Communism as practiced in the People’s Republic and elsewhere have produced somewhat satisfactory results as long as government does not interfere too much in the practice of commerce. China is a stunning example of how capitalism [more accurately mercantilism in their case] can produce nearly unlimited wealth and prosperity along side a totalitarian government. Cuba and North Korea are examples where the citizens have a zero chance of rising above poverty levels. We have some 190 countries on the planet and counting changes in” leadership” this sums to about some 1000 or more governments since 1900 alone and most of them do not function well if you analyze and rank the wellbeing of their citizens as a metric. Government is essentially a failure when the history is analyzed in full context and politicians are mostly the root cause of such failure. The chief complaint here is that governments will not share power with individuals for long and will attempt to confiscate wealth derived from capitalism. There is no other source. The political quest for wealth frequently destroys capitalism in local sectors. Note that capitalists vanish from the scene if their business adventures fail for any reason but politicians seem to be firmly cemented in place.  Their propensity to fail does not diminish their status or position in political parties and many times such conduct only facilitates and enhances their stature and frequently only elevates them in the eyes of their adoring chorus.  We would be intellectually closer to the bugs and rodents in cognitive terms if we failed to realize that politicians never offer themselves as the failing component of some disastrous social program or war. They have more excuses that there are grains of sand in Arabia. Thus a criminal, loser or racist might attain a higher station in the political world even though he or she may have the California[8][9][10][11][12][13] disease [Our National Leper], or be tacitly comfortable with drug abuse, financial chaos or even the progressive sodomizing of children or other perversions.  We have more to fear from the soon-to-be second hand marijuana smoke rising and falling in the Assembly in California than from guns in private hands. When corporate leaders fail they are demoted from their position by the sterile arithmetic facts stated clearly in their balance sheets; when political leaders really botch a job they are frequently praised. Corporations constantly reassemble and overcome problems and are thus self-refining and efficiency driven while political parties remain stagnant and their leaders sometimes resemble painted statuary dutifully[14] studying the ancient history of political theory.

Suffice it to say that governments and capitalists interact in complex ways and those ways frequently determine the economic fate of a given society. This topic of complex ways must sooner or later be defined in terms of the stability of the economy and more particularly in terms of financial crises. Governments cannot seem to properly balance tax revenues and spending.[15] There is apparently no potential political power in a balanced budget. A reading of two recent books: Ascent of Money[16] by Niall Ferguson’ and the newer book This Time is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart and Kenneth Rogoff show, very clearly, that the vast majority of governments cannot manage finances with any long term competence. They make enormous mistakes as outlined by 1957 book: War and Aftermath 1914-1929 by Pierre Renouvin[17] that offers us a critical but objective scrutiny of the political and military actions of various government agencies starting in the 1890s and leading up to August 1914 where most world stock markets suddenly shut down for months; this history is enlightening. By 1916 most governments had spent all they had and were wildly printing money to fund the Great War.[18] We achieved 51 million deaths out of that adventure and enough hate and discontent to set up the next world war for 31 million more to pay the ultimate price. This is government operating in full bloom and proves that diplomacy can recurrently solve no problems. Failed governments have no discernable history in the political sense.

We can talk about peace and such, but every year we find military action and economic pressures being applied in many places on this globe. Even Obama bombs villages in two places in the Middle East despite his seeming aversion to war. The ethic that should prevent wars proposed by many is absent in nearly all governments. We must finally admit that we are never going to agree on what peace and stability means on this planet and be content to dealing with lesser crises. War is expensive and  this relevant fact brings us back to the perpetual occurrences of financial crises:

We had a depression in 2007 that was, in my view[19], temporarily stalled from its downward plunge by massive interaction by the US Federal Reserve and Treasury that resulted in essentially doubling our money supply [M2] in a few weeks.  We wasted a trillion dollars on war for no apparent gain and much more in worthless social programs and the legacy of these efforts surged directly into our debt. Our government now prints unbelievable amounts of money and all of that pile slithers directly into the national debt now approaching 14 trillion dollars.  Our soaring debt will rekindle this depressionary fire in the next few years.[20] We are bankrupt.

Several things must be made clear about this attempted salvage of our economy in the 2007 Depression: [1] It was an experiment never attempted on such a massive scale and [2] much of it was guess work at the time as the politicians had scant time to analyze what was happening and [3] the aftermath of this process generated new political opportunities to expand government and control over certain markets.  We are now hopelessly mired in debt and trying to spend our way to prosperity using more debt.[21] There is no way we can grow out of 14 trillion in debt with deficits exceeding a trillion dollar every year on a GDP of only 14 trillion unless we debase our currency.  We are on the path to economic destruction.

The first thrust after any catastrophe is to put new laws into place that will ‘fix’ the problem and ‘prevent’ it from happing again. World War 1 was the Great War that would end all wars. This nostrum has never worked in the past because we continue to have such financial catastrophes and government has been in place with ostensibly their fingers on the levers of the money machines for the last 5000 years without any convincing evidence that they are doing anything other than grabbing power or guessing what to do next. They are incompetent.

A recent and noisy example of how government can ‘fix’ a problem is the nationalization of General Motors.[22] What happened was actually very simple: the unions forced concessions on job security, pay, benefits and retirement from the company over many decades that brought its labor costs up to unacceptable and noncompetitive levels and the company then lost money on every car they made on average so the corporation failed. This attracted political attention and the Obama organization decided to fix the problem by nationalizing the company. This conforms to my theory of ‘spreading around the wealth.’[23] GM was swamped by $80 billion in debt and was going bankrupt.  Our current Neo-Marxist liberal/radical government now blends fascism[24][25][26] with socialism in an attempt to redistribute the wealth and they applied this in fact as we saw in the GM and Chrysler bailouts where bond holders and stock holders were wiped out [a 70% haircut in the parlance for the bond holders] and the shrunken remains given to the unions while the management was replaced by orders from the White House.[27] The unions retained some 17% of the company [for what?? Political reciprocity??] and the US and Canada lent them 6.1 billion to get restarted. From money lying around in sprawling government project accounts, they ‘repaid’ the ‘loan’ 5 years ahead of schedule and now celebrate. They intend to hire soon but at lower wages according to Mark Reuss who heads up GM of North America. Thus, their debt was wiped out by our government. The taxpayers are stuck with 45 billion in stock and now GM wants to offer an IPO, which will most likely dilute the shares and secure a loss for the taxpayers. This is all an illusion as their labor costs remain uncompetitive against other car manufactures who make profits in this country. We have substantially subsidized a failing company for a political return and we will have to perpetually rescue this monster from time to time. Wages and benefits must come way down before GM can be successful in a free market.

This project is now viewed as a positive interaction by the government in ‘fixing’ a problem with a corporation.  The ugly fact is that they were $80 billion in debt and could never make that up by selling cars. At a 10% profit margin per car, it would have meant sales of $800 billion to get that back by selling 26,666,666 autos, about double the US market.  At a profit level of only 1%, it would have required $8 trillion in sales or nearly one car for every person in the US. This is a political farce as we expect. The thrust here was, obviously, to repay the unions for their hard work and enormous political contributions to the Obama organization.  This form of bribery is common in politics. Thus, the government spent printed money in the form of debt to secure more votes.

As the celebrations over this feat subside we now turn to how we can ‘fix’ the derivatives markets and ‘prevent the taxpayer from being stuck’ with another financial disaster. Our government can do that they say.

The immense size of the derivative market, currently running $596 trillion[28], is daunting. It turns out interest rate contracts [$145.0 trillion] and foreign exchange contracts [$18.2 trillion] constitute 90% of the contracts in this market in the US. Thus, the rest of the world handles the remaining 432.8 trillion. This is the fertile ground where kleptocracy[29] maybe stealthily conducted by governments as they jockey currency exchange rates around to avoid debt repayments.  We need to know two salient features of this market. [1] It is based on risk aversion insurance instruments where, in principle, the number of buyers and sellers is algebraically zero and that most of these contracts are not highly capital based. [2] The business proceeds only on faith unlike standard insurance contracts. None of this is important in terms of details—what is necessary to understand about this market and the potential solution to the problem is this: derivatives are fueled by leverage and leverage is the driving force behind this market just as it is in every other financial market on the planet. This leverage extends to all financial transactions, banks and everything else particularly the carry trade that has generated billions of profit on the US dollar’s low interest rate.[30] We all use leverage. Our homes and cars are leveraged. Leverage is not evil unless you are a socialist.

Leverage in banks is debt-driven[31] so the bank capital reserve limits the upper bound of how high this can go and for an 8% capital-to-debt ratio it becomes simply 1/0.08 or 12.5 max. This is peanuts compared to how the government set up securitized mortgages.  We can complain about numerous  massive government failures such as the Great Society, HUD, War on Poverty, and the phony Community Communist Reinvestment Act[32][33]that allowed the liberals to buy votes by offering ‘affordable housing’ to deadbeats and illegal aliens and abruptly ended with an asset bubble. This process is ongoing. This real estate bubble brought down Bear Stearns [34] who conjured up a leverage of 35.5 to 1 with their total debt almost equal to our GDP [13.4 trillion[35]]. Fannie Mae and Freddie Mac probably hold $3-7 trillion of bad debt known as toxic assets. Such bubbles are a natural part of our economic system and have been happening almost yearly for the past 5000 years. All it takes for a bubble to form is an unreasonable demand for some good or service that pushes prices to levels way above the asset base.  The bubble is a free market correction to the supply and demand schedules. We are doubtless bulling another bubble with the push toward alternative “green” energy machines that only add cost to an existing asset.[36]

We read fluff like this from liberal politicians on derivatives:

"Ultimately, we were not able to reach comprehensive consensus that will fill in dangerous gaps while allowing companies to safely use derivatives to hedge their risks," Reed [Sen from Rhode Island e.d.] said in a statement. "I am hopeful that there will be bipartisan support for bringing derivatives out into the open, regulating trades and ensuring that regulators have the tools to keep up with new innovations in the system."[37]-- Senators divided over rules on the derivatives market. [Emphasis is mine in all quotes.]

If we thought GM had a tough frog march back to financial security we have to stand aghast at the notion that our government can fix this derivatives market. Since there is little or no capital behind some 600 trillion in derivatives we can ask if they could be restricted to a leverage of only 100 whereby somebody would post capital of 6 trillion dollars.  According to a leading expert on international financial affairs:

“Unless this capital [for investment in this context]  is forthcoming, a clutch of countries will prove unable to roll over their debts at a bearable cost. Those that cannot print money to tide them through, either because they no longer have a national currency (Ireland, Club Med), or because they borrowed abroad (East Europe), run the biggest risk of default.”[38]--The capital well is running dry and some economies will wither. The world is running out of capital. We cannot take it for granted that the global bond markets will prove deep enough to fund the $6 trillion or so needed for the Obama fiscal package, US-European bank bail-outs, and ballooning deficits almost everywhere.”--By Ambrose Evans-Pritchard  26 Apr 2009 [Emphasis is mine in all quotes.]

Our GDP is only 14.3 and ¼ of the world’s GDP so where could we get 6 more to hold leverage down to only 100, three times higher than what was able to sink Bear Stearns at 35.5?? The world GDP is only about 4 x 14 or 30 trillion. Governments fail to acknowledge that this market is a free market with thousands or millions of willing buyers and sellers. This is a classic free market.

So, to sum up: all this smacking about leverage and risk by politicians is misplaced. Our system runs on leverage and debt because credit is money! Debt fuels growth and future profits and more growth. Risk management saves capital and protects assets and financial instruments. There is no way to back derivatives with capital and guarantee no future financial crisis any more than there is a way to prevent a run on any bank. There is no way to back up the banks other than the printing presses running full tilt as we saw in late 2007. This position is not being made clear to the voters: government cannot possible do what they claim.

Our politicians have financial and economic advisors and are not as stupid as they first appear. The only purpose of any government intervention into capitalism is to gain power and collect more taxes to build up their power base. The 2007 Depression was a grand opportunity to hike spending and bloat government and the Goldman Sachs case is a prime example. The case against Goldman is flimsy and the target of the investigation [Paulson] is not even named in any indictment. The interesting fact that Goldman’s employees gave Obama a million dollars in campaign contributions [that he will not pay back] leads us to assume that this is a crass grunt and grab intermezzo for Washington. They just want some more power and tax revenues. Goldman should just pay a fine and continue on.

Goldman is the best of the best and can best any rules or regulations that our politicians can put up. They can move their operation to Singapore or Hong Kong where there is a more receptive business environment at any time and prosper. Politicians either don’t understand leverage and how it works to expand the money supply and its function in investments or they do not. If Goldman is cut up and trashed the remnants will simply reassemble someplace else and continue on with investments as they did with the fine people at Bear Stearns that needed new jobs. The US needs to participate in capitalism because Asia is growing under this mechanism and can now provide what the US could in the past. The populist view that the ‘big guy’ is cheating the ‘little guy’ out of his or her future is so sadly misplaced that we must wonder how we ever survived FDR, LBJ and JEC.[39] The reason was capitalism and Wall Street ingenuity. This makes the politicians look like bigger fools and uglier criminals than we might expect.

Now, let’s do some rational thinking about the derivatives market. Firstly, how much did we lose when some of our investment banks went down? That was 10 trillion at best and another 5 for Europe. So, what was the net effect of the existing market? We lost 15/600? A mere 2.5% of the market!?? Now, we push further on the Stone of Reason to see what lies beneath and ask: what can our government do about this risk? Put up a few trillion here and there in capital backing? No. There is no money to do this. Missing from the equation here is the data that might show that the derivatives market actually prevented some loses fr0m the financial meltdown on Wall Street. This market exists for a reason and because so many people buy products from this market we probably err greatly to summarily condemn this financial instrument or tax it to death.

The effect of government interference in markets is always the same: higher costs and a series of distortions. We seem to want to depend upon politicians who are only radical, racist-based chum chuckers[40] or outright criminals[41] or pervert enablers[42]  for help and advice on this issue. They profess to know the solutions to this problem. What solution can they offer? Why, they can get tax money to buy more political power.

The effect of government intrusion into such markets that address the important attribute of risk aversion is that the cost of buying risk insurance will soar thus fewer municipalities and pension funds will buy fewer contracts and the risk of damage from defaults and varying exchange rates will rise. That is an unnecessary cost and is inefficient.

Thus, you will be paying incompetents to tax you to make the risks in business and the currency exchange world increase. That sounds like the old politics we know and vote for. The new radicals like Bertha Lewis of ACORN fame, noisy propagandists like Joe Klein of Time[43], Andy Stern of the vicious street-gang and head bashing SEIU union and their Communist allies and other chum chuckers are trolling for money and power.  They try to play on the propagandist’s favorite themes: fear, corporate greed and racism. They attempt to show that the Tea Party people are Nazi thugs who want to round people up people of color and send them to internment camps and other crass lies.[44] And, notice that Democrats like Joe Biden, Hillary Clinton, and Harry Reid sit idly by and make no comments or corrections to these lies and their preposterous statements. These senators are just slugs stuck in the cracks of the Washington leftist movement. Reid has just sacrificed himself for the greater good of Marxian statism.

All these people want is the control over your money and future and they will get if we don’t chuck these parasites out in November.  All they have is your money. And, you don’t have enough to satisfy the far left. They will attempt to grab it all if they can. Lenin is still their patron saint.

rycK [a 5^th generation Californian in exile]