How We Get Ahead Now: Gaming the System (April 20, 2010)
The status quo not just incentivizes gaming the system, it has made it the primary way to get ahead in today's economy.
Gaming the system is not just encouraged--it has become the foundation of the U.S. economy. Without it, the status quo will implode. Goldman Sachs gamed the system to package guaranteed-to-default mortgages and present them to buyers as AAA-rated "safe" investments yielding a high return, while selling a hedge fund derivatives which were a bet against the mortgages. The hedge fund helped GS select the most likely to default mortgage tranches to raise the probability that their bet (going short) against the mortgages would rise to essentially guaranteed profitability.
This is the norm on wall Street and has been since at least the late 1990s, as revealed in the important book Fiasco: The Inside Story of a Wall Street Trader.
But it's not just Wall Street which the status quo rewards for gaming the system: the housing/credit bubble offered average Americans ample opportunities to game the system--a practice they continue perfecting as the Federal government desperately attempts to reinflate the housing bubble with wave after wave of trillion-dollar bailouts, mortgage guarantees and tax credits.
Let's start with Wall Street. Frequent contributor Harun I. referenced this Transcript of Bill Moyers Journal with Simon Johnson and James Kwak, authors of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, in a note on the status quo's extreme dependence on Goldman Sach's trading volume and thus its extreme vulnerability to collapse:
I see the sharks are circling (Goldman Sachs). But along the lines of "be care what you wish for," this process needs to proceed carefully, or, the individual investor needs to take measures to protect against a sustained market decline should the technical signs arise. Why? At one time GS comprised 70% of the volume on the NYSE. Should that decline sharply, if the big six banks merely stood aside and refused to buy, the market would likely free fall.
Thank you, Harun. This leads to a staggering conclusion: were the gaming to cease, the stock market would collapse, as it now depends on dark pools, high-frequency trading, unregulated derivatives, and a host of other "gaming the system" tricks. Without the tricks to support it, the U.S. market will fall like a rotten plum.
Before you label this hyperbole, note that two sectors, Financial and Energy, are expected to account for a massive 53.9% of all incremental S&P 500 earnings between 2009 and 2011 even though they account for just 25.0% of the total market capitalization of the S&P 500.
By comparison, the Consumer Discretionary and Retail sectors will contribute just 5.5% of incremental earnings from 2009 to 2011: Zacks S&P 500 Earnings Analysis.
Were Wall Street forced to cease its gaming of the system via misrepresentation, malfeasance, fraud, embezzlement and failure to disclose material facts, then profitability would collapse.
In essence, fraud, embezzlement and corruption of the political process are the only profitable businesses left on Wall Street.
The same can be said of the housing market: without gaming the system, the housing market would go into a free-fall. This holds true not just for the mortgage lenders and Wall Street but also for the American public, many of whom are happily complicit in the fraud perpetrated by the mortgage packagers and lenders, as described by southern Nevada correspondent B.K.:
During the boom years, many (in fact, most) people purchased more than one home. In order to get around the "primary resident" issue (a.k.a. "wink and a nod" clause), contracts were drawn-up under the name of a sister, father, family dog, whatever.
Thank you, B.K. So consumer spending is being goosed to some degree by the fraud of those free-riding the "mortgage crisis" while the banks getting stiffed by those reneging on liar loans get made whole by the Federal government via guarantees, bailouts, zero-interest loans, and all the rest of the socialization of risk and privatization of profits engineered by the Federal Reserve, the Treasury, and Congress (via the bank bailouts and the socialization of "government-sponsored enterprises" (GSEs) Freddie Mac and Fannie Mae).
Stop the gaming, fraud and lying, and you gut the U.S. economy, which has grown dangerously dependent on Wall Street and housing for its "growth" and stability. Cripple the gaming which produces the outsized profits, and you cripple both Wall Street and housing, which would then eviscerate the stock market and the sick-unto-death U.S. economy.
As Harun observed, defusing the incentives to game the system is literally like defusing a very large, very volatile, very unstable weapon of mass destruction.
I say it can't be done. The gaming mentality is now so deeply woven into the U.S. economy and culture that it is akin to a parasite so interconnected with its host that killing the parasite will also kill the host.
This is how empires dwindle, grow vulnerable, and then collapse: the productive are taxed while the wealthy game their way out of paying their equitable share, while the status quo (the State/Plutocracy partnership) showers bread and circuses on the unproductive to buy their silence and complicity as the Oligarchy/Plutocracy loots and ransacks what is left of a productive economy and culture.
Late note: It appears I am not alone in recognizing that lies, fraud and misinformation
are the heart of the U.S. economy: from today's Wall Street Journal:
An Economy of Liars
When government and business collude, it's called crony capitalism. Expect more of
this from the financial reforms contemplated in Washington.
Bait And Switch: The (Futile) Pursuit of the American Dream
Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships
Globalization and Its Discontents Joseph Stiglitz
The Rise and Fall of the Great Powers
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