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.

In the transcript above. Mr. Kwak points out:

"They have assets equivalent to 60 percent of our gross national product. And to put this in perspective, in the mid-1990s, these six banks or their predecessors, since there have been a lot of mergers, had less than 20 percent. Their assets were less than 20 percent of the gross national product."

In the post industrial paradigm Wall Street 'is' the economy. Wall Street may kindly remind us of this fact by simply doing nothing as the market falls.

This system needs to be dismantled as carefully as one would defuse live ordnance. If this is done precipitously this bomb is going to hurt many when it explodes.

The system as it stands is doomed but how it unravels and on what political party's watch it occurs and therefore upon whom the blame will fall will be attempted to be controlled on both sides of the aisle.

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.

Now - these "investors" are not simply living in one of their primary residences rent-free - they are also collecting rent on the other homes that they stopped making their mortgage payments on last week, month, or last year! This is the reality here in Las Vegas; it is the norm.

When you looker deeper into the economic ramifications of this ongoing housing mess as it relates to consumer spending, you begin to see ... the Deadbeats are so happy to get "free" money on their many homes, they offer attractive deals to tenants. A property that might normally rent for - say - $1,500/mo, is being offered for $1,000/mo. Now that puts extra money in the tenants' pockets to spend on the economy as well.

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.

There is more on this dynamic in my book Survival+ (Survival+ The Primer is the 130-page abridged version).

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.

Some finance/economics books of enduring interest:

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown

The Misbehavior of Markets

The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else

End of the Line: The Rise and Coming Fall of the Global Corporation

Irrational Exuberance

Bait And Switch: The (Futile) Pursuit of the American Dream

Nickel and Dimed: On (Not) Getting By in America,

Reminiscences of a Stock Operator

Confessions of an Economic Hit Man

When Genius Failed: The Rise and Fall of Long-Term Capital Management

Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships

The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities

Fiasco: The Inside Story of a Wall Street Trader

The Paradox of Plenty: Hunger in a Bountiful World

The Shock Doctrine: The Rise of Disaster Capitalism

Greed, Fraud & Ignorance: A Subprime Insider's Look at the Mortgage Collapse

The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century

The Cultural Contradictions of Capitalism

The Dollar Crisis: Causes, Consequences, Cures

Tragedy & Hope: A History of the World in Our Time

How The World Really Works

The Great Wave: Price Revolutions and the Rhythm of History

World on Fire: How Exporting Free Market Democracy Breeds Ethnic Hatred and Global Instability

Web of Debt

Fooled by Randomness

The Richest Man in Babylon

While America Aged: the Next Financial Crisis

Financial Armageddon: Protecting Your Future from Four Impending Catastrophes

The Road to Serfdom

When Giants Fall: An Economic Roadmap for the End of the American Era

Globalization and Its Discontents Joseph Stiglitz

This Land Is Their Land: Reports from a Divided Nation

Who Rules America? Challenges to Corporate and Class Dominance

Capitalism, Socialism, and Democracy

The Rise and Fall of the Great Powers

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