The Big Squeeze: Predicting the Effects of Savings Extortion and Abuse of the Middle Class   (January 27, 2011)

I am pleased to present a uniquely clear-sighted three-part series by frequent contributor Zeus Y. on the consequences of our corrupt financial-political Status Quo being exploited by a rapacious Financial Elite.

Part I: Oligarchy Becomes Anarchy Introduction

By now it should be clear even to the most optimistic observer that the global financial system has given itself over to systemic lawlessness. Once international banks were effectively allowed to print their own money in an unregulated “shadow” system and have it redeemed full value by national taxpayers, the charade was over. The only thing left, at this point, given the full cooperation of governments and an eerie world-wide non-enforcement of law, is for banks, like a cancer to savage and consume every concrete store of non-counterfeit productivity and asset value.

Not only have governments from China to the United States committed themselves to a chess game meant to eke out relative advantages on a sinking ship, but they have positively rewarded those who are speeding the collapse. A simple, cannibalistic economic rule now persists until a new system emerges: Economic manipulation, destruction, and extortion are simply more profitable, far more profitable, than good old fashion value creation. Disaster capitalism will be pursued full force.

Whether a country is communist or capitalist, authoritarian or marginally democratic, no longer matters. Citizens globally have been made to be the pawns and patsies of a universal financial Ponzi scheme that can only end in carnage. Who cares if this insures debt peonage for the world and likely mass austerity, suffering, and shortages. There’s a buck to be made! Who cares if my own children will be choking on the garbage I spewed into the financial air and water system. I’m rich!

When morality, reason, and sovereignty collapse together, we are left with outright anarchy, in everything but name. This is a reality so uncomfortable that hundreds of trillions dollars more of citizen retirement savings and other assets are likely to be tragically liquidated trying to regain stability and finance the “lean times” in the hopes of the promised upturn.

Act I: Oligarchy Becomes Anarchy

This anarchy and its suicidal impulse was brought to a head, but by no means started with, the collapse of Lehman Brothers and Bear Stearns. These crises did however confirm that the gatekeepers had become one and the same with the barbarians at the gate.

The same story kept repeating itself and was easily predicted by the news accounts of single “rogue” traders damaging storied banks in England, France, and other countries in the past decades: The techno-nouveau riche found vulnerabilities in the “civilized” corruption and racketeering of the establishment banks. These vulnerabilities expanded and softened as banks adopted unfettered gambling as a way to produce huge profits. When gambling didn’t pay, scapegoats were identified and jailed, the sins of the system were larded on those individuals, and nothing changed systemically.

Later, young guns armed with razor wits and high-powered computers saw that they could guarantee for themselves multi-billion dollar profits by not only betting on collapse but aiding and abetting (and even sometimes directly causing) a crash of the very banks they worked for or dealt with. Supported by a profit-by-any-means mentality, they simply took market manipulation to the next logical level, and a Pandora’s box of financial ills was loosed on to the world.

Consider Lehman Brothers. As detailed in Danny Schechter’s movie Plunder, Lehman Brothers was brought down by a spate of naked short selling simultaneously coupled with exotic very short-term anonymous short positions worth hundreds of millions of dollars. One can conclude with high probability given the established dynamic that those who engineered this and profited enormously from it were former employees or colleagues of said employees who migrated to hedge funds.

These players were insider enough to be privy to accounting tricks and frauds, the Repo 105 scams and so forth, being perpetrated by Lehman Brothers. They knew that Lehman Brothers was hiding gargantuan losses and skating on an illusory margin, so they devised a way to push them off the cliff by naked short selling and entrepreneurially betting on their own success. Why not teach the old farts a thing or two about their own game and laugh all the way to the proverbial bank.

With the repeal of Glass-Steagall and the collapse of the walls between conventional banking, investment banking, investment rating systems, and government regulation, the financier class had completed its nefarious project, a fungible two-tiered economic system “unhinging” finances from concrete reality, productivity, and value creation.

On one hand, a shadow banking system created hundreds of trillions of dollars of counterfeit wealth through the construction and leveraging of derivatives and mark-to-model assets. This was sold and exchanged for real assets, i.e. businesses and real estate. In addition trillions of dollars more in real wealth were siphoned off in transaction fees, bonuses, and profit taking. Financial, criminal, and civil liabilities were, and are still being, avoided through regulatory and governmental capture. On the other hand, infiltrated real value assets are being simply taken over: foreclosed upon, reassigned, and used as guarantees for this colossal fraud. Shadow liabilities are being hidden or shifted on to taxpayers’ bills.

Unsurprisingly, hedge funds like Magnetar saw an opportunity to profit from this inequality under the law by lobbying banks to construct highly rated junk investment portfolios and then betting against those portfolios many times over. So you have the young amoral renegade side of the elite sparring with the crooked establishment side in what amounts to them as one big galactic video game. When they lose, they always have another life. When they win, they take home the money and the title. Someone else pays.

It has to be noted that there is no personal stake in this game. Naked short selling, for instance, is phantom selling, selling shares you don’t actually own. Phantom buying, which is what is currently propping up the stock market, is using Fed-funneled money to buy up your own stocks. Risk has been removed from the system. There is only liability, profit, and power. Those of power and size taking great “risks” can leverage those risks into an extortion demand: “take our liabilities off our books, allow us to valuate them for as much as we want, and/or hide them for as long as we like or we’ll blow up the system.” Governments, with the exception of Iceland, said, “Please, financial terrorist, don’t do that. We’ll do anything you ask.”

If free market capitalism existed and worked these banks would have been allowed to collapse, their losses eaten by bond and stock holders, and civil and criminal charges filed against institutions and individuals. However, to do so would have exposed the rot and common criminality in the interlinked global system. Accountability would have indicted the people and connections behind the curtain, so the entire anarchic enterprise has to be covered up and its costs shifted to taxpayers, in a vicious downward cycle, which only accelerates rapaciousness and irrational incentives and punishes savings and responsibility.

Savings interest rates have been near zero for years, lower than inflation. Unemployment is high and people are liquidating their assets to pay for their costs of living. In addition, their future earnings and children’s savings being charged in advance for the multi-trillion dollar malfeasance of banks. Pensions are being looted and/or liquidated along with other real assets.

The major U.S. banks, on the other hand, reported within quarters of the crash they created, that they were able to go through an entire quarter without a single losing trading day. That is pretty easy to do when so-called toxic assets are offloaded to the Federal Reserve for 100 cents on the dollar and when banks receive hundreds of billions of 0% interest rate money and turn around and buy Treasury bonds with 3% interest, “paying” taxpayers back with interest earned on the debt these same banks caused.

No violations are too egregious or too pervasive for the Department of Justice or the SEC to ignore, no infraction too obvious or ridiculous to be covered up. These offices weakly go after the penny ante “bad apples” and keep a bubble system propped up and hopped up on its own version of financial adrenalin. A short laundry list of the most tragicomic examples:

Fraudclosure: hundreds of thousands of mortgages being processed by robosigners, recorded and shifted around electronically, and their paper trails neglected or destroyed, contrary to even the most basic commerce and property laws. Not a single significant prosecution yet.

Exchanges selling shares in precious metals without even having close to the reserves in physical metal to back up and JP Morgan’s “alleged”

Mortgage insurers simply not paying their obligations.

Multiple insurance on the same properties paid out in multipliers above the actual value of the property.

Verified cases of houses being "foreclosed" upon that were already bought with cash.

Same property sold to different owners.  

Extorted “marked to model” FASB standards fraud.

With no effective reserve requirements, leverage limits, or accounting standards, institutions with power can simply make up any amount they choose. The above examples show how rampantly institutional entitlement has evolved to claim and sell any property they choose, and valuate and sell any instrument they conjure up.

Power is all about access, and evidence shows where the current power resides. National governments in full collusion and cooperation with gigantic international financial corporations, have opened the floodgates of access to the “little people’s” wealth through bailouts, Fed policy, and quantitative easing, and clanged shut the castle door of the financial elite by allowing them to establish the value of thei r own assets and to concoct, rate, and sell almost any financial asset or instrument with no accountability, transparency, or enforcement.

By Zeus Yiamouyiannis, Ph.D., copyright January, 2011

Tomorrow: Part II: Abused Fundamentals and Fake Markets: How They Play Out

Other recent essays by Zeus on

When The Market Has Cancer (June 19, 2010)

Unhinged: When Concrete Reality No Longer Matters to the Market (and What to Do About It) (May 15, 2010)

How the Credit Default Swap Scam Works (October 13, 2008)

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