New blogs

Leherensuge was replaced in October 2010 by two new blogs: For what they were... we are and For what we are... they will be. Check them out.

Friday, April 23, 2010

Financial madness: how they rob us in daylight and how things will only get worse

There is an interesting spat of economic articles at
Global Research these days. Really too much for me to fully understand and analyze but indeed enough to get me on my toes because no one of them is the least hopeful.

The Goldman Sachs ripoff

Maybe the most visible to the usual media reader/watcher/listener is the new Goldman Sachs scandal, analyzed by Patrick O'Connor and Barry Grey at The Goldman Sachs Indictment. They blame the Zionist corporation of precipitating the collapse of the housing bubble in their benefit and they say that GS is going to get out of this one with just a fine, a drop on the ocean of what they robbed, largely because the Obama administration is largely made up with their men. Only one real person is indicted, a 31 years old junior trader, while the infamous GS CEO, Mr. Blankfein, nor their customer, Paulson Inc., are named in the cause.

Their actions—exhibiting an insatiable and manic drive for personal enrichment—have produced devastating consequences for tens of millions of ordinary people, not only in the United States, but around the world. Millions have lost their jobs, their homes and their life savings. Untold numbers of young people have lost their chance for a college education. Untold numbers of old people have been driven into poverty and an early death.
And Reagan, the prophet of late Capitalism, said that "greed is good"... What do you think? Good for whom?

This same story is also dealt with in another article by Robert Scheer. He begins with rough words:

The story of the financial debacle will end the way it began, with the super-hustlers from Goldman Sachs at the center of the action and profiting wildly. Never in U.S. history has one company wielded such destructive power over our political economy, irrespective of whether a Republican or a Democrat happened to be president.

At least the robber barons of old built railroads and steel mills, whereas Goldman Sachs makes its money placing bets on people losing their homes. On Tuesday, Goldman announced a 91 percent jump in profit to $3.46 billion for the quarter, while the dreams of millions of families continue to be foreclosed and unemployment hovers at 10 percent because of a crisis that that very company did much to cause.

And ends with even more discouraging words:

It is insulting to the spirit of populist revolt, which has been fundamental to the success of America’s grand experiment in democracy, that a fat-cat Republican-funded tea party revolt is now the vessel of popular anti-Wall Street discontent. That vessel ought to be our president, who campaigned as a champion of the common people.
Certainly Machiavelli himself would scold Obama badly. His ideal prince would cut the GS head quickly before more damage is made and also to score in popular support, which for Machiavelli is a critical asset for any leader worth that name (and who wants to stay as leader).


I borrowed this subtitle from Mafianomics by Michael Werbowski. You thought the GS ripoff is bad enough? Well, I'm really sad to inform you that it is only the tip of the proverbial iceberg: the system is rotten to the core.

But Werbowski is kind of soft and imprecise: he complains about how bad is today's capitalist speculation and how immoral is profit for the sake of it, regardless of the pain it causes to society. But for a Red like myself this sounds a bit like idealizing some sort of cavalier feudalism or benevolent slavery and complaining that reality never meets the ideal. Capitalism is that way: rotten scam and organized robbery from the beginning. You should know better.

More interesting and detailed is the article by Ellen Brown titled Computerized front-running and financial fraud. Here we are placed in front of the daily reality of the mafioso scam.

It was initially just a patented program to take on the role of the specialist (the specialized brokers that are the pillars of the stock market) and make it more efficient and faultless. But, after the crash, the patent had to be sold and ended up in the "wrong hands": a private investment corporation. The program was hence altered to do exactly the opposite of what it was supposed to do: to take advantage of stock market weaknesses. This would have been illegal in EU but seems to be legal in the USA. Also other 132 such "improvements" have been patented after the original one by Keiser.

So nowadays there is a whole array of broker companies taking advantage, thanks to supercomputers, of mere instants in data transmission and processing to make their own speculative bids and ripoff everybody else, who do not have such means.

The details are even more complex and I'd say interesting and, of course, Goldman Sachs is denounced as the ring leader of this mafia, but you better read the original article to get the whole picture.

The new financial bubble.

Another rather worrisome piece is the article by Washington's Blog titled Are interest rate derivatives a ticking time bomb? Here we can read about one of the methods of institutional ripoff by well organized financial mafias and what is seemingly another bubble that will soon blow out on our faces.

What are interest rate derivatives? I could not get a clear idea, sincerely. It is a complex financial instrument designed to hedge financial risks. But, as the article states clearly, people tend to overestimate their ability to understand complex financial instruments. So I won't be so arrogant when even the bosses of the credit default swap scandal had no idea what they were dealing with. I'll better admit my own ignorance.

But whatever they are it is important to understand that they are based on notional values (i.e. the money on which they are based never really changes hands: it's essentially an accountancy tool) and that's the only way the derivatives' market is ten times the size of the global GDP. In other words, while the real economy (more or less, as GDP has some flaws too) amounts to 60-70 trillion USD, the derivatives' market is estimated in 600 trillion.

If that's not a bubble you tell me what is it.

The authors admit that, in theory, these complex financial instruments are designed to keep the balance of the scales but they also warn that theory and practice may not go hand by hand. And when George Soros himself warns against them, then it really gets worrisome:

I must state at the outset that I am in fundamental disagreement with the prevailing wisdom. The generally accepted theory is that financial markets tend toward equilibrium and, on the whole, discount the future correctly. I operate using a different theory, according to which financial markets cannot possibly discount the future correctly because they do not merely discount the future; they help to shape it. In certain circumstances, financial markets can affect the so-called fundamentals which they are supposed to reflect. When that happens, markets enter into a state of dynamic disequilibrium and behave quite differently from what would be considered normal by the theory of efficient markets. Such boom/bust sequences do not arise very often, but when they do they can be very disruptive, exactly because they affect the fundamentals of the economy…

The trouble with derivative instruments is that those who issue them usually protect themselves against losses by engaging in so-called delta, or dynamic, hedging. Dynamic hedging means, in effect, that if the market moves against the issuer, the issuer is forced to move in the same direction as the market, and thereby amplify the initial price disturbance. As long as price changes are continuous, no great harm is done, except perhaps to create higher volatility, which in turn increases the demand for derivatives instruments. But if there is an overwhelming amount of dynamic hedging done in the same direction, price movements may become discontinuous. This raises the specter of financial dislocation. Those who need to engage in dynamic hedging, but cannot execute their orders, may suffer catastrophic losses.

This is what happened in the stock market crash of 1987. (...)

There is much more but you better read it yourself.

1 comment:

ren said...

Continue your good work on economic critique of the capitalist system, my friend Maju. I enjoy reading them!