The financial crisis made clear to all (except bankers of course)

Hat tip to a Mr Lynn Jones, recently of General Motors, for this wonderfully lucid explanation of the financial crisis.

Seanie is the proprietor of a bar in Dublin .

In order to increase sales, he decides to allow his
loyal customers - most of whom are unemployed
alcoholics - to drink now but pay later. He keeps
track of the drinks consumed on a ledger (thereby
granting the customers loans).

Word gets around and as a result increasing numbers of
customers flood into Seanie’s bar. Taking advantage of
his customers’ freedom from immediate payment
constraints, Seanie increases his prices for wine and
beer, the most-consumed beverages. His sales volume
increases massively.

A young and dynamic customer service consultant at the
local bank (Angola Irish Bank) recognizes these
customer debts as valuable future assets and increases
Seanie’s borrowing limit. He sees no reason for undue
concern since he has the debts of the alcoholics as
collateral.

At the bank’s corporate headquarters, expert bankers
transform these customer assets into DRINKBONDS,
ALKBONDS and PUKEBONDS. These securities are then
traded on markets worldwide. No one really understands
what these abbreviations mean and how the securities
are guaranteed. Nevertheless, as their prices
continuously climb, the securities become top-selling
items.

One day, although the prices are still climbing, a
risk manager (subsequently of course fired due to his
negativity), of the bank decides that slowly the time
has come to demand payment of the debts incurred by
the drinkers at Seanie’s bar.

However they cannot pay back the debts. Seanie cannot
fulfill his loan obligations and claims bankruptcy.
DRINKBOND and ALKBOND drop in price by 99 %. PUKEBOND
performs better, stabilizing in price after dropping
by 95 %.

The suppliers of Seanie’s bar, having granted him
generous payment due dates and having invested in the
securities are faced with a new situation. His wine
supplier claims bankruptcy, his beer supplier is taken
over by a competitor.

The bank is saved by the Government following dramatic
round-the-clock consultations by leaders from the
governing political parties. The funds required for
this purpose are obtained by a tax levied on the
non-drinkers.

RL:Brilliant. The nub (or one of the nubs) is here "Nevertheless, as their prices continuously climb, the securities become top-selling items."

The economist Hyman Minsky classified derivatives into hedge, futures and Ponzi. It is this Ponzi aspect that has created a "value" for these instruments which is an order of magnitude greater than the world's GDP. When they come home to roost, they will break the banks. Governments need to identify and neutralise these Ponzi derivatives, perhaps by making them the responsibility of the CEOs who negligently bought into them. This would be unfortunate for the CEOs because they would go bankrupt despite their bonuses and pensions, but hey, you cannot make an omelette without breaking eggs.

...And for those who remain confused despite this simplified explanation, here is a visual pictorialisation of the whole process of the bank rescue...

Bank Nationalisation? - purge them of Toxins first

Just a word on nationalisation of the banks.

It looks like a no-brainer. We own huge chunks of them already, we're going to buy more, the banksters are sucking their thumbs and playing with their bonuses instead of lending money, so why not go the whole hog and nationalise the damn things, so they are under our control?

Before we do, we need to know what it is we are nationalising.

RBS bought ABN Amro, then found ABN Amro was a corpse riddled with wriggling maggots of derivative debt. Lloyds bought HBOS, a child bride after which Lloyds had lusted for many months, only to discover that it had bought a festering heap of billions of pounds worth of derivative debt.

Do we, the taxpayer, want to be the next in line to find this reeking heap of putridity in our beds? I think you will find the answer to that question is no.

Do we on the other hand, want to leave it all to market forces, and let the financial system die the death? It is tempting to say yes to that, but when you consider the Depression of the 1930s and its knock on effects, it is clear that the only people who would say yes are the free market fundamentalists, who are blind to all external reality, because their gaze is fixed only on the shrine of their free market ideology.

So, no, anyone who does not want a Depression does not want to see the banking system crash big time.

Should we be insuring the banking system? Again, no, because of the ticking time bomb of toxic assets that they contain. We stand to lose every penny of the - what was it? £250 billion - that Darling has put behind the banks to insure them against losses.

So, do not buy banks, do not leave them to fail, do not insure them.

What then is to be done?

The answer is that the Toxic Assets must be controlled, accounted for, and neutralised. Their poison must be extracted from the body of the banking system.

This is not going to be easy, but it is going to be a damn sight easier than just letting them run to maturity.

These are the steps that can be taken:

1. Pass a law to require all derivatives holdings to be registered at a central agency.
2. Examine all holdings for signs of fraud (using the characteristics of the Madoff and Stanford frauds as indicators)
3. Examine all holdings for signs of Ponzi schemes that only work if the market is expanding. Invalidate all Ponzi debts
   
4. Find how much of the Toxics can legally be ascribed to negligent decisions of the chief executives of companies. Make said CEOs responsible for their mistakes, by bringing the debts back to the executives who decided to buy them. Said executives go bankrupt, and the toxic assets are neutralised by their bankruptcy.
5. If you do not like this plan, think up a better way of neutralising the Toxic Assets, bearing in mind that their "value" is about 10 times greater than the gloobal GDP of the whole planet.

So if you want to nationalise the banks, go ahead by all means, but just make sure you are not nationalising an astronomical debt.

Fred Goodwin should accept responsibility for his decisions

Clearly, "Sir" Fred Goodwin should be parted from his £650,000 pension, because he was personally responsible for the foolish acquisitions policy of RBS while he was CEO.

However, Government should go much further. The overriding aim of policy should be to build a fence between good and bad money. Good money is the real deposits made by savers into banks for safekeeping, and bad money is the manic, irrational, notional, speculative, casino type "financial instruments", the CDOs, CDSs, and Minsky's Ponzi-type derivatives. Bad money is what Warren Buffet termed "financial instruments of mass destruction", whose total "value" is counted at 10 times the GDP of the whole world economy. They are hovering on the financial horizon, and the banksters are unable to put a market value on them. Someday, these malign financial birds of prey will come home to roost, wrecking the institutions that own them, turning the recession into a 10 year global depression.

These derivatives must be neutralised.

Minsky characterised them as Ponzi schemes, schemes that make money while the system is growing, but which become valueless when growth in the financial markets grinds to a halt. Like now.

When Ponzi schemes collapse, the suckers who bought into them lose everything, except what they can scrape back from the estate of the scheme originator, if they are lucky enough to catch him.

Now. Bonuses are paid to top bankers for their performance. They exist to motivate, and to reward success. They are sacraments of the holy ritual of wealth creation. They symbolise the cult of the individual.

So. Just as the bankers were paid handsome bonuses in recognition of their personal entrepreneurial skills and brilliant financial judgment, now that their plans have gone tits up, they should accept the converse, accept the consequences of their personal misjudgments.

What I am proposing is that the responsibility for the fancy instruments that they bough into should come back to the individuals. Anyone who put his (or her, in the case of Nicola Horlick) signature on the purchase agreement of a toxic asset should now accept personal responsibility for that asset. They should own it.

The great likelihood is that they will go bankrupt. This is tough on them, but capitalism is tough, as the Tories never tired of telling the unemployed back in the dark days of Thatcherism. They will go bankrupt, along with the 30,000 or so ordinary people who go bankrupt every year. They will of course qualify for SS benefits, along the lines sketched out by Wanda.

Naturally, there will be a court battle. The banksters will claim that they signed on behalf of their institution, and that the negative values of the toxic assets should therefore go back to the banks, and thence to the taxpayer. Lawyers acting on behalf of us, the people, will argue that their bonuses show that they were acting on their own behalf. The judges will have to decide, and it will to all the way to the very highest courts. We may win, we may lose. We must try, because if/when these toxic assets come home to the banks, it is going to bankrupt the world economy, and that will certainly end in global tears.

It is therefore right that the few ubermensch, the ruthless free market fundamentalists like Fred "The shred" Goodwin, who referred to some of his acquisitions as "mercy killings" should bear their fate philosophically.

I will ask m'learned friend what he thinks.

Meanwhile, here is an alternative, slightly less radical, approach to this problem.

Ed Balls says crisis is the worst for 100 years

Ed "Private Frazer" Balls says the economic crisis is the worst for 100 years: "Children's and Schools Secretary Ed Balls has warned that the current economic downturn will be worse than the Great Depression, reports said.

Balls, a close ally of Prime Minister Gordon Brown, told a conference at the weekend that the crisis was the most serious global recession for 'over 100 years,' according to the Yorkshire Post .

At the gathering in Yorkshire, he also raised fears of a resurgence in far-right groups as there was during the Great Depression."

This deliberate statement, as part of a speech, confirms Gordon brown's Freudian slip last week, and indicates that the Government is aware of the true extent to which the banking system is...I am searching for a non-sexual expression here...ruined by the Ponzi credit derivatives.

It looks as if the banks have gone the way of the Norwegian Blue To clear up any doubt, the banking system has shuffled off its mortal coil and joined the choir invisible. Its metabolic processes are history. It is demised. The banks' account sheets make Mr Micawber look like Croesus. They are Black Hole Singularity. They are tohu-bohu, without form and void.

To summarise: the financial system is built on debt. Banks create money for lenders out of nothing, restrained only by a multiple of the capital that they actually hold, a typical ratio being 65:1, meaning that they were lending out £65million for every million that they held. The derivatives bubble has inflated this debt bubble until the derivatives market is "valued" at ten times the world's GDP. Part, if not all, of the derivatives market is a Ponzi scheme, a pyramid selling scam which is dependent on infinite growth to sustain itself. In shor the banksters have been taken for a ride with all our money. When Ponzi schemes break, there is no compensation for the marks; they lose all, and are lucky if they get the satisfaction of seeing the scammer locked up.

If this analysis is correct, we are in the coming months going to witness the evaporation of our money into cyberspace. I believe this is why Ed Balls, consciously, and Gordon, subconsciously, are letting us know that a Depression of ten or more years looms.

If our money does go up in a great financial bush fire, we are going to need a plan to rectify the situation. This is where James Robertson's G20 Campaign offers a new beginning.

The other aspect of the problem is that Ed Balls was warning of a right wing backlash, as in the 1930s. This is a real threat, and he did well to warn of it.

Right wing politics is a hot air balloon, with two burners: unemployment and housing scarcity. As long as there are white people with no jobs and no homes, the BNP can point to immigrants in jobs and homes and make them scapegoats for the people's anger. The classic response of the Left, to march and counter-march against them, is a hopeless tactic, creating a game of cowboys and indians, or worse, Israelis and Palestinians. The real political solution to the rise of the far right is for Government to make sure that there are sufficient houses and jobs in Britain for all. The Green Party's Right to Rent policy is a start for housing; and the Green New Deal is the tool for creating good work and energy security. The GND+ is an even better tool, that creates even more jobs, but the Handbrake Tendency has seen to it that we cannot vote on that for another 18 months (sigh).

What is the Green Party's policy on the financial crisis? Well, we will be able to vote on a few measures, including a short stab at Monetary Reform, at our conference in Blackpool Winter Gardens, 20th-23rd March. Until then, we have no policy.

This, to my mind, is absurd. Our Manifesto for a Sustainable Society is a great democratic venture in political policy, but it is not holy Writ, and it does not cover political developments that happen after policy is decided at Conference. Clearly, we need a day to day ability to respond to the rapidly changing political circumstances. We do have a Political Committee appointed by GPEX and accountable to them, but its processes and decisions are opaque.
We need to formalise this process, giving Political Committee power to make decisions that go beyond what is written in the MfSS, and report back to Conference. However, it will take two years to get this through, if ever...

So there we have it. We just need Monetary Reform, Right to Rent, GND+, and a Green Party leadership that is empowered to think on its political feet. La lutte continua.

Davos 2009: Gordon Brown calls for global co-operation to beat economic slump - Telegraph

Davos 2009: Gordon Brown calls for global co-operation to beat economic slump : "This is the first financial crisis of the global age. And there is no clear map that has been set out from past experience to deal with it."

What does he mean? We have had recessions before, recessions which have been international in scope. Globalisation means that this recession is more global than in history, but is this all he means, or is Gordon betraying an unspoken worry that the present disease in the global banking system that goes further than this? A disease that has never been seen before?

If so, he is talking about the derivatives which have multiplied the amount of debt in the financial system by orders of magnitude. Nobody, not even George Soros, understands the damn things, because they are absurd, and it is impossible to determine a value for them. They are a huge known unknown infesting the accounts of any banks that have dabbled in investment banking. The derivatives market, or at least part of it, is a huge Ponzi scheme, which flourished when the market was growing, and now the market is collapsing, they are collapsing in on it, like a jerry-built house filled with rotting flesh collapsing in an earth tremor onto the owner and his family. Our political and economic masters who sang the praises of Globalization (US sp.) have ended up waltzing the world economy into the biggest confidence trick in history.

Maybe the financial system will recover in due course. Or maybe the derivatives will get into the financial bloodstream and cause financial septicaemia. Gangrene may set in. Amputations may result.

Maybe we will have to radically redesign the financial system from scratch.

Get real, Gordon

So we the UK taxpayers are now providing an insurance policy for the banksters. Insurance usually covers events subsequent to the payment of the first premium, but this is different. We are going to be covering risks that were created long before we began to insure them.

Damned if we do and damned if we don't. Do nothing, and banks begin to crash, one after the other. People lose their savings, people lose confidence, good banks haemorrhage cash that is withdrawn to be stashed under the king size. Try to prevent this, and the taxpayers of the future are burdened with a huge National Debt.

Gordon stands firm, a seemingly unwobbly rock of determination in the middle of a roaring torrent of financial uncertainty.

The ultimate worry is that the UK could go bankrupt. He is trying to provide guarantees against a nightmare of debt. The debt arises from stupid bank lending on the housing bubble, a debt that has been multiplied many times over by the financial derivatives market. The total value of the derivatives market was estimated last year at $60 trillion, 13 times greater than the world's capital base, and 10 times greater than the world's GDP. Even Flash Gordon cannot hold that kind of pressure in check. It is now down to a mere $50 trillion and falling (though I read in the Guardian Special Report Friday 30 Jan that they are worth $290 trillion. 50 trillion, 290 trillion, what does it matter?)

Lehmans Brothers Holdings held up to $440 billion in credit default swaps (CDS) derivatives. "Up to", because nobody knows how to put a price on the damn things. The post mortem will not be complete for a couple of years, but so far the the damage has come to a puny $75 billion, because some of the rats jumped out of the sinking ship to infect the rest of the financial fleet, and because the positive and negative values "netted out" - canceled each other.

They are called Toxic Assets (a) because they are so huge, and (b) nobody knows exactly how huge they are. We have a financial system with a bloodstream thick with pustulant unknowns, some known unknowns and much more unknown unknowns, and maybe a few unknown unknown unknowns. I'm thinking of Bernie Madoff and his hedge fund Ponzi scheme here.

The worry is that Gordon and Alistair are setting their faces to weather the storm, guaranteeing that the good old British (or should that be Scottish) dependability will ensure that the banking system makes a good recovery in time.

The question is - is recovery possible?

Money is created through lending at interest. Money arises from debt. Money is a social construct based on confidence. If confidence leaves the system, money loses its value. On top of this basic fact, the derivatives have inflated the debt to the dizzying proportions that we now see.

The basic problem in Gordon's position is that he is compelled to pour yet more money into banking - an essentially unreal economy. He says that it is because if the banking system goes, the real economy goes - which is slightly, but not absolutely true. Gordon should remember the old adage, "Food will get you through times of no money better than money will get you through times of no food".

The Government's money is going to the banks with few conditions it seems. Short Selling has restarted, and we do not read of plans to regulate the financial system, not even the OTC derivatives. Labour is shy of nationalising the banks outright, although that is clearly the way things are going.

The real tragedy is that our money is going into a black hole, into a place where hard earned cash can disappear into the aether in a trice, on the back of negative market sentiment. I would rather see my money invested in a Right to Rent policy, whereby the nation takes over un-payable mortgages, leaving the family in situ, paying an affordable rent. Invested in house insulation, which means that money and carbon dioxide release is saved for as long as the houses stand. Invested in renewable energy technology. Invested in the community, and in recycling, and in the many other branches of the Green Economy. Invested in the real economy, Gordon. Capisc'?

Toxic asset repository is the way to go

Treasury mulls bad bank for toxic debt - Telegraph: "The Treasury is understood to have asked the investment bank Credit Suisse to draw up a detailed plan for the logistics of creating a bad bank, in a bid to restore confidence in the sector and to kick-start lending to consumers and businesses.

A bad bank has been floated as a potential measure to help solve the financial crisis by analysts but it has risen up the political agenda in recent weeks as banks' balance sheets look increasingly dire."

I blogged obsessively in October on this sensible way of dealing with the toxic asset question, which are an explosive mixture of sub-prime mortgages which have been marinated in an opaque brew of derivative funds. The mortgages were bundled up into packages to be sold and re-sold as seemingly clever but ultimately stupid derivatives traded in an unregulated, anarchic derivatives market. We should buy them, but at knock down prices.

We have to draw the poison from the system if the banks are to get lending again.

It is a good idea to gather them together in one place, so that they can be studied. Many of them may prove to be illegal Ponzi schemes of the Bernie Madoff type.

Insofar as there are mortgage agreements in them which the homeowner cannot possibly pay off, the government should operate a Right to Rent policy, taking over the mortgage, but allowing the homeowner to stay on in the same house, paying an affordable rent. In this way, the state will once again have a stake in bricks and mortar, which is a good investment in the long run.

Tory pot, Labour kettle

The Tory message is that Labour is digging away in a huge hole of debt. Quite so. Indubitably.

Labour got to this position by letting the financial markets go unregulated, building up a mountain of debt built on a wobbly foundation of ever rising house prices - a kind of Ponzi scheme.

Labour was deaf to the agonised pleas of massed ranks of Tory MPs calling for regulation of the financial markets, calling for the reining in the profits of financial institutions, re-balancing the needs of the real economy relative to the financial markets, which are predicated on the assumption that a social construct (money) can be treated as a commodity.

Sorry, I missed all the Conservative critique of Labour's market policies. I must have been too busy pondering the mystery of how like the Tories NuLabour has become...

PONZI SCHEME DIAGRAM

I tried to make a Ponzi scheme bitmap diagram, but it ended up just a confusing mess (just like the real thing), and in the end it is more informative to set it out in the simple list form below.

Here's how to make a Ponzi scheme:

1 Scammer asks scammees to lend him money, promising big returns.
2 10 Scammees give say 100 each = 1000.
3 Scammer gives each 10 at end of year, and keeps 900 for his lifestyle.
4 Scammees are pleased with their 10 (believing it to be in addition to the 100 they gave, which is not now the case, as it has gone to support the scammers lifestyle). Scammees are encouraged to recruit further scammees, who repeat 2,3,4, until no further scammees are recruited, or until the original scammees request their money back.
5 The scam works while it is growing. Just like the "growth economy". When growth stops, the scam collapses. Just like the "growth economy", which has to keep growing in order to work.

Which is insane, because it is impossible to expand forever in a finite space.
This shows what happens if a hamster does not stop growing.


Bernie Madoff has been sent down for the rest of his natural life for his Ponzi scheme.

Hyman Minsky was an economist, one of the rare ones who predicted the Credit Crunch. We should therefore listen to him. He said some derivatives were Ponzi schemes.

So the whole orthodox economy, the one we live in, is a gigantic Ponzi scheme. (More here).

Greens have been criticising the doctrine of everlasting growth for 30 years, and for having the temerity to assert that it is impossible to expand forever in a finite space. We have been ridiculed and sidelined as a result. 'Twas ever thus.

The orthodox economy is in fact nothing but a dys-economy. Economics must be based on ecology to be valid.

The lunatics have taken over the asylum, and it is the task of our generation to reinstate ecological wisdom in the place of casino capitalism.

Now that you're here, click on the "Ponzi", or "Solving the financial crisis" labels below, to find how Green economics approaches the triple whammy of problems the world is facing up to in our time: Recession, Peak Oil, and Climate Change.

There's loads of other stuff here that you won't get anywhere else. Make yourself at home. All comments get answered.

Don't believe it is possible to stop economic growth? Read Herman Daly on the Opportunity Cost of growth.

Madoff - warnings were ignored

Good article here on Huffington Post. "Who Could Have Known?" ..about 9/11? Fannie Mae? Citigroup? Bernie Madoff?

It goes into the (ignored) warnings on this succession of disasters.

On the Madoff Ponzi debacle, it shows that Harry Markopoulos, who was in the business (a rival firm to Madoff's) knew:

In 1999, after researching Madoff's methods, Markopolos wrote a letter to the SEC saying, "Madoff Securities is the world's largest Ponzi Scheme." He pursued his claims with the feds for the next nine years, with little result.

Jim Vos, another investment adviser who had examined Madoff's firm, says: "There's no smoking gun, but if you added it all up you wonder why people either did not get it or chose to ignore the red flags."

The answer comes from Vos's cohort Jake Walthour Jr., who told HuffPost blogger Vicky Ward: "In a bull market no one bothers to ask how the returns are met, they just like the returns."

[Update: Markopoulos alleges physical threats against his person]

This is not the last of these funds to go bust.We should not be surprised to hear multiple billion-dollar popping sounds as the Ponzi funds (and non-ponzi funds also) implode through the end of the era of indefinite economic growth.

In a sense, the whole financial/economic system is a global Ponzi scheme, reliant on growth for its continued existence. It is axiomatic that it is impossible to grow forever in a finite system, yet this is the financial orthodoxy of the 20th century, which still is believed to be true by grey politicians and economists.

The problem with economic growth lies in the throughput of materials - mining at one end, and disposing at the other. This is unsustainable. It cannot be done. It has to come to an end. Yet when Greens say this, we are ignored, or sidelined as stupid idealists.

We would do better, if we re-framed the position to this: "The growth in throughput cannot go on forever". There is an opportunity for a major growth in the Green sector of the economy , and by putting Keynesianism into a Green New Deal, we can address the financial crisis and the ecological crisis at the same time.

But I digress. Neither the financial economy nor the throughput economy can expand forever. The stopping point of both have been predicted. Economics students (don't wait for your lecturers to do it - did they predict the crunch) should look back and become familiar with the thinking of people who did predict this mess. Beginning with Hyman Minsky.

A clue is given above: "In a bull market no one bothers to ask how the returns are met, they just like the returns."


Bull markets are the up-side of a bipolar system. The market exists on sentiment, which is another word for emotion. They were bull, now they're bear. They were hypomanic, now they're depressed. Dr Paulson has given them a massive script of PROZAC (Fluoxetine - I write that in to get a load of hits from people researching their medication - sorry) equivalent - $700 billion, to be taken in the bank account when necessary - but the patient is still looking pale and listless; more worryingly, the patient is fretting about getting back to work to do the same thing all over again. This is because Dr Paulson shares the patient's growthist delusions.

The real doctors are the guys like Minsky and Herman Daly - he of the steady State Economy. This stuff is not difficult intellectually - just paradigmatically.

Paradigmatically. New word. I think it sounds nice. What do you think?

Our way of viewing the world is going to have to shift. We are entering a critical time of change on a par with the Industrial Revolution, the Reformation or the Renaissance.

Don't say no-one told you this was going to happen.

Madoff : who's next?

I see the tally is mounting up on what Mr Madoff has made off with. (Sorry, someone had to say it): here are the names we recognise: RBS £400m; Santander 2 bn euros; and Nicola Horlick got her fingers burned.

All these sound and respectable institutions and people; Madoff was well-respected, chair of Nasdaq, not some back-street shyster. This is like finding out that the Royal Apothecary failed his first MB and has a bogus certificate of qualification.

How can we tell what other hedge funds are Ponzi? Remember that Hyman Minsky classified derivatives into hedge, futures and Ponzi, so there may be many others to come. We have only two weeks to wait, because December 31st is accounting time for hedge funds, when more scams may come to light.

Again, the cry will go up: "They're not the Masters of the Universe, they're just a lot of very naughty boys" (and girls, Nicola, sorry). It is funny until we remember the impact on real people if their banks succumb.

Hedge fund Ponzi scheme uncovered to no surprise to readers of this blog.

New York (HedgeCo.Net) - Former chairman of the Nasdaq Stock Market Bernard Madoff was arrested yesterday and accused of orchestrating a ponzi scheme that bilked some $50 billion out of investors, authorities say.

The founder of Bernard L. Madoff Investment Securities allegedly has been running the scheme for years, using new money coming into the fund to pay returns to other investors, keeping up the façade of an admirable performance. In his alleged confession to the FBI, Madoff took the blame, saying he “paid investors with money that wasn’t there.”

According to the SEC complaint, Madoff informed two senior employees at his firm yesterday that he was “finished,” and that his business is “all just one big lie,” and “basically, a giant Ponzi scheme.” He also allegedly admitted that the firm was insolvent and had been for years.

Wahey, here we go. Regular readers (both of you) will recall that this blog was obsessing (use the labels below, Solutions to the financial crisis) over the economist Hyman Minsky who characterised derivatives into hedge funds, futures and Ponzi schemes. Now this one has come to light. $50 billion. 50,000,000,000! And they guy was well-respected. Now he faces a possible court room experience, followed (if found guilty) with 14 years in Gitmo - no sorry, that should be 14 hours community service, maybe. Awful. Terrible that this should happen to a rich person.

What is really terrible is that the whole world is still solemnly accepting the credit-based imaginary monetary system as the only possible reality, rather than looking at economics in the light of physical, biological and ecological realities, and reframing our monetary policies accordingly.

The question is, how many other derivative funds like this are there? By definition, any financial rewards system that depends for future growth to pay present investors is a Ponzi scheme. That means in fact that the entire world financial scheme is Ponzi, since we either have to have economic growth or economic recession - nothing in between. No concept of a steady state eoconmic system. Green Parties have been objecting to the unsustainable growth in throughput in the economy for 30 years, ignored or ridiculed by grey politicians. Maybe sometime soon economists will begin to realise that economics must be founded on sound ecology.

9 Postulates on Money

I'm off to Dorchester today to discuss the economy with the local Green Party. Here are my notes (in case I leave them behind by accident):

1. The amount of money in the world is increasing year on year. The growth in the global money supply has a doubling rate of 6-12 years.
It follows from this that:
(a) the system is unsustainable
( b) money is being created somewhere

2. Since the power of Government to create money is limited to coins and notes, about 3% of the total, it follows that private loan institutions (banks &c) put 97% of the new money into the system, creating the growth in the money supply.

3. They do this by making loans (creating debt) which must be paid back with interest, and using a fractional reserve system that allows them to lend to a multiple of the amount of capital that they actually hold.

4. Governments have granted lenders the ability to provide loans which are supported only by the confidence that
- not many of their borrowers will default at the same time
- not many of their creditors will want to withdraw their money at the same time

These are not safe assumptions, as the 2007-9 financial crisis caused by the “credit crunch” has demonstrated. The privatised, interest-bearing loan method of creating money leaves the economy open to periodic crashes, which cause poverty, inequity, social tension and carry with them the risk of war. At the same time, when the system is working, the lenders’ only constraint is their judgement as to the borrowers’ credibility. They have no thought as to the benefit or harm to society and environment that the loans to which the loans will be put.

5. The necessity of paying back loans and interest is one of the drivers of economic growth, since a business that has interest and loans to pay off must produce more goods than a business that has no such obligations.

6. Economic growth is destroying the ecosphere.

7. Since all money is issued as debt, bearing compound interest, it is no wonder that the world is drownig in debt, at every level, from personal to international.

8. The derivatives have inflated this debt by “leveraging” – borrowing to buy in the hope of future profits. Minsky describes some derivatives as Ponzi schemes – pyramid selling. The total value of derivatives market is about 10x the world’s GDP. This is one reason that banks do not trust each other, and so will not lend.

9. If the banks will not lend, there is not enough money in the economy, and we go into deflation. It is absurd for the Government to borrow money from the banking system it has just rescued at huge cost to the taxpayer. In this deflationary situation, it is open for the Government to issue new money for investment purposes, creating the needed money just as banks create it (as a multiple of its reserves). This can be issued to renewable energy projects as low interest loans, zero interest loans, or grants.

Hedge funds, Pyramid selling, court room apertures

The Editor
The Guardian

"Riots break out across Colombia after investment scam collapses" (p. 23, 14th November); "US hedge fund bosses threaten to move to Britain" (p32, ibid). The economist Hyman Minsky classified hedge funds that financed their operations out of future investments as "Ponzi" types, which is exactly what the Colombian pyramid scam was doing. The difference is of course that these hedge fund managers are too big to get through the doors of a court room.

The Economist defends the indefensible CDSs

The Economist article starts: "They are, says a former securities regulator, a “Ponzi scheme” that no self-respecting firm should touch. Eric Dinallo, the insurance superintendent of New York state, calls them a “catastrophic enabler” of the dark forces that have swept through financial markets.

Then it goes on to try to justify them.

My comment: The economist Hyman Minsky, who to his credit predicted all of this and was sidelined for his pains, classified derivatives into hedge funds, futures, and Ponzi.

Ponzi schemes are illegal confidence tricks in the real world. Why then are they not illegal confidence tricks in the banking world?

I rest my case.

Why won't the Banks cut interest rates?

Alistair Darling and Yvett Cooper are getting a bit cross with the banks, because the Bank of England (BoE) has cut interest rates to 3%, the lowest for 50 years, and they want the banks to reciprocate by cutting rates to business and mortgage borrowers. The banks show little sign of enthusiastic compliance, and Northern Rock, the bank that Darling bought part of only the other day, has joined several others by withdrawing tracker mortgages which are linked to the base rate - a deliberate act of disobedience.

The BoE rate is now a mere 3%, at its lowest for 54 years, but the rate that banks use to lend to each other, LIBOR, is still 4.98%, 60% higher.

Why the gap?

First, interest rates are how banks make their (and our) money, so lower interest rates mean less profit per pound lent out for the banks - at a time when they are desperate to fill their gasping empty coffers.

Second, they do not trust each other with their money, do not trust each other not to go bust owing them billions. Some interbank loans are overnight, to allow the banks to balance their books as they are required to do, and presumably they do not expect each other to not wake up in the morning, but other interbank loans go out for months.

So high LIBOR rates is banks' a way of saying, "We are not confident about the health of our colleagues/competitors in the financial system".

So why are they not happy? Part of the answer must lie in the derivatives, the enormous, unstable inverted pyramid of multiplied debt that hovers over the financial markets like an enormous alien mother ship casting a threatening shadow over the City. Never forget that some derivatives are nothing but a massive Ponzi scheme, a pyramid selling scam that works while the system is expanding, but implodes when the system reaches its limits.

The bankers and politicians are like soldiers in a WWI shell hole in which a grenade has just landed. They are frozen rigid with fear, waiting for it to go off. None of them has the guts to grab hold of it and chuck it away, by challenging the legality of Ponzi derivatives in the courts.

The Queen and the Big Credit Crisis Question

Queen Elizabeth II wonders why no one spotted credit crunch. They did, ma'am. Warren Buffet, George Soros, and Hyman Minsky, among others. Especially Hyman Minsky, who died 12 years ago. His analysis was very strong: the root of financial insecurity lies in the perception of financial security. In particular, he explained that some derivatives are a Ponzi scam. In law, a Ponzi scam is illegal. In finance, the scammers sometimes get burned when their scheme collapses, but it seems that they are above the law.

So far, anyway.

Thing is, your Maj, that a herd mentality takes over. Dissenting voices are ignored.

Hedge Funds and Mortgage Fraud

Hedge Funds and Mortgage Fraudinformation from "America's Premier Online Legal News Source.
The FBI started Operation Malicious Mortgage in June 2008.

Item: 144 mortgage fraud cases causing $1 billion losses for homeowners.

Item: "Two former Bear Stearns are alleged to have told investors that two hedge funds were in good financial condition despite knowing that the funds were at risk of collapse".

Item: "Barclays...is refiling its $300-$400 million hedge fund lawsuit against Bear Stearns in the wake of Bear Stearns' collapse. Barclays was a sole shareholder in one of Bear Stearns' two hedge funds that collapsed in the summer of 2007. The bank described the Bear Stearns collapse as among the most shocking hedge fund failures in the past decade.

Item: "Two principals who were involved in a hedge fund swindle have been sentenced for their part in scamming millions of dollars from investors. The two received prison sentences of 220 months and 75 months after they were found guilty of lying to investors and providing counterfeit account statements. The men were involved in a hedge fund that was actually a Ponzi scheme, through which the defendants, along with one other accused, swindled more than $194 million from investors".

These cases must represent the tip of a massive iceberg that is crawling with maggots and rot at its heart, a toxic timebomb in the shipping lanes of world trade that threatens to explode covering the whole world with rotten lettuce, maggots and particles of ice. Also the polar bears will suffer.

Seriously, the derivatives market must be brought to account. Post-hoc legal cases will take years to unravel. We need a Toxic Asset Dump, where the damn things can be assessed, and the bad ones neutralised.

Wextrust Ponzi scam US Securities and Exchange Commission

Here we go. Evidence of a "Ponzi" scheme. "Wextrust entities, alleging that defendants conducted a massive Ponzi-type scheme from 2005 or earlier that raised approximately $255 million from approximately 1,200 investors."

The case will take months or years to resolve.

Open letter to an MP on the Toxic Asset question

No apologies for continuing to bang on about the derivatives market, because it is a disease at the heart of the financial system. If the toxins cannot be withdrawn from the financial system, they threaten to bring down the banks, which will turn a 2 year recession into a 10 year depression. War might figure among the many adverse results of that. So here is a letter containing a way forward on the toxic assets problem. If you broadly agree with it, please copy, amend (some parts are specific to my situation), and send it to our own MP or representative.


... MP
House of Commons
London SW1A OAA




Many thanks for your letter of 09 October, and for your succinct resume of the position with the financial crisis.

However, you did not address the question in my letter, which is how we might draw the “toxic assets” out of the financial system. I am concerned that Government should use the breathing space that its bailout has obtained to take action to contain and if possible deflate the bubble of toxic assets created in the derivatives market.

In my previous letter I mentioned a figure of $1.14 quadrillion as the total “value” of the derivatives market, but on further research was unable to trace the source of this figure. However the Bank for International Settlements gives a figure of $596 trillion in December 1997*, which is about ten times the amount of foreign debt owed by every country in the world. The derivatives market may well have doubled in the ten subsequent months. This is an absurd amount, psychotic in the sense that it is a notion completely divorced from economic reality.

It is unconscionable that the “products” of a tiny handful of financial gamblers and gamesters should endanger the livelihood of everyone in the world. It is therefor an urgent necessary to examine these products in detail in order to verify that they are in fact based on valid and legal trading principles. One general point is that the people who created these instruments have been behaving as companies, but have been operating outside of company law. In particular, they must be examined to find out whether at least some of them amount to Ponzi schemes, which are illegal. If they are found to be illegal, the debts that they represent can be repudiated by the banks, which might help to stabilise the financial system and save billions of pounds of taxpayers’ money.

Mr Paulson is quoted as saying that he wanted to "kill the bad hedge funds and heavily regulate the rest." However, it is noticable that the “cash for trash” component of his TARP seems to have slid down the agenda, presumably because he recognises that the sheer magnitude of the TA problem would overwhelm the resources of the US Government.

Willem Buiter, inter alia, has suggested that a Toxic Asset Dump, TAD, should be set up, to act as a receiving and clearing house for institutions who have doubts about whether they still wish to hold them on their books. In this institution the value – or otherwise – of the “assets” can be analysed, and their legality – or otherwise – can be assessed. From what we learn in the TAD, ways and means can be devised to subject toxic derivatives to a controlled deflation.

The details of the exact scope and powers of this institution can be finalised by the statesmen and their financial regulators, but the central principle is to bring the derivatives market to account. Some banks, unsure of the validity of their derivatives holdings, might be grateful for the opportunity to subject their holdings to an objective audit, especially if they thought that there was a chance that the debt implicit in them might be cancelled if they were to be found to be illegal. At a second level of regulation, banks should be required to file the details of their holdings in specified derivatives, particularly the CDS. Confidentiality might be offered if there was a perception that knowledge of their holdings might endanger their standing in the markets. At a third level of regulation, all derivative holdings might be required to be registered with the TAD.

Given the globalised nature of the financial markets, it would seem best to set the TAD up at World Bank or IMF level, but the UK could forge ahead with a pilot scheme in order to speed up the process.

I would be very grateful if you would transmit this letter to the Treasury for an answer, or preferably ask a question about the Government’s plans to contain the derivatives market in the House.

Please also raise the question in Conservative Party circles, and especially to find the opinion of specialists in Company Law about the Ponzi aspect of some of these trades.

I hope that you will not mind that I send this as an open letter. This is not from any motive of political competition, but because these matters are so serious that any measures that will increase the chance of this proposal to be taken up must be used.


With many thanks

Yours sincerely