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Analysis
Economics of Mass Deception
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The Story of Today's Crisis
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It seems that the crisis will further prolonger if its structural reasons have not been tackled.October 11,2008, ( Reuters photos) |
Often referred to as a sub-prime mortgage collapse, this obfuscates the real reason of the economic crisis of 2008. By associating tangible useless failed mortgages, at least something "real" can be blamed for the carnage. The problem is, this is myth. The magnitude of this fiscal collapse happened because it was all based on hot air.
The banking industry renamed insurance betting guarantees as "credit default swaps" and risky gambling wagers were called "derivatives." Financial managers and banking executives were selling the ultimate con to the entire world, akin to the snake-oil salesmen from the 18th century but this time in suits and ties. And by October 2008, it was a quadrillion-dollar (that's $1,000 trillion) industry that few could understand.
Propped up by false hope, America is now falling like a house of cards.
History of the Crisis
| It was a coup by elite bankers in order to control the economy. |
It all began in the early part of the 20th century. In 1907, J.P. Morgan, a private New York banker, published a rumour that a competing unnamed large bank was about to fail. It was a false charge but customers nonetheless raced to their banks to withdraw their money, in case it was their bank.
As they pulled out their funds the banks lost their cash deposits and were forced to call in their loans. People now therefore had to pay back their mortgages to fill the banks with income, going bankrupt in the process.
The 1907 panic resulted in a crash that prompted the creation of the Federal Reserve, a private banking cartel with the veneer of an independent government organisation. Effectively, it was a coup by elite bankers in order to control the industry.
When signed into law in 1913, the Federal Reserve would loan and supply the nation's money, but with interest. The more money it was able to print, the more 'income' for itself it generated. By its very nature the Federal Reserve would forever keep producing debt to stay alive.
It was able to print America's monetary supply at will, regulating its value. To control valuation however, inflation had to be kept in check.
Great Depression
| What had been redeemable for gold became paper 'legal tender', and gold could no longer be exchanged for cash as it had once been. |
The Federal Reserve then doubled America's money supply within five years, and in 1920 it called in a mass percentage of loans. Over five thousand banks collapsed overnight. One year later the Federal Reserve again increased the money supply by 62 percent, but in 1929 it again called the loans back in, en masse.
This time, the crash of 1929 caused over sixteen thousand banks to fail and an 89 percent plunge on the stock market. The private and well-protected banks within the Federal Reserve system were able to snap up the failed banks at pennies on the dollar.
The nation fell into the Great Depression and in April 1933 President Roosevelt issued an executive order that confiscated all gold bullion from the public.
Those who refused to turn in their gold would be imprisoned for ten years, and by the end of the year the gold standard was abolished. What had been redeemable for gold became paper 'legal tender', and gold could no longer be exchanged for cash as it had once been.
Abolishing Gold Standard
| The US dollar was now worth whatever the United States decided. |
Later, in 1971, President Nixon removed the dollar from the gold standard altogether, therefore no longer trading at the internationally fixed price of $35. The US dollar was now worth whatever the United States decided it was worth because it was "as good as gold." It had no standard of measure, and became the universal currency.
Treasury bills (short-term notes) and bonds (long-term notes) replaced gold as value, promissory notes of the US government and paid for by the taxpayer. Additionally, because gold was exempt from currency reporting requirements it could not be traced, unlike the fiduciary (i.e. that based upon trust) monetary systems of the West. That was not in America's best interest.
After the Great Depression private banks remained afraid to make home loans, so Roosevelt created Fannie Mae. A state supported mortgage bank, it provided federal funding to finance home mortgages for affordable housing. In 1968, President Johnson privatized Fannie Mae, and in 1970, Freddie Mac was created to compete with Fannie Mae. Both of them bought mortgages from banks and other lenders, and sold them to new investors.
Creating Consumerism
| The sense of delusion and entitlement kept Americans on the treadmill of consumer consumption. |
The post World War II boom had created an America flush with cash and assets. As a military industrial complex, war exponentially profited the United States and, unlike any empire in history, it shot to superpower status. But it failed to remember that, historically, whenever empires rose they fell in direct proportion.
Americans could afford all the modern conveniences, exporting its manufactured goods all over the world. After the Vietnam War, the United States went into an economic decline. But people were loath to give up their elevated standard of living despite the loss of jobs, and production was increasingly sent overseas. The sense of delusion and entitlement kept Americans on the treadmill of consumer consumption.
In 1987, the US stock market plunged by 22 percent in one day because of high-risk futures trading, called derivatives, and in 1989 the Savings and Loan crisis resulted in President George H.W. Bush using $142 billion in taxpayer funds to rescue half of the Savings and Loan Crisis.
To do so, Freddie Mac was given the task of giving sub-prime (below prime-rate) mortgages to low-income families.
In 2000, the "irrational exuberance" of the dot-com bubble burst, and 50 percent of high-tech firms went bankrupt wiping $5 trillion from their over-inflated market values.
After this crisis, Federal Reserve Chairman Alan Greenspan kept interest rates so low; they were less than the rate of inflation. Anyone saving his or her income actually lost money, and the savings rate soon fell into negative territory.
Creating Tailspin of Debts
| The more the bank loaned, the more interest it collected even with no money in the vault. |
During the 1990s, advertisers went into overdrive, marketing an ever more luxurious lifestyle, all made available with cheap easy credit. Second mortgages became commonplace, and home equity loans were used to pay credit card bills. The more Americans bought, the more they fell into debt.
But as long as they had a house their false sense of security remained: their home was their equity, it would always go up in value, and they could always remortgage at lower rates if needed. The financial industry also believed that housing prices would forever climb, but should they ever fall the central bank would cut interest rates so that prices would jump back up. It was, everyone believed, a win-win situation.
Greenspan's rock-bottom interest rates let anyone afford a home. Minimum wage service workers with aspirations to buy a half million-dollar house were able to secure 100 percent loans, the mortgage lenders fully aware that they would not be able to keep up the payments.
So many people received these sub-prime loans that the investment houses and lenders came up with a new scheme: bundle these virtually worthless home loans and sell them as solid US investments to unsuspecting countries who would not know the difference. American lives of excess and consumer spending never suffered, and were being propped up by foreign nations none the wiser.
It has always been the case that a bank would lend out more than it actually had, because interest payments generated its income. The more the bank loaned, the more interest it collected even with no money in the vault.
It was a lucrative industry of giving away money it never had in the first place. Mortgage banks and investment houses even borrowed money on international money markets to fund these 100 percent plus sub-prime mortgages, and began lending more than ten times their underlying assets.
After September 11, George Bush told the nation to spend, and during a time of war, that's what the nation did. It borrowed at unprecedented levels so as to not only pay for its war on terror in the Middle East (calculated to cost $4 trillion) but also pay for tax cuts at the very time it should have increased taxes.
Bush removed the reserve requirements in Fannie Mae and Freddie Mac, from 10 percent to 2.5 percent. They were free to not only lend even more at bargain basement interest rates, they only needed a fraction of reserves. Soon banks lent thirty times asset value. It was, as one economist put it, an "orgy of excess."
It was flagrant overspending during a time of war. At no time in history has a nation gone into conflict without sacrifice, cutbacks, tax increases, and economic conservation.
And there was a growing chance that, just like in 1929, investors would rush to claim their money all at once.
Nothing from Nothing
| High stakes gambling known as derivatives create nothing from nothing. |
To guarantee, therefore, these high risk mortgages, the same financial houses that sold them then created "insurance policies" against the sub-prime investments they were selling, marketed as Credit Default Swaps (CDS). But the government must regulate insurance policies, so by calling them CDS they remained totally unregulated.
Financial institutions were "hedging their bets" and selling premiums to protect the junk assets. In other words, the asset that should go up in value could also have a side-bet, just in case, that it might go down. By October 2008, CDS were trading at $62 trillion, more than the stock markets of the whole world combined.
These bets had absolutely no value whatsoever and were not investments. They were just financial instruments called derivatives—high stakes gambling, "nothing from nothing" — or as Warren Buffet referred to them, "Weapons of Financial Mass Destruction."
The derivatives trade was "worth" more than one quadrillion dollars, or larger than the economy of the entire world. (In September 2008 the global Gross Domestic Product was $60 trillion).
Challenged as being illegal in the 1990s, Greenspan legalized the derivatives practice. Soon hedge funds became an entire industry, betting on the derivatives market and gambling as much as they wanted.
It was easy because it was money they did not have in the first place. The industry had all the appearances of banks, but the hedge funds, equity funds, and derivatives brokers had no access to government loans in the event of a default. If the owners defaulted, the hedge funds had no money to pay 'from nothing'.
Those who had hedged on an asset going up or down would not be able to collect on the winnings or losses.
The market had become the largest industry in the world, and all the financial giants were cashing in: Bear Stearns, Lehman Brothers, Citigroup, and AIG. But homeowners, long maxed out on their credit, were now beginning to default on their mortgages.
Not only were they paying for their house but also all the debt amassed over the years for car, credit card and student loans, medical payments and home equity loans.
They had borrowed to pay for groceries and skyrocketing health insurance premiums to keep up with their bigger houses and cars; they refinanced the debt they had for lower rates that soon ballooned. The average American owed 25 percent of their annual income to credit card debts alone.
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* The article is republished with the kind permission of Global Research.ca
Tanya Cariina Hsu is a political researcher and analyst focusing on Saudi Arabian and US relations. She was among the first to break the barrier against public discussion of the Israeli influence upon US foreign policy decision making. A Clean Break" Symposium in Washington D.C. in 2004.
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