‘Death of American Capitalism:’ The 10 final scenes

By Paul B. Farrell, MarketWatch

ARROYO GRANDE, Calif. (MarketWatch) — Good news, Americans are “downbeat about today. Upbeat about tomorrow,” says the latest USA Today/Gallup Poll. “Americans feel battered by hard times, record home foreclosures, stubbornly high unemployment rates and war.”

And yes, we are “fed up with Washington and convinced more than 3 to 1 that the nation is heading in the wrong direction,” yet there’s “confidence that there will be better times ahead, that the classic American dream endures and hasn’t been extinguished. It’s not even at its low ebb.” Why? Because we’re in denial!
Bull market for bonds is ending

Bond investors enjoyed stellar gains for several years but that’s about to end, says Kurt Brouwer, chairman of Brouwer & Janachowski and editor of MarketWatch’s Fundmastery blog. He talks with Money & Investing Editor Jonathan Burton.

Do Main Street’s 95 million investors know something Warren Buffett’s long-time partner, Charlie Munger, doesn’t know? Munger is warning us “It’s Over” for America. Yes, “o-v-e-r,” America’s in decline, at the end-of-days, coming to “financial ruin,” says Munger.

Optimism has always been the enduring spirit that made us a great nation, brought us back from overwhelming challenges and impossible odds — WW II, the Civil War, the 1776 Revolution. Yes, that spirit still burns in our soul, says the poll.

But we also know, as we said earlier in “The Death of the Soul of Capitalism,” that over the long-term, through many centuries, historians give nations an average of about 200 years before they burn out. Why? Because the “blind optimism” that makes a nation great in the early years of its rise to power and glory becomes, paradoxically, its worst enemy in the end-days.

Their arrogance traps them in a self-sabotaging cycle that weakens their resolve, makes them vulnerable to new, unpredictable challenges, ultimately destroying them from within. That happens over and over throughout history, even as their optimistic brains tell them they’re still the greatest.

So for a moment, please set aside your “optimism,” listen to our translation of Munger’s drama as a 10-scene crime-thriller about America on the “road to ruin.”
Plot notes: Warning, America is on a ‘road to financial ruin’

Turns out that like Buffett, whose tales we detailed earlier, Munger’s a good storyteller. His parable, “Basically It’s Over: A parable about how one nation came to financial ruin,” appeared in Slate magazine. Clearly he’s warning about the end of capitalism, the end of democracy, the coming end of America.

In his parable Munger calls America “Basicland … rich in all nature’s bounty.” In our recasting it as a drama, we’ll use “America” rather than “Basicland” in the narrative to drive home the full impact of Munger’s powerful message.
Scene 1: Power and wealth create false sense of invincibility

Significantly, Munger says 2012 is the turning point, a signal, the moment setting up the final crisis scene. We’ve often made a similar timing prediction, one tied to the 2012 election, and a reminder of the warning made by Jared Diamond in “Collapse: How Societies Choose to Fail or Succeed.” In the late stages of a nation’s cycle: A crisis hits. Everyone, leaders and citizens, act surprised. But it’s too late: “Civilizations share a sharp curve of decline. Indeed, a society’s demise may begin only a decade or two after it reaches its peak population, wealth and power.” Just 20 short years to ruin?

Munger warns: “Even a country as cautious, sound, and generous as America could come to ruin if it failed to address the dangers that can be caused by the ordinary accidents of life. These dangers were significant by 2012, when the extreme prosperity of America had created a peculiar outcome: As their affluence and leisure time grew, America’s citizens more and more whiled away their time in the excitement of casino gambling.” Yes, Main Street “feels battered” while Wall Street gambling casinos generate billions.
Scene 2: Greed consumes America: Gambling replaces real work

In Munger’s brilliant parable “the winnings of the casinos eventually amounted to 25% of America’s GDP, while 22% of all employee earnings in America were paid to persons employed by the casinos” and “many of the gamblers were highly talented engineers attracted partly by casino poker but mostly by bets available in the bucket shop systems, with the bets now called financial derivatives.” Yes, the same derivative bets Buffett targeted when he warned against “financial weapons of mass destruction.”

Scene 3: Wall Street’s casinos prosper as Main Street suffers

Munger’s also not talking about just the million or so gamblers working in Wall Street’s “too political to fail” casino-banks. No, “gamblers” are also among Main Street America’s 95 million average investors, though most of the high rollers are the slick pros on casino payrolls where “most casino revenue now came from bets on security prices under a system used in the 1920s.” Think of Goldman’s trading operation that often makes $100 million profits daily, while America has close to 20% underemployed.
Scene 4: America’s side-bet debt to foreign casinos skyrockets

Now comes the crucial turning point in Munger’s crime-thriller: “Many people, particularly foreigners with savings to invest, regarded this situation as disgraceful. After all, they reasoned, it was just common sense for lenders to avoid gambling addicts … They feared big trouble if the gambling-addicted citizens of America were suddenly faced with hardship.” They were right.
Scene 5: Nations in denial rarely prepare for disasters in advance

“Then came the twin shocks,” a plot twist borrowed from “Avatar,” “Wall-E” and Al Gore, the kind of shocks that most “optimists” (especially those hell-bent on voting Obama and the liberals out of office by 2012) always deny. So, “hydrocarbon prices rose to new highs.” Munger must mean a twist like oil hitting a scene-stealing $1,000 a barrel.
Scene 6: In the later stages, get-rich-quick beats real work

America seeks the advice of the “Good Father,” a tall ex-Fed chairman who suggests “America change its laws. It should strongly discourage casino gambling, partly through a complete ban on the trading in financial derivatives, and it should encourage former casino employees — and former casino patrons — to produce and sell items that foreigners were willing to buy.” Never happen: Not as long as Wall Street’s gamblers can make more in a year trading derivatives than most Americans make in a lifetime. Why “work?”
Scene 7: Wall Street CEOs, economists, lobbyists love gambling

Sounds great, many approved, “but others, including many of America’s prominent economists, had strong objections. These economists had intense faith that any outcome at all in a free market — even wild growth in casino gambling — is constructive. Indeed, these economists were so committed to their basic faith that they looked forward to the day when America would expand real securities trading, as a percentage of securities outstanding, by a factor of 100, so that it could match the speculation level present in the United States just before onslaught of the Great Recession that began in 2008.”
Scene 8: Wall Street gamblers love Reaganomics, hate change

Though Munger and his partner got rich in this bizarre parable, his plot turns dark as America’s “investment and commercial bankers were hostile to change. Like the objecting economists, the bankers wanted change exactly opposite to change wanted by the Good Father.” Wall Street “came to believe that the Good Father lacked any understanding of important and eternal causes of human progress that the bankers were trying to serve” by leaving today’s free market gambling casino operations untouched, so it could quickly return to pre-2008 “greed is very good” reality.
Scene 9: Main Street investors join Wall Street’s ‘Happy Conspiracy’

The endgame now unfolds rapidly. Munger warns that America’s investors, workers and citizens have become so jaded they merge with Wall Street’s self-sabotaging conspiracy: “Of course, the most effective political opposition to change came from the gambling casinos themselves. This was not surprising, as at least one casino was located in each legislative district.” They “saw themselves as part of a long-established industry that provided harmless pleasure while improving the thinking skills of its customers.”
Scene 10: Politicians love Wall Street’s derivative casino: Game over!

The 86-year-old Munger is himself a metaphor for America’s version of the classic historical cycle: He was an optimist as he and Warren built their $267 billion company over four decades. But sadly, his parable, his vision of America’s future, has no optimistic finale. Rather it’s reminiscent of Diamond’s “Collapse,” Bogle’s “Battle for the Soul of Capitalism,” and so many other recent reminders about how America just went over a cliff and how Wall Street’s casino-banks will soon drive us off a bigger cliff into the Great Depression II by 2012.

Munger’s parable is more than a Hollywood suspense-thriller, it’s another example of the classic historical life-cycle of a nation.

In the final scenes “politicians ignored the Good Father one more time,” the casino-banks returned to gambling in derivative “securities with extreme financial leverage. A couple of economic messes followed, during which every constituency tried to avoid hardship by deflecting it to others. Much counterproductive governmental action was taken, and the country’s credit was reduced to tatters. America is now under new management, using a new governmental system. It also has a new nickname: Sorrowland.”
Epilogue: Your moral dilemma: a no-win scenario or historical destiny?

Do we really have a choice? Ask yourself, what’s ahead after 2012? Can you see beyond a destructive campaign: Obama at war with Palin and the “Tea Party of No?” What are the long-term prospects of our “civilization.” Do you share Munger’s dark vision?

Or does the USA Today/Gallup Poll tell you guys like Munger, Buffett and Volker do “lack any understanding of important and eternal causes of human progress that the bankers are trying to serve” with their gambling casinos. “Optimists” in those polls are just politicians, bankers and citizens like you, in denial, can’t hear the warnings. So we get no changes, no action, no preparations because at this stage in the long-term historical cycle, optimism has turned into our worse enemy, wishful-thinking.

Solution? Get into action, let’s launch the “Second American Revolution.” Got any constructive, optimistic strategies? Share them. Add your comments.

Advertisements

Former Bank of America CEO Ken Lewis Charged with Fraud; It’s Only a Start

Written by: Michael Shedlock

On April 24, I wrote Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis.

You will be pleased to read Ex-BofA chief Lewis charged with fraud.

New York Attorney General Andrew Cuomo said Thursday it was bringing civil charges against senior Bank of America (BAC) executives, including former company CEO Ken Lewis, for their role in the company’s controversial purchase of Merrill Lynch.

Cuomo’s office, which has been aggressively pursuing an investigation into the merger and subsequent bonuses paid to former Merrill employees, said it was charging Lewis and Bank of America’s former chief financial officer Joe Price with fraud.

The lawsuit contends that the bank’s management team understated the losses at Merrill in order to get shareholders to approve the deal, then subsequently overstated the firm’s willingness to terminate the merger to regulators weeks later in order to get $20 billion of additional aid from the federal government.

Full Article

Enough With The Government Cover-Ups

Edward Harrison, 01.12.10, 04:20 PM EST

What really happened to AIG and other bankrupt firms.

pic

It has come to light recently that American International Group withheld important information about its dealings with financial counterparties in the lead-up to its collapse and bailout by the Federal Reserve. What is most troubling about this episode is that it was officials at the Federal Reserve Bank of New York–not AIG–who seem to have orchestrated the secretive and potentially illegal activities. Moreover, the actions by the regulator were uncovered only through an investigation conducted on behalf of the House Oversight and Government Reform Committee. Were it not for the doggedness of the committee’s ranking Republican member, Darrell Issa of California, the public would be none the wiser.

Is this what it has come to in America: Public officials making policy via cover-ups, secret deals and government coercion? It seems so. If we don’t demand a full investigation into this type of behavior and criminal prosecution where appropriate, we should expect more of the same in the future.
Full Article

Is The U.S. Economy Being Tanked By Mistake or By Intent? by Bill Sardi

Is The U.S. Economy Being Tanked By Mistake or By Intent?

by Bill Sardi

Recently by Bill Sardi: Who Is Left Holding the Bag on US Debt?

The government wants Americans to believe the greatest economic collapse in history was the result of ineptness and mistakes yet still have confidence in their financial institutions.

Should American bankers be let off the hook because they self-declare, before an investigational panel, that the failure of their newly invented risk swaps and other highly leveraged investment schemes was simply due to “mistakes”? Not malfeasance – just every-day mistakes? Bankers just fell asleep at the helm at a critical juncture in American history. Is that what we are being led to believe?

Oh well, it’s just 18 million American homes that now lay empty in the wake of unprecedented foreclosures, and the bankers have collected obscene bonuses for reckless lending of their depositors’ money. It’s like the captain and crew of a ship saying, not to worry, twenty-percent of the passengers were lost overboard, but this was due to unavoidable mistakes, and then being rewarded with bonuses when they reach port.


FULL ARTICLE

THE RICH? THEY GET ELECTED

http://www.truthdig.com
Posted on Nov 7, 2009

A day after it was announced that the U.S. unemployment rate had hit the double-digit mark, a report was released showing that nearly half of the members of Congress are millionaires, seriously questioning the notion that our lawmakers identify with “we the people.”

Hilariously enough, four of the top five richest lawmakers in Congress are Democrats. —JCL

Politico.com:

Talk about bad timing.

As Washington reels from the news of 10.2 percent unemployment, the Center for Responsive Politics is out with a new report describing the wealth of members of Congress.

Among the highlights: Two-hundred-and-thirty-seven members of Congress are millionaires. That’s 44 percent of the body – compared to about 1 percent of Americans overall.

CRP says California Republican Rep. Darrell Issa is the richest lawmaker on Capitol Hill, with a net worth estimated at about $251 million. Next in line: Rep. Jane Harman (D-Calif.), worth about $244.7 million; Sen. Herb Kohl (D-Wis.), worth about $214.5 million; Sen. Mark Warner (D-Va.), worth about $209.7 million; and Sen. John Kerry (D-Mass.), worth about $208.8 million.

Read more

YAHOO: Preparing for the Worst

by Robert Kiyosak

Posted on Monday, August 24, 2009, 12:00AM

“Is the crisis over?” is a question I am often asked. “Is the economy coming back?”
My reply is, “I don’t think so. I would prepare for the worst.”

Like most people, I wish for a better future for all of us. Life is better when people are working, happy, and spending money.

The stock market has been going up since March 9, 2009. Talk of “green shoots” fill the air. Yet, in spite of the more positive news, I continue to recommend that people prepare for the worst. The following are some of my reasons:

1. I believe the stock market is being manipulated. I suspect the government, banks, and Wall Street are doing everything they can to keep the market from crashing. Our leaders know that nothing makes the world feel better than a raging bull market.

Do I have any proof that the market is being manipulated? No. I just smell a rat, or a pack of rats. I believe greed, self-interest, arrogance, and fear control the financial markets. I suspect those in charge will do anything to keep us all from panicking… and I don’t blame them. A global panic would be ugly and dangerous.

2. In my view, this global crisis has been caused by the Federal Reserve Bank, the U.S. Treasury, Wall Street, and the central banks of the world. They caused the problem, profited excessively in doing so, and now profit by being asked to fix the problem.

Every time I hear a politician mention the word stimulus, my mind flashes back to high school biology class, when I touched battery wires to a dead frog to make it twitch. Today, you and I are the dead frogs. Pretty soon the dead frog will be fried frog.

In the 1980s, our government’s hot money stimulus was measured only in the millions of dollars. By the 1990s, the government had to ramp the stimulus voltage into the billions in order to get the frog to twitch. Today the frog has jumper cables with trillions in high-voltage hot money pouring through the lines.

While most us feel better when we have more high-voltage money in our hands, none of us feel good about higher taxes, increasing national debt, and rising inflation for the long term. Another old saying goes, “Sometimes the cure is worse than the disease.” I say the government stimulus cure is killing us frogs.

3. Old frogs don’t hop. Another reason I am cautious about the future is that the Western world has a growing number of old frogs. Between 1970 and 2000, the economy responded to bailouts and stimulus packages because the baby boomers of the world were entering their greatest earning years — their purchasing power increased, and demand for homes, cars, refrigerators, computers, and TVs boosted the economy.

The stimulus plans seemed to work. But when a person turns 60, their spending habits change dramatically. They stop consuming and start conserving like a bear preparing for winter. The economy of the Western world is heading into winter. Hot wires and hot money will not get old frogs to hop. Old frogs will simply join the bears and stick that money in the bank as they prepare for the long, hard winter known as old age. The businesses that will do well in a winter economy are drug companies, hospitals, wheelchair manufacturers, and mortuaries.

4. The dying frog economy will lead us to the biggest Ponzi schemes of all: Social Security and Medicare. If we think this subprime financial crisis is big, it’s my opinion that this crisis will be dwarfed by the crisis brewing in Social Security and Medicare…Medicare being the biggest crisis of all. As old frogs head for the big lily pad in the sky, they will demand young frogs spend even more in tax dollars just to keep old frogs from croaking.

5. The 401(k)Ponzi scheme. A Ponzi scheme, like the scheme Madoff ran, depends upon young money to pay off old money. In other words, a Ponzi scheme needs tadpoles to finance old frogs. The same is true for the 401(k) and other retirement plans to work. If young money does not come into the stock market, the old money cannot retire. One reason so many people my age are worried, not only about Social Security and Medicare, is because they’re concerned about getting their money out of the stock market before the other old frogs decide to drain the swamp.

The facts are that the 401(k) plan has a trigger that requires old frogs to begin withdrawing their money at a certain age. In other words, as baby boomers grow older, more and more will be required, by law, to begin withdrawing their money from the market. You do not have to be a rocket scientist to know that it is hard for a market to keep going up when more and more people are getting out.

The reason the 401(k) has this law related to mandatory withdrawals is because the Federal government wants to collect the taxes that they deferred when the worker’s money went into the plan. In other words, the taxman wants their pound of flesh. Since they allowed the worker to invest without paying taxes, the government wants their tax dollars when the employee retires. That is why the laws require older workers to sell their shares ¬– and pay their pound of flesh.

Demographics show that we are entering a battle between young and old. I call it the “Age War.” The young want to hang onto their money to grow their families, businesses, and wealth. The old want the tax and investment dollars of the young to sustain their old age.

This war is not coming…it is upon us now. This is one of many reasons why I remain cautious and say, “The worst is yet to come.”

Goldman Sachs – THE WORLD’S BIGGEST PONZI SCHEME

Taken from a comment by “Calltoaccount”, which was taken from Institutional Risk Analytics, blogged by http://www.cjr.org

Res Ipsa Loquitor: Here’s the real story that’s been conveniently swept under the rug.

From Reuters: QUESTION: Did Goldman do any due diligence on AIG before buying credit default swaps (CDS) from it?

ANSWER: “We do extensive due diligence on all our counterparties.” –  posted 4/2/09 by Karl Denninger

(Credit Barry Ritholtz and Institutional Risk Analytics, the original source)

WHOAH!

In fact, our investigation suggests that by the time AIG had entered the CDS fray in a serious way more than five years ago, the firm was already doomed. No longer able to prop up its earnings using reinsurance because of growing scrutiny from state insurance regulators and federal law enforcement agencies, AIG’s foray into CDS was really the grand finale. AIG was a Ponzi scheme plain and simple, yet the Obama Administration still thinks of AIG as a real company that simply took excessive risks. No, to us what the fraud Bernard Madoff is to individual investors, AIG is to the global financial community.

As with the phony reinsurance contracts that AIG and other insurers wrote for decades, when AIG wrote hundreds of billions of dollars in CDS contracts, neither AIG nor the counterparties believed that the CDS would ever be paid. Indeed, one source with personal knowledge of the matter suggests that there may be emails and actual side letters between AIG and its counterparties that could prove conclusively that AIG never intended to pay out on any of its CDS contracts.

Read that folks.

Then read it again.

Then read it AGAIN.

More excerpts:

There are two basic problems with side letters. First, they are a criminal act, a fraud that usually carries the full weight of an “A” felony in many jurisdictions. Second, once the side letter is discovered by a persistent auditor or regulator examining the buyer of protection, the transaction becomes worthless. You paid $6 million to AIG to shift risk via the reinsurance, but the side letter makes clear that the transaction is a fraud and you lose any benefit that the apparent risk shifting might have provided.

And finally, the last nail in the coffin:

The key point is that neither the public, the Fed nor the Treasury seem to understand is that the CDS contracts written by AIG with these various non-insurers around the world were shams – with no correlation between “fees” paid and the risk assumed. These were not valid contracts as Fed Chairman Ben Bernanke, Treasury Secretary Geithner and Economic policy guru Larry Summers claim, but rather acts of criminal fraud meant to manipulate the capital positions and earnings of financial companies around the world.

Indeed, our sources as well as press reports suggest that the CDS contracts written by AIG may have included side letters, often in the form of emails rather than formal letters, that essentially violated the ISDA agreements and show that the true, economic reality of these contracts was fraud plain and simple. Unfortunately, by not moving to seize AIG immediately last year when the scandal broke, the Fed and Treasury may have given the AIG managers time to destroy much of the evidence of criminal wrongdoing.

Only when we understand how AIG came to be involved in CDS and the fact that this seemingly illegal activity was simply an extension of the reinsurance/side letter shell game scam that AIG, Gen Re and others conducted for many years before will we understand what needs to be done with AIG, namely liquidation. Seen in this context, the payments made to AIG by the Fed and Treasury, which were then passed-through to dealers such as Goldman Sachs (NYSE:GS), can only be viewed as an illegal taking that must be reversed once the US Trustee for the Federal Bankruptcy Court for the Southern District of New York is in control of AIG’s operations.

Thank you Timmy, thank you Ben Bernanke, thank you Henry Paulson, thank you George Bush and thank you President Obama.

If this is true every one of you needs to go to prison.

After those of you still in your positions are impeached.

Again, for the simple who need it in one sentence:

AIG was a Ponzi scheme plain and simple, yet the Obama Administration still thinks of AIG as a real company that simply took excessive risks. No, to us what the fraud Bernard Madoff is to individual investors, AIG is to the global financial community.

Distilled to one sentence: The bailout of AIG is equivalent to the US Taxpayer bailing out Madoff’s admitted (and now convicted) Ponzi Scheme.

PS: This isn’t MY analysis, this is the analysis of Institutional Risk Analytics. If you don’t understand who they are, you should – they’re one of the most-respected groups out there when it comes to banking system analysis. If they’re willing to print something this damning….

Posted by Calltoaccount on Sat 18 Jul 2009 at 09:40 AM