Derivatives and the Recession
Copyright © 2009-2012 by Zack Smith .
All rights reserved.
IntroductionWe know we're in a Recession, so what caused it? And what factors are influencing it now? Who is profiting and who is losing? Was this recession made to happen? On this page I am presenting my notes that address these questions.
Let us not just assume, as the media would have us do, that poor people who bought houses they could not afford (or rather were suckered into it by predatory lenders) were the main cause of the crisis, or even that they are the sole worthy recipient of blame. That is a story for children, not for we who seek to know the truth. After all, bankers control much of the mainstream media corporations through interlocking directorships: They control the spin.
No, there's much more to the story and the duped poor people may in fact be only a tiny part. It involves a much larger mesh of wrongdoing and outright criminality, involving bankers engaging in derivatives gambling, bailouts for politically-connected racketeers, Ponzi schemes, front-running scams, money laundering on a massive scale, and much more.
Assets versus goodsA good is something that is bought and sold but is but to use and worn out, and its value declines. The market determines the prices of goods. Examples: Shoes, computers, food.
An asset is a product that is bought in order that you might sell it later at a higher price. The market does not determine the prices of assets, but rather speculators do. Examples: Houses, fine art, classic cars.
When Alan Greenspan made it far too easy to get loans by reducing the interest rate after 9/11, he fueled speculation in assets, not goods. He claimed that the wisdom of the market would stabilize the housing market, even though asset prices are not subject to market forces. He was lying.
The abusive speculatorsThere is a cadre of wealthy speculators who are at war with savers. Who's a saver? If work for a living and you put money into a bank for safety and to collect interest, you are a saver.
Wealthy speculators like:
This effectively results in a global Ponzi scheme.
Wealthy speculators dislike:
Wealthy speculators use part of their ill gotten gains to bribe politicians (which is legal in the USA where we call bribes "campaign contribution" or private consultant jobs). Therefore politicians are on their side, not on the side of the savers.
John Paulson and Goldman SachsJohn Paulson is one speculator who became infamous for betting against subprime securities and massively winning. He is said by Kevin Connor to have worked with Goldman Sachs to create those fraudulent securities, designing them to fail so that he could later profit on their failure, terming this a "vulture flight pattern". In 2010, Paulson was operating in Greece with a team of 20 traders and Goldman Sachs to bet against Greek national debt.
The abused saversSavers are regular people who hope to benefit from putting their money in banks, which effectively lends the money to banks to invest with in return for interest.
Banks pay you for the right to use your money for investments.
Without your savings, banks are unable to make loans. Fractional Reserve Lending lets them lend out 10 times the savings that they have on hand.
Savers benefit from:
The peekaboo accounting scamWe now know that Lehman executives were, like execs at almost every US corporation it seems, engaging in "peekaboo accounting" as commentator Max Keiser calls it. This means they would move debts off their balance sheets just days before having to issue a quarterly report, and a week later move it back on.
Peekaboo accounting is also now a common practice of corporations, who move profits and debts to other organizations temporarily when reporting time comes.
Besides making profits disappear temporarily, corporations also move profits to foreign subsidiaries located in tax havens to avoid paying taxes on those profits. This practice accelerated under the George W. Bush presidency, as described in a Citizens for Tax Justice report.
The shadow banking systemAlso known as the dark exchange, the after-hours market, the OTC market.
Bank for International SettlementsLocated in Basel, Switzerland. Website.
The BIS has useful statistics on the global derivatives market, which was $1200 trillion or so in 2010. BIS stats.
Market ReligionSome time ago I devised the term market religion to describe what I saw as a set of behaviors that are akin to religion, in a psychological and anthropological senses. I had been taking courses in both psychology and anthropology. Anthropologists are interested in what constitutes a religion and they generally specify a set of characteristics.
I kept seeing these key characteristics of religiousness in financial news reporting, but also in the America's ostensibly capitalist culture generally. So I began to consider capitalism to be a kind of pseudo-religion.
It was a satirical claim of course, but then again, as an atheist I often see patterns of religiousness in people, even in other atheists' behaviors and beliefs.
Market FundamentalismMarket fundamentalism is a term that describes a collection of claims that is actively promoted by various people. Typically these people are pushing the Neoliberal agenda.
Some of these claims:
Ponzi schemesRobbing Peter to pay Paul is the essence of a Ponzi. In a Ponzi this happens many times until the money bubble pops. Peter and Paul are usually eager participants, and are unaware of each other.
Fractional reserve lending
General MotorsSenator Charles E Grassley accused General Motors of using peekaboo accounting to pretend that it paid back bailout money when in truth it repaid it using yet more public money. Grassley referred to this as a "money shuffle". Depending on how many times GM robbed Peter to pay Paul, perhaps one can call their conduct a mini-Ponzi.
BubblesA bubble is a Ponzi scheme, created to transfer wealth to the Ponzi schemers, who then pop the bubble, and then they rush in afterward to suggest a solution for their corrupt politicians like Obama and Gordon Brown to deploy. A bubble is caused by cheap money, which lets speculators inject borrowed money into markets, inflating the value of assets like homes and dot-com businesses.
Robbing Peter to pay Paul:
The money supplyWhere does money come from literally?
There are two sources of money:
When banks do not lend, and/or people and businesses are too poor to borrow, the money supply shrinks. When the money supply shrinks, money becomes more expensive (hard to obtain) and the relative value of a currency can increase whereupon deflation can set in.
Deflation helps savers, because their savings will buy more stuff, but hurts speculators (like big banks), who have far more political clout. The banker-owned media tend to claim that deflation is bad. They mean it's bad for speculators.
In the USA, the bankster-controlled Obama Administration started giving billions of dollars away to corrupt, incompetent bankers and to anyone else who would accept it. This expanded the money supply but some deflation has occurred anyway in the housing sector.
What is a market maker?This term technically means a person or company that exists in the market to provide for an orderly and fair market. They buy when others are selling and the sell when others buy. Market makers are not supposed to profit from their position, because they can see trades before they happen. And yet many do.
However the term as used by Goldman Sachs is a euphemism for thief. Goldman engages in high-frequency trading and therefore has great power over the market. They can push the market up or down on a whim because the number of trades they're doing (volume) is so large. They are closer to the core mechanisms of the market so that they can rig the market in order to never lose.
Because players like Goldman can manipulate the market in dramatic ways, they stand accused of creating panics in order to influence politicians to prevent imposition of new regulations.
Zero-reserve banking systemThe banking cartel (banks and the US government) has figured out that banks can game the system so that they don't have anything on hand. A bank will obtain an asset, lend out 10 times its value, and right away sell the asset. So they have basically no risk except for the system itself. If they do experience a loss, they will employ the Neoliberal practice of going to Washington to get the politicians to have the taxpayers bail them out, paying off their bad bets. (In Neoliberalism they privatize profits and socialize losses.)
LeverageFractional reserve lending in analogous to the system as a whole. Big financial companies are "over-leveraged" meaning they have bets and debts greatly in excess to their real assets. However since Alan Greenspan the "fraction" has been shrinking as a percentage. This increases the risk for everyone since a stable economy is one that is built upon production (not bets and debts) and whose currency is backed by (built upon) something tangible such as a precious metal like gold and/or silver.
Goldman Sachs has taken over the US government?Some charge that Goldman Sachs has staged a coup d'etat. Consider:
Some brokers like Goldman Sachs stand accused of deliberately selling their clients worthless products, then "shorting" these products i.e. betting that the value of those products will fall from their inflated price. In this way, they were ensured of a profit and their clients were certain to lose.
It is also worth pointing out that the controlling board of the BBC is dominated by Goldman Sachs executives, according to Max Keiser.
What are they up to?They are said to do 1 trillion trades per hour and to make a profit of $100 million per day.
The WTC 7 connectionThe controlled demolition of the World Trade Center at 5:20pm on 9/11 had a convenient effect for criminal bankers: The demolition of building 7, which most Americans have never seen nor heard of, resulted in a large loss of documents owned by foreign banks that described the value of assets. It also contained key files on the Enron investigation and other financial investigations.
What is an economic bubble?A bubble is a phenomenon in which a feedback loop arises:
Bubbles are often due to Ponzi schemes. Anything that is a Ponzi scheme naturally creates a bubble.
Examples of economic bubbles:
Since fractional reserve lending is a Ponzi scheme, it too is creating a bubble but slowly.
America's social security system is a Ponzi scheme.
Bubbles beget more bubblesA Chinese official has admitted that China and the US are addressing the bubble problem by creating more bubbles.
InflationInflation is portrayed in some Economics 101 classes as being a natural phenomenon of the market.
That's not quite correct.
It is actually also the product of a scheme invented hundreds of years ago by kings and queens and dukes who realized that there was a hard limit on how much they could tax their subjects before they would face the end of a pitchfork. So a new scheme was invented. It works as follows.
If a regular person writes a check without any money in the bank to pay for it, they risk going to jail.
If the Federal Reserve does it however, Congress thanks them for it. The Fed has the right to invent money out of thin air, because it's a central bank. Printing more money has bad future consequences those won't appear until later, Congress will have spent the money by then.
So rather than tax the public more, Congress can go to the Fed anytime and get free money. It was the same with royals.
This weakens the dollar, because of supply and demand. The more of a currency that is in circulation, the less value it has.
However printing more money also results in inflation, which erodes consumers' buying power and destoys savings. But this harm will not occur immediately.
Shady international cabal of financiersIt has been said that when Ian Fleming was writing his James Bond books he always gave them a basis in truth, albeit uncommon truth. So on some level Dr No, Goldfinger and other bizarre characters had counterparts in the real world.
For the common person who just wants to keep his or her down and live life, talk about an international cabal that is trying to shape world events will immediately illicit scoffs and condemnation of "conspiracy theories" and "tin foil hats".
Yet there seems to be historical evidence, unsurprisingly not provided by Establishment lackeys, that such Dr No wannabe's do exist and regularly meet in organizations such as the Bilderberg group, Trilateral Commission, and the Council on Foreign Relation.
Which is to say that economic bubbles are not accidents but are planned, as are Depressions, Recessions, and the like. Rich people of this ilk frequently use the term "New World Order" in public to refer to their ultimate goal.
And indeed there are many momentous events where gross malfeasance or criminality played a role behind the scenes: The creation of the Federal Reserve; the Great Depression; major economic bubbles (Dot Com, Housing, etc.); repeal of the Glass-Stiegel Act;
What is the Federal Reserve?The Federal Reserve is a cartel of private banks whose members were once (around 1910) known as the Money Trust.
The public despised them and wanted to break their parasitic grip on society so the Money Trust members pulled a fast one: They met secretly on Jekyll Island (Georgia) to write the Federal Reserve bill. They then used trickery to get it passed in Congress as a bill to break their own hold on the economy.
Woodrow Wilson foolishly signed it into law, which he later admitted was a grave mistake.
The Federal Reserve Act indeed legalized and enshrined the Money Trust as the Federal Reserve.
The purpose of any cartel is to reduce competition between members preferably to zero while increasing profits and reducing risk for members. The Federal Reserve Act did that.
DefinitionA derivative is a gamble.
OTC = over the counterThis odd term refers to any transaction that does not have a middleman.
When you buy a car from another person as a private sale, that is an example of an "over the counter" transaction. Transactions negotiated through Craigslist classified ads and on Ebay are often OTC as well.
When you buy a stock on the stock market, this is not OTC. There is an intermediate (the market) who will sell you stocks even if there is no one selling to it. Likewise you can sell to the intermediate even if there is no buyer. The intermedate functions as a market maker.
OTC can be risky for society if some party buys a highly risky product like a mortage-backed security without understanding that it's junk, and then asks society to bail them out.
Mark to market is the act of defining the market value of a contract. Some companies, realizing that an objective value could not be set, abused the mark to market concept to engage in accounting fraud.
Program tradesA program trade is a trade brought about by a computer program. They are advantageous in certain situations.
What certain situations? Arbitrage, from microsecond to microsecond or millisecond to millisecond.
On the New York Stock Exchange, 70% of the trades are program trades.
Of that 70%, 50% are by Goldman Sachs.
Therefore, 35% of the volume on the NYSE is Goldman Sachs program trades.
Another major program trader is Citadel.
Naked short sellingThere's a technique called "naked short selling" that is used to literally counterfeit a company's stock in order to make a profit by selling that fake or phantom stock. In the process, its price is driven down and that negatively affects whatever company is the victim of a naked short attack.
It is because of naked short selling that Bear Stearns' stock and Lehman Brothers' stock plummeted and each declared bankruptcy. They were the victims of fund managers orchestrating a coordinated attack on their stock using naked shorting.
It's not just banks that have been victims. Many companies have including Overstock.com, as explained by its CEO in this Fox News interview of David Byrne.
The SEC identified decreed that 19 banks to be protected from naked shorting. What this really meant was that the SEC was in all other cases and prior to that new rule refusing to enforce the laws against naked short selling, which is definitely an illegal activity.
Why? Because the people and companies who profit from naked shorting are very powerful. Indeed, according to David Byrne 9 of the protected banks were engaging in naked short selling.
Here's a YouTube video posted by WriterJudd about the naked-short-selling attacks on Bear Stearns and Lehman:
Notice that in this video the author (presumably WriterJudd) identifies three hedge fund managers whom he believes are guilty of the Bear Stearns and Lehman attacks:
Counterfeit ratingsEveryone knows that mortgage-backed securities were fraudulent. So why did organizations, towns, cities, and countries buy them?
Because ratings agencies like Moody's were paid more to provide better ratings of these securities. It was fraud.
This established the mortgage-backed securities as a "confidence game", i.e. one in which a victim is made to feel confident that something is worth a great deal of money when actually it's fairly worthless.
The unemployedThe official unemployment number is bogus because it ignores people who are working only part-time and people who have stopped looking for work.
The Chinese lenders
The Wall St. fraudstersThere are supposedly at least 16 types of fraud that are in commonplace use on Wall Street. Many of these techniques are old, others are Enron-inspired, but they are common and are used by Wall Street firms to steal from the public.
World debt versus world GDP
The US dollarIt's the world reserve currency. But for how long?
Dollar devaluationIn October 2009, journalist Robert Fisk announced that China, Fruance, Russia, oil producing countries and Gulf states had met secretly to discuss dumping the US dollar as the currency for trading oil.
This is the "decoupling effect" that Peter Schiff warns will happen.
It is known that China has been quietly accumulating gold. Gold has an inverse relationship with the dollar.
It is known that Gulf states have about $2 trillion dollars of reserves.
The Carry TradeInterest rates are not the same in every country. If you see that the interest rates are low in country A, such that you can borrow cheaply, and that investments exist in country B that are offer a higher rate of return, then you can make money by borrowing in one currency, exchanging it, and investing in country B. This is the carry trade.
If the interest rates rise in country A, the carry trade disappears and investors are left with bad investments.
The carry trade was instrumental in Iceland's unlikely rise. The carry trade is how they made money without producing anything and despite Iceland's tiny population of only 300,000 people.
The carry trade can explain why the dollar has risen recently even while the stock market fell. The dollar was in demand because it's cheap to borrow. Interesting commentary by Jan-willem Nijkamp.
The "Beijing put" refers to China's purchasing of gold whenever it falls below $1000 per ounce. It does so quietly so as to not send the price higher. Thus it buys in the valleys i.e. when the price dips.
The future: What could happen?
Peter Schiff says...
At his point both Russia and China have argued that the US dollar should be abandoned as the world reserve currency.
Jim Rogers says...His website
Rogers is a famous investor and frugal man who has "little need for money". He and friend George Soros won big when trading currency during their younger years. Rogers warns everyone to get out of the US dollar and the UK pound. He has famously told young Britons to leave the UK.
Michael Hudson says...His website
Michael Hudson explains the meltdown: KPFA Guns and Butter interview MP3.
Michael MooreMoore's 2009 film "Capitalism, a Love Story" brings the details of the derivatives mess and the threat of corporatism to the public's doorstep.
He does a pretty good job considering that he makes mainstream American films and is surely constrained from speaking verboten topics.
Yet what he doesn't say is almost more important than what he does. He fails in this documentary to mention:
AfricaThe Neoliberal system takes the resources of Africa and gives them aid and guns in returns. You can no longer say it's "the West" doing it, since China is in on the game.
Reminder: Our corrupt mediaWe live in an age of huge scams. Massive wrongs are being committed or have been and few people are being held accountable. Events have shown that Obama is in on the racketeering and the cover-ups. He is providing a continuation and expansion of George W. Bush's disastrous policies, not just in the area of finance but also in the building-up of the police state.
Both the mainstream media and the carefully-named
For info about who controls the alternative media, see here: diagram
For reference: Gold price
gold price charts provided by goldprice.org And oil too:
It seems that America is toast All ruined not unlike our East Coast There may be a silver lining For our empire needs confining Our greatness is an empty boast.
Documentaries about the financial crisis
About student loans:
About the rich:
A few links