Fixing the Lie-More Economy
The Libor-Barclay’s scandal has made us increasingly aware of the collusion between politics and finance. The fix already lies in on our LIE MORE economy, where corporate raiders can easily siphon money out of our economy, leaving us fighting among ourselves for a shrinking economic pie. We debate safety nets, taxes, jobs, the deficit, and stimulus spending when the very first thing we should do is simply disconnect the siphon.
The derivatives market, of which the vast majority is made up of interest rate products, is one manifestation of the political-financial monopoly. As Goldman Sachs’ employee Fabrice Tourre so eloquently described in his emails to girlfriend Marrine Serres, he was the “fabulous Fab” creating “Frankenstein” products that were nothing more than “pure intellectual masturbation” for sale to unwitting clients. The financial wizards of this monopoly include Wall Street banks, of which I will only highlight three. These unregulated derivative products were very profitable and from 1998 to 2008, Bank of America reported profits of $135 billion, Citibank $145.8 billion, and JP Morgan Chase $97.6 billion. The political cronies of this monopoly included appointed and elected members of our federal government. A few of the top federal government regulators who ignored the warning signs to regulate the derivatives were Greenspan, Rubin, Levitt, Geithner, and Summers. Obviously the White House and Congress were active participants in the monopoly because of the benefits this collusion brought to them:
- A smoke and mirrors prosperity for political re-election purposes.
- Campaign contributions (same three-bank example contributed $49.8 million from 1998 – 2008)
- Lobbying (these three banks paid $139.1 million from 1998 – 2008)
- U.S. Congress members benefit from abnormally positive returns on personal investments.
- Open Secrets profiled 849 people who work in the finance and investment industry as lobbyists who previously worked in the federal government (more work directly in lobbying industry). As Jack Abramoff explains, “unless we sever the link between serving the public and cashing in, no other reform will matter.”
The derivatives market grew at an alarming rate of nearly 1,000 percent since 1998 for a total size of $700 trillion, estimates the Bank for International Settlements (BIS). Very bold legal protections were even put into place ensuring that the victims of this ponzi scheme could not get a crumb of that stolen pie back. In 2005 a bankruptcy reform law was passed giving seniority in bankruptcy to these “Frankenstein” products.
Ten years after the warning sign by Long Term Capital Management of a $4 billion derivatives loss in 1998, we witnessed the failure of AIG and taxpayer bailout of $180 billion. The taxpayers funneled money through AIG to pay off the bets they made with Wall Street Banks marking the beginning of the bailout bubble. To continue with the previous three-bank example, Bank of America, Citigroup, and JPMorgan Chase received $635 billion in taxpayer bailouts plus an unknown amount from the Federal Reserve’s $16 trillion in emergency programs.
We spent more to bail these three banks out than they made in profits for ten years – $378.4 billion in profits vs. $635 billion-plus in bailouts. Banks got a much higher return on their political investments than their financial investments. These three only spent $189 million in campaign contributions and lobbying during the previous ten years.
Instead of crumbling under the pressure, the monopoly became stronger. Indeed, the entire banking sector has continued a rapid consolidation in the last 10 years. In 2002 the top 10 U.S. banks held 55 percent of the industry’s domestic assets and today they hold 77 percent. As if that isn’t worrisome enough, according to the Office of the Comptroller of the Currency, these three banks hold $187 trillion in derivatives. The concentration of these contracts in the hands of a limited number of banks magnifies the risk.
For years now we have been hearing about financial reforms and new regulatory agencies, but clearly what we didn’t get was an attitude adjustment. We can throw all of the money, staffing and legal power we want at this problem, but until there is a commitment to eliminate this monopoly, the ponzi scheme continues. Last month during the whale-watching tour, we realized that regulators can’t even catch a bank seemingly cornering a market. Frighteningly, we are also observing that the bailouts are not a thing of the past. While issuing a series of credit ratings downgrades, Moody’s Investors Service actually spells out in a handy bar graph that government “systemic support” is still a significant factor that elevates the credit rating of every big bank in its review. As this tragic comedy plays out, one day after the downgrades, investors responded by sending up shares of the affected firms. Dennis Kelleher, the president of Better Markets, explained that the market is ignoring the announcement and “counting on the Fed bailing every one out again.” The market relies on the Fed because the numbers many banks are showing are known to be inaccurate. The Switzerland-based Bank for International Settlements, which acts as a bank for the world’s central banks, said in its latest annual report, “As we have urged in previous reports, banks must adjust balance sheets to accurately reflect the value of assets.” The lack of transparency and credibility in banks’ balance sheets fuels a vicious cycle. When investors can’t trust the books, lenders can’t raise capital and may have to fall back on the taxpayers for a bail out. This further pressures public finances, which in turn weakens the banks even more.
The siphoning of wealth out of our economy doesn’t only occur through the taxpayer bailout costs and the “earnings” on the origination of these “Frankenstein” products, but also through the less visible pick-pocketing of savers through inflation, currency devaluation and low to negative real interest rates. We are even being pick-pocketed by this monopoly through higher municipal taxes, rates and fees. Our municipalities were ripped-off on municipal bonds because the banks colluded to rig the public bids, a business worth $3.7 trillion. The banks conspired to lower the interest rates that towns earned on these investments and therefore systematically stole from “virtually every state, district and territory in the United States.” Now on the flip side of this deal, the taxpayers are again being hosed by the monopoly. After the housing market crashed, the Federal Reserve cut the Fed Funds Rate to 0 percent. This triggered the interest rate swaps that cities entered into with the monopoly resulting in a high fixed rate. The Federal Reserve is an indirect participant in every single swap trade and derivative trade. Many U.S. cities now have huge losses on these swap contracts. A study was published by the Refund Transit Coalition, entitled “Riding the Gravy Train,” and it found 1,100 swaps deals at more than 100 government agencies that are costing taxpayers $2.5 billion a year.
The monopoly bailed out the largest banks directly with taxpayer money allowing them to offload or restructure their most toxic holdings, including many derivatives like interest rate swaps. No similar bailout was offered to local governments, however. The public has been left holding derivative contracts that are currently not much more than agreements to subsidize banks further with taxpayer dollars.
The structure of this system is not working for us citizens and the national dialogue is not addressing the monopoly problem. We debate stimulus monies and pass packages doling out money to local governments who many times turn around and spend it on the interest rate-gouging to the bailed out banks. We debate regulations and pass bills adding thousands of pages of laws and creating numerous additional agencies hiring countless new regulators to ignore the monopoly problem, handcuff the real job creators and stifle growth. We debate the federal income tax rates and wring our hands in despair about the budget deficit instead of stopping the trillions of USD being siphoned out of our national economy by the monopoly.
This political-financial monopoly will not improve itself. If we the citizens want an economy better than this dire crisis, we must act like the brave and the free that we are and courageously change this system. From where I’m sitting as an average American citizen, the fact that the monopoly kingpins are still in position today and have gained even more power since 2008 is a clear signal that we are not on the path to a recovery. Why haven’t we cut them off from the influence of money? Either we are the brave and the free, or we are not.