The Financial Con Of The Decade Explained So Simply Even A Congressman Will Get It

Tyler Durden's picture

Sometimes, when chasing the bouncing ball of fraud and corruption on a daily basis, it is easy to lose sight of the forest for the millions of trees (all of which have a 150% LTV fourth-lien on them, underwritten by Goldman Sachs, which is short the shrubbery tranche). Luckily, Charles Hugh Smith, of has taken the time to put it all into such simple and compelling terms, even corrupt North Carolina congressmen will not have the chance to plead stupidity after reading this.

Of course, to those familiar with the work of Austrian economists, none of this will come as a surprise. 

1. Enable trillions of dollars in mortgages guaranteed to default by packaging unlimited quantities of them into mortgage-backed securities (MBS), creating umlimited demand for fraudulently originated loans.

2. Sell these MBS as "safe" to credulous investors, institutions, town councils in Norway, etc., i.e. "the bezzle" on a global scale.

3. Make huge "side bets" against these doomed mortgages so when they default then the short-side bets generate billions in profits.

4. Leverage each $1 of actual capital into $100 of high-risk bets.

5. Hide the utterly fraudulent bets offshore and/or off-balance sheet (not that the regulators you had muzzled would have noticed anyway).

6. When the longside bets go bad, transfer hundreds of billions of dollars in Federal guarantees, bailouts and backstops into the private hands which made the risky bets, either via direct payments or via proxies like AIG. Enable these private Power Elites to borrow hundreds of billions more from the Treasury/Fed at zero interest.

7. Deposit these funds at the Federal Reserve, where they earn 3-4%. Reap billions in guaranteed income by borrowing Federal money for free and getting paid interest by the Fed.

8. As profits pile up, start buying boatloads of short-term U.S. Treasuries. Now the taxpayers who absorbed the trillions in private losses and who transferred trillions in subsidies, backstops, guarantees, bailouts and loans to private banks and corporations, are now paying interest on the Treasuries their own money purchased for the banks/corporations.

9. Slowly acquire trillions of dollars in Treasuries--not difficult to do as the Federal government is borrowing $1.5 trillion a year.

10. Stop buying Treasuries and dump a boatload onto the market, forcing interest rates to rise as supply of new T-Bills exceeds demand (at least temporarily). Repeat as necessary to double and then triple interest rates paid on Treasuries.

11. Buy hundreds of billions in long-term Treasuries at high rates of interest. As interest rates rise, interest payments dwarf all other Federal spending, forcing extreme cuts in all other government spending.

12. Enjoy the hundreds of billions of dollars in interest payments being paid by taxpayers on Treasuries that were purchased with their money but which are safely in private hands.

Charles' conclusion does not need further commentary as it is absolutely spot on:

Since the Federal government could potentially inflate away these trillions in Treasuries, buy enough elected officials to force austerity so inflation remains tame. In essence, these private banks and corporations now own the revenue stream of the Federal government and its taxpayers. Neat con, and the marks will never understand how "saving our financial system" led to their servitude to the very interests they bailed out.

The circle is now complete: in "saving our financial system," the public borrowed trillions and transferred the money to private Power Elites, who then buy the public debt with the money swindled out of the taxpayer. Then the taxpayers transfer more wealth every year to the Power Elites/Plutocracy in the form of interest on the Treasury debt. The Power Elites will own the debt that was taken on to bail them out of bad private bets: this is the culmination of privatized gains, socialized risk.

In effect, it's a Third World/colonial scam on a gigantic scale: plunder the public treasury, then buy the debt which was borrowed and transferred to your pockets. You are buying the country with money you borrowed from its taxpayers. No despot could do better.

As for part two of this epic con we are all living through, Charles explains as follows:

The Con of the Decade (Part II) meshes neatly with the first Con of the Decade. Yesterday I described how the financial Plutocracy can transfer ownership of the Federal government's income stream via using the taxpayer's money to buy the debt that the taxpayers borrowed to bail out the Plutocracy.

In order for the con to work, however, the Power Elites and their politico toadies in Congress, the Treasury and the Fed must convince the peasantry that low tax rates on unearned income are not just "free market capitalism at its best" but that they are also "what the country needs to get moving again."

The first step of the con was successfully fobbed off on the peasantry in 2001: lower the taxes paid by the most productive peasants marginally while massively lowering the effective taxes paid by the financial Plutocracy.

One Year Later, No Sign of Improvement in America's Income Inequality Problem:

Income inequality has grown massively since 2000. According to Harvard Magazine, 66% of 2001-2007's income growth went to the top 1% of Americans, while the other 99% of the population got a measly 6% increase. How is this possible? One thing to consider is that in 2001, George W. Bush cut $1.3 trillion in taxes, and 32.6% of the cut went to the top 1%. Another factor is Bush's decision to increase the national debt from $5 trillion to $11 trillion. The combination of increased government spending and lower taxes helped the top 1% considerably.

The second part of the con is to mask much of the Power Elites' income streams behind tax shelters and other gaming-of-the-system so the advertised rate appears high to the peasantry but the effective rate paid on total income is much much lower.

The tax shelters are so numerous and so effective that it takes thousands of pages of tax codes and armies of toadies to pursue them all: family trusts, oil depletion allowances, tax-free bonds and of course special one-off tax breaks arranged by "captured" elected officials.

Step three is to convince the peasantry that $600 in unearned income (capital gains) should be taxed in the same way as $600 million. The entire key to the U.S. tax code is to tax earned income heavily but tax unearned income (the majority of the Plutocracy's income is of course unearned) not at all or very lightly.

In a system which rewarded productive work and provided disincentives to rampant speculation and fraud, the opposite would hold: unearned income would be taxed at much higher rates than earned income, which would be taxed lightly, especially at household incomes below $100,000.

If the goal were to encourage "investing" while reining in the sort of speculations which "earn" hedge fund managers $600 million each (no typo, that was the average of the top 10 hedgies' personal take of their funds gains), then all unearned income (interest, dividends, capital gains, rents from property, oil wells, etc.) up to $6,000 a year would be free--no tax. Unearned income between $6,000 and $60,000 would be taxed at 20%, roughly half the top rate for earned income. This would leave 95% of U.S. households properly encouraged to invest via low tax rates.

Above $60,000, then unearned income would be taxed the same as earned income, and above $1 million (the top 1/10 of 1% of households) then it would be taxed at 50%. Above $10 million, it would be taxed at 60%. Such a system would offer disincentives to the speculative hauls made by the top 1/10 of 1% while encouraging investing in the lower 99%.

Could such a system actually be passed into law and enforced by a captured, toady bureaucracy and Congress? Of course not. But it is still a worthy exercise to take apart the rationalizations being offered to justify rampant speculative looting, collusion, corruption and fraud.

The last step of the con is to raise taxes on the productive peasantry to provide the revenues needed to pay the Plutocracy its interest on Treasuries. If the "Bush tax cuts" are repealed, the actual effective rates paid on unearned income will remain half (20%) of the rates on earned income (wages, salaries, profits earned from small business, etc.) which are roughly 40% at higher income levels.

The financial Plutocracy will champion the need to rein in Federal debt, now that they have raised the debt via plundering the public coffers and extended ownership over that debt.

Now the con boils down to insuring the peasantry pay enough taxes to pay the interest on the Federal debt--interest which is sure to rise considerably. The 1% T-Bill rates were just part of the con to convince the peasantry that trillions of dollars could be borrowed "with no consequences." Those rates will steadily rise once the financial Power Elites own enough of the Treasury debt. Then the game plan will be to lock in handsome returns on long-term Treasuries, and command the toady politicos to support "austerity."

The austerity will not extend to the financial Elites, of course. That's the whole purpose of the con. "Some are more equal than others," indeed.

h/t Andrew

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Sqworl's picture

Just drank it up with the elites in South Hampton...somebody said, I wonder what the poor people are doing???

sourgrapesson's picture

Sounds like something one would say who could be related to that dead queen of mean bitch Leona Helmsley.  

Rollerball's picture

Praying they'll camel through that eye of the needle.

TuesdayBen's picture

Oh, the Poor People?  Well, what we're doing this fine evening, the 46th Saturday evening since the severance package was granted, is relaxing on the sofa in our bank's SFH, enjoying some low-budget entertainment in the form of ZH courtesy of some neighbor's wifi signal.  Just returned from the first night out in over a week - Outback Steakhouse's business is way down, yet the price of the chicken sandwich w/ side salad and tax increased from $10.40 to $11.95.

Is Obama's focus on job creation still laser-like?  Lacking substance, ephemeral, fleeting.

Say, is it true that federal income taxes will be raised sharply next year?  If so, you 'workers' have my condolences.

jeff montanye's picture

it is a good chicken sandwich but what the ...?

FEDbuster's picture

No more chicken sandwiches here, the Outback here (Prescott, AZ) closed down last month.

Eric Cartman's picture

Yeah, went to Red Robbin for a burger the other day with my girlfriend and the waitress said "we have new menu's." At first glance it looked the same until I saw the price for the Whisky River BBQ burger I always order. It went up from $8.29 to $9.29. I think I saw about 10 tables occupied, the rest were all empty. Now I know why. No more Red Robbin for me! 

Boilermaker's picture

I'd bet my left nut that the portions went downward as well.  Red Robin does, however, make a tasty burger.  I don't know if it's $10 good...but it is good.

gmrpeabody's picture

  I don't know where the hell all you people are coming from on this topic. Every study and every index known to mankind shows conclusively and absolutely that CPI is DOWN or TRENDING DOWN. There is no inflation, nor will there be inflation. Any wild inflation predictions are the product of crazed gold bug types screaming their book, and nothing more. You simply cannot fall for all the hype from blogs such as Tyler or Jesse. ;-) 

  BTW...that whiskey river BBQ burger went up even more here, and the new $6 hourly paid cooks wouldn't know what a medium was if it bit them on the ass.


trav7777's picture

CPI gets "hedonic" adjustments.

For example, when people opt for starvation because they cannot afford food, food cost component of CPI goes to 0.  No inflation!

I grocery shop at Slaveway enough to have noticed the same trend.  Prices are moving upward, not downward.  So much for my precious FRNs, Douchinger.  Sometimes the store will hang "new low price!!" tagging on an item and I've been there and bought it for long enough to recognize that the price is actually HIGHER.

Has anyone noticed that a bag of Doritos now costs nearly $4??  WTF

voltaic's picture

Girlfriend just mentioned to me that Secret deodorant was advertising a "new lower price", of course that came with a non-advertised "new less weight." 

Cathartes Aura's picture

while I don't buy "corporate" food (Nabisco, et al), I do occasionally shop in supermarkets - and like to peruse the isles to see what the current claw-backs are. . . check your ingredients, they're definitely going towards "filler" - bought some pesto (basil, parmesan, olive oil, simple ingredients really), and upon use, found it tasted hella bitter - checked the ingredients, "parsley" is the new green cheap filler. . . parsley is not an ingredient of pesto. . .

also, be on the look-out for "mechanically reclaimed meat" - it's a named food source, AFTER the meat is removed from the bones, what's left is blasted off, and added to food products as "meat". . . it's been used for decades, but I've noticed it's been creeping up the ingredient list the past couple years - if it's high or even first on the list, you may want to reconsider eating it. . .

with regards foods "downsizing" in packaging, it's been going on for a couple years now. . . shopped with friends for a gathering, noticed boxes of crackers, side-by-side on the shelf, different volumes, losing about 1-2 ounces with "new improved packaging". . . lol

but seriously, if you've never checked ingredients before, you might want to. . . or just cut back on the shopping for pre-made "fud" products.

litoralkey's picture

posting this late:

RE: reclaimed meat products, as of 12 years ago, over 95% of this was used in pet food,, today over 60% is used in human food, mostly by fast food chains and as you mentioned, convenience food brands on supermarket shelves.

It's the part most likely to be diseased due to contact with intestinal contents.

Kali's picture

So, not just impoverished Seniors eating cat food anymore.  I have dealt with many food processors and growers over the years.  That's why I grow a lot of my own, or buy it directly from the people I trust who do.  If most people really knew what they were eating or how it was processed, they wouldn't.

francis_sawyer's picture

"Everyday Low Prices"... bitchez!

gridlocked's picture

Funny how services are rising at a phenomenal rate.

 BCBS up 10.5%

Cable up 9%

Electric up 10%

Property taxes (mine anyway) up 7.2%

The CPI is the most BS stat ever created.


Eric Cartman's picture

Hey guys check it out! We have another Government Junkie in the club. I want "gmrpeabody" first. He will Respect Mah Authoritah! 

Eric Cartman's picture

Well, I made up for it with a smaller tip. She wasn't that good anyway and the place was dead. So in the end, it is the little guy who takes the hit. In this case, waiters and waitresses are gonna get shafted. 

Eric Cartman's picture

Who ever junked me for pointing out inflation in the food supply needs a good kick in the nutz! The Fuck.

Dburn's picture

The best one I heard was "glad all you fuckers are working, so I don't have too. Thanks"

Hephasteus's picture

They are designing a new game. It's like baseball only you just use the bat.

FEDbuster's picture

Yes, and one of their new bats will be the VAT.  Value Added Tax hits the poor right in the crotch, while having little effect on elites. 

The fact that the American serf class is well armed hasn't even slowed them down a bit.  Of course they are making sure local police are militarized, so they can put down any insurrections.

Suisse's picture

The true poor are unarmed and unable to afford firearms and ammunition.

DeanTheMachine's picture

So all those losers shooting each other in the ghettos are rich? Or they're just not the "true poor."

NOTaREALmerican's picture

Jeez,  no "the poor" aren't just "those people".


Plenty of crack addled white trash running around your suburbs too.    Not sure if they've got money for guns-n-ammo after they spend money on their pimped-up SUV (with the low profile tires).  

Ardent Spirits's picture

Got a news flash for you. The cops will just step back, go home & protect themselves & their families. The National Guard won't do the dirty work either, the more fascist officers won't survive the first day. I think a VAT would be iffy to pass, better chance for a national Internet commerce sales tax.

amusedobserver's picture

I think this is a saying whose origins are lost in the mist of time.  My father and uncle (mom's side) both had a similar saying, "Wonder what the poor people are eating?"  that they would say at a family feast.  They grew up in the Great Depression, my mom's side was particularly poor, growing up in the upper midwest with bare feet and lard sandwiches.  It means that no matter how bad off you were, there was always someone worse off, the "poor".  And no matter how poor you were, you still saw yourself as middle-class.  Of course, the context is lost when it is said now.'s picture

Nobody is worse off than those poor souls eating the bare feet and lard sandwiches.

twinturbo's picture

Thank you Genuine LOL amongst genuine dismay.

Gully Foyle's picture

Poor Haitians Resort to Eating Dirt

Charlene, 16 with a month-old son, has come to rely on a traditional Haitian remedy for hunger pangs: cookies made of dried yellow dirt from the country's central plateau.



[an old convict and H.I. lying on their prison bunks, passing the time]
Ear-Bending Cellmate: ...and when there was no meat, we ate fowl and when there was no fowl, we ate crawdad and when there was no crawdad to be found, we ate sand.
H.I.: You ate what?
Ear-Bending Cellmate: We ate sand.
H.I.: You ate SAND?
Ear-Bending Cellmate: That's right!

CPL's picture

And that explains only that the island cannot produce enough food by itself to feed it's population of 9.8 million packed into 10,500 sq miles (about the size of Massachusetts, pop 6.6 million)

Malthusian rules are in effect along with the islands crippling poverty in education and money.

trav7777's picture

Just like Singapore, Hong Kong, Luxembourg, Lichtenstein, etc., right?

Somehow they've managed to make a good go of it despite the densities.  Haiti's problem is Haitians.'s picture

A large share of Haiti's problems come courtesy of American corporatism and miltary adventurism (yeah, I know it's difficult to believe...).


"I helped make Mexico, especially Tampico, safe for American oil interests in 1914. I helped make Haiti and Cuba a decent place for the National City Bank boys to collect revenues in. I helped in the raping of half a dozen Central American republics for the benefits of Wall Street. The record of racketeering is long. I helped purify Nicaragua for the international banking house of Brown Brothers in 1909-1912. I brought light to the Dominican Republic for American sugar interests in 1916. In China I helped to see to it that Standard Oil went its way unmolested."


-- Smedley Butler, War is a Racket

Cathartes Aura's picture

Haiti's problem is the United States and the oil addiction.  What do you suppose are the

 economic and strategic reasons the US has constructed its  in the fifth largest embassy in the world - fifth only besides the US embassy in China, Iraq, Iran and Germany - in tiny Haiti, post the 2004 Haiti Bush regime change.

they've known of this since the 60's, and of course, it is necessary to keep the country impoverished and de-stabilised for whenever they need to tap into that valuable resource.

UN Special Envoy to Haiti, Bill Clinton, is giving the UN occupation a facelift so that its troops stay in Haiti for the duration.

breezer1's picture

'what are the poor people doing'?

bill buckner's 'the privateer' newsletter answered that today. they are watching hotdog eating contests in celebration of the 4th of july.

Peterpaul's picture

Charles Hugh Smith is a national treasure. He also has a part two to this post here:



The last step of the con is to raise taxes on the productive peasantry to provide the revenues needed to pay the Plutocracy its interest on Treasuries. If the "Bush tax cuts" are repealed, the actual effective rates paid on unearned income will remain half (20%) of the rates on earned income (wages, salaries, profits earned from small business, etc.) which are roughly 40% at higher income levels.

breezer1's picture

i agree. i have been reading his posts for a long time and am a contributor. very human.

Goldenballs's picture

Depends where you are poor I suppose but most of them are shitting their pants.


Or removing items from your house while you are in South Hampton,ready for the Sunday boot sale.

Cognitive Dissonance's picture

Just in case you don't understand how it works, when replying to some one's comment, you click on the "reply" under that comment and type your thoughts.

Just in case you don't understand how it works. It does look like you know how to edit.

jeff montanye's picture

good tutorial.  now for some old but good news:  check out peter beinart on the failure of the jewish establishment.  gives one hope.  if we say it takes more than a generation to make things better there, why should it be faster here?  the silicon?

Rollerball's picture

Define "Jewish".  Is that akin (synonomous with) "Jew-like"?  Seems Jew-like have done pretty well since writing various interpretations of the universal moral code.
jeff montanye's picture

seriously, check out the article.

Eric Cartman's picture

Jew's don't give me hope, they give me hemorrhoids. 

Dburn's picture

Seeing as how Jews have given you hemorrhoids, you need a old Jewish remedy: sit on a sharp object and just swivel. Then wait for the next ones to come
while your screaming in pain, you motherfucker.

Eric Cartman's picture

Dude, I think 7 Jews may have read our comments. lol. 

russki standart's picture

Then don´t bend over for them.