Why Is the Financial World So Messed Up?

Phoenix Capital Research's picture

Why is the financial world so messed up? Because it’s run by Central Bankers. And those folks view money very differently than the businesspeople who create businesses, jobs, and wealth.


For your average Central Banker, the professional relationship between money and risk is a distant one. This has much to do with the fact that your average Central Banker is an academic, someone whose income has been fixed based on his or her status at a particular academic institution (tenure vs. non-tenured).


Consequently, there is virtually no direct correlation between a salary increase and risk-taking or innovation. In academia, politics and the number of one’s publications (which is also a highly political process) are what determine one’s income, status, and power.


Compare this to an entrepreneur or small business owner (who comprise 70% of jobs in the economy and whose efforts ultimately lead to the creation of medium and even large businesses). For this group of people, money and risk are very closely related: every decision they make concerning spending capital comes with the risk of the loss of said capital and subsequent damage to their business.


In this environment, one thinks about money very, very differently from those in academia. Income and salary are far from guaranteed. For many entrepreneurs and small business owners (particularly in this economy) the security of a bi-weekly paycheck is non-existent. Moreover, business capital, once lost, is very difficult to rebuild.


Mind you, I am primarily focusing on entrepreneurs and those who create and grow businesses here. Most managers at pre-established, medium to large enterprises tend to avoid taking risks as their focus is on climbing the corporate ladder step by step. Thus they tend to avoid taking large risks or engaging in much innovation as the career risk of failure far outweighs the benefits of success. Yet even for this group, the chance of losing money for their employer makes the relationship between money and risk palpable (unlike academics).


To return to our Central Bankers, once one leaves academia to join a Central Bank, the salaries remain fixed (though they can be quite high: the Swiss National Bank’s head earns almost $1 million per year vs. Bernanke’s $175K per year). Thus, one’s personal relationship towards money does not change dramatically in the sense that one’s salary is still fixed. The only difference is that one’s power and influence are now so great that many life expenses (travel, luncheons and dinners, etc.) are covered by various institutions and no longer come out of one’s own pocket.


However, on a professional level, your average Central Banker’s relationship to money has changed completely. Money is no longer simply a data input for a formula to be tested on economic models. It is now literally something that can be created out of thin air by the pushing of a button. And that money can be sent into the economy or banking system permitting a real-time real-world execution of one’s academic theories/ economic models.


One can only imagine the sense of entitlement and power this situation would create, particularly for those who have never worked in the private sector or started a business and thus haven’t participated in actual wealth generation.


I raise all of these issues because they go a long way towards explaining the unbridled arrogance of the ECB’s recent Greek bond swap. The details of the swap are as follows: the ECB simply exchanged 50€ billion worth of old Greek sovereign bonds (which were soon to be worth much less if not be outright worthless) for 50€ billion worth of new Greek sovereign bonds which would not be exposed to default risk or any kind of debt restructuring (unlike those bonds held by private Greek bond holders).


I want to mention here that the ECB only owned about 50€ billion worth of Greek sovereign bonds to begin with. So they exchanged roughly ALL of their exposure to Greece to new bonds that will not lose money during a restructuring or default.


The message here is clear: all private investor sovereign bond holdings are now subordinate to those of the Central Banks/ the IMF.


So what kind of impact do you think this will have on the bond markets? What about bond managers who now know for a fact that their holdings subordinate to the Central Banks’s and that the latter group can change the rules of the game any moment they want?


More importantly for today’s market… there’s no way the ECB pull this same act again for its other PIIGS bonds? Over a quarter of the ECB’s balance sheet is PIIGS’ debt. You think the bond market would put up with another swap like this? No way.


In plain terms, we’re fast heading into a situation in which even the Central Banks are at danger of blowing up (how could the ECB stomach the losses of its PIIGS exposure without going belly-up? Heck it’s leveraged at 36 to 1!).


When this happens, it will make 2008 look like a picnic. So if you’ve yet to take steps to prepare for this, you need to get moving.


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Within its nine pages I explain precisely how the Second Round of the Crisis will unfold, where it will hit hardest, and the best means of profiting from it (the very investments my clients used to make triple digit returns in 2008).


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Good Investing!


Graham Summers


PS. We also feature four other reports ALL devoted to helping you protect yourself, your portfolio, and your loved ones from the Second Round of the Great Crisis. Whether it’s my proprietary Crash Indicator which has caught every crash in the last 25 years, or how to stockpile food (where to get it, what to buy, and how to store it) our reports cover this information in great detail.


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optimator's picture

I didn't read past "Fixed salaries".  How about the 500K a year salary at the IMF that Billary is salviating over?  How about putting a "Price" on being able to tell family members what's going to transpire long and short term?  Most here wouldn't mind being in on the " Table Talk" evenings, but I doubt anyone on this board will ever be see Ben Shalom's dining room!  Parasites all.

blindman's picture

@ " ..why messed up?" ..
because the basic building block/recipe is
3 cups of madness, a pound of lies and three
drops of poison.

tempo's picture

The financial world is messed up because of the worldwide labor glut and the enormous inequities between wages and benefits in the US/EU/UK and the rest of the world. Billions will work for $25/day, 12 hours/day 6 days per week to make smartphones and electronics for billions who want to retire at 50 in the West. So the West runs trillion dollar deficits and performs financial engineering to pay off the domestic population. No one in the west will work like the slaves in the East. Thats the problems...there is no answer...there is only more and more debt with more dependence on the central bankers.

blindman's picture

money as debt and financialization of commodities
essential for life. ?
gabor mate'
Wednesday February 29 9:00am 59 min
Public Affairs
Brain Development & Addiction with Gabor Mate

talk back .
" slavery by another name ", douglas blackmon
( here the origin of the modern money system )
Wednesday February 29 3:00pm
1 hour 59 min
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" slavery by another name ", douglas blackmon bill moyers interview

Downtoolong's picture

I'm not sure that I agree with the author's somewhat narrow explanation of the problem, but, the title question in the post is extremely fair and relevant. I can't think of an industry that is more screwed up than the financial industry right now. Given that our society has granted it the right to be the omnipotent industry, don’t we deserve better than this in exchange? As one junior congresswoman so eloquently put it in a recent hearing, “It doesn’t need to be this way”.



engineertheeconomy's picture

If it's ok for them to just print money, it should be ok for us to just print money too

If we could just print our own money ourselves, we could buy as much of anything we wanted

crazy, you say?

the money would become worthless overnight, you say? 

well, that's what THEY are doing...

 like they're Gods or something...

if it's ok for them to be Gods, why can't we all be Gods too?

then after a few months or so when the paper became absolutely Zimbabwe worthless and there was no food on any of the shelves at the store, at least we would all be in the same boat

can you imagine the TERROR in their eyes if we were all in the same little boat in the BIG ocean with lots of sharks swimming around?

it would be fun to watch people strangle theBankers with their bare hands before they threw them overboard


Eeyores Enigma's picture

"THEY" are the ones who decide when the money THEY print is no longer worth anything.


Until then there is still lots of REAL assets THEY can force everyone to give over to THEM in exchange for THEIR worthless crap.

Paul Thomason's picture

In the stars it says it's all about to go pear-shaped!.

Check out this weird article about planet jupiter and the stock market - 'The Jupiter Cycle: Predicting Major Stock Market Reversals'


shuckster's picture

The rationale against gold is simple - we are an Anglo society - Anglo societies have never placed much value in gold, because, it is afterall just a metal. It is highly valued by other societies, so we need it on reserve in case a war forces us into some sort of international trade (with say, Persia who places a high value on gold) - however, Anglo societies do not explicitly value gold. We acknowledge that gold's value is derived from it's rarity - so if we can create something with rarity, we can create a currency - but like a plastic debit card, the value is not derived from the plastic itself but rather the access that the card gives you (assuming it belongs to someone with substantial wealth). In the middle ages, Kings used to trade sticks with unique markings on them with the lords. The lords knew the sticks (pieces of wood) had value because the king would accept them in return, for say, paying taxes. In the same way, our dollar has value because we know the government will accept it as a payment of taxes - something we have to pay regardless of our circumstances. 

And since Iran is now trading oil for gold (same as Ghadafi did) I think it is safe to put a real price on gold (not the current $1700 valuation which is ridiculous). Whatever Iran is paying in gold for a barrel, that is roughly the current value of gold, give or take 10%....

chunga's picture

A little voice in the wilderness...

Senator Moura Steamed Over Chase Foreclosure Flunkies

"I have personally called and spoken with your staff. They are unprofessional, rude, use their power to frustrate callers, and do what they can to prohibit (instead of facilitate) meaningful resolution(s). If a State Senator is treated that way, I shudder to imagine how your customers and my constituents are treated. It's atrocious."

Fiesty Freshman Senator Moura [R-RI] acts in good faith and allows Chase the whopping benefit of the doubt that Chase (or any alleged assigns) even posess legal standing to foreclose.

"Monsieur, I ask your pardon. I did not do it on purpose."

Marie Antoinette - On her way to the guillotine.

illyia's picture

Money is a measurement device: Work = value, measured in money divided into increments to easily allow for variation.

It's like if you are a tailor and suddenly everyone is trading measuring tape; like if you are a designer and everyone starts trading rulers; like you are a cook and people are taking your measuring cups...

To me that's why all this focus on money is incredibly absurd. Nevermind QE. All you are doing is trading rulers - now stretched so that they are irrelevant.

Can't eat rulers, wear measuring tape or build a house with measuring cups. The game ends when people figure it out. Financial games have nothing to do with real work/value.

And that money [measuring sticks] can be sent into the economy or banking system permitting a real-time real-world execution of one’s academic theories/ economic models.


Zero Govt's picture

Sound assesment of the differece between State (monopoly) and private (competitive) managers

But the biggest difference is that private managers have to please the market (end users). In the State, being a monopoly, considerations for end-users are trivia

which is how monopolists (central bwankers) can 'print' away to save a banking system (the ingratiated), whose problems they helped create, without a second thought for vandlising the money system and end-users (businesses, pensioners and savers etc) wealth

The free market is an ever changing organism of shared interests. The State is a cabal of self serving minority interests. One process is productive, the other destructive

rsnoble's picture


I'm losing patience.

Here shortly ill be drunk as hell and have to reread this article so I can enjoy it even more.  Nothing like basking in your own demise and laughing your ass off.  Yep, nut house here I come.

Blotsky's picture

Well said, sir.

Oddly enough, I did just that, last night.

And will do the same tonight...

Richard Chesler's picture

Central Banks is just a fancy name for Organized Crime.

Sheesh! These crooks make the mafia look like boy scouts.


NuYawkFrankie's picture

Re Nothing like basking in your own demise and laughing your ass off

LOL!!!! Hahaha!!!  Good one!  I'm nominating this little gem for Quote O' theDay!

Zero Govt's picture

save the beer... spill it on a Silver coin at the end of the week instead

sobering, satisfying, sabre rattling

max2205's picture

They do and they will because they know their place in the whole process.