Submitted by Zeus Yiamouyiannis from Of Two Minds [16]
Money from Nothing - A Primer on Fake Wealth Creation and its Implications (Part 2)
Only in a debt-based money system could debt be curiously cast as an asset. We’ve made “extend and pretend” a quaint phrase for a burgeoning market for financial lying and profiteering aimed toward preventing the collapse of a debt- (or lack-) based system that was already doomed by its initial design to collapse. This primer will detail the major components and basic evolution of fake wealth creation, accelerating debt expansion, hollowing out of the economy, and inevitable financial implosion.
Implications:
The implications for this exponentially increasing dominance of fake wealth have only gotten more comprehensive and absurd since I last summarized them in an article two years ago. ( Unhinged: When Concrete Reality No Longer Matters to the Market (and What to Do About It [17]).
Apparently you only need a few things to make a mockery of the entire global economic system, and big banks garnered these few important things through “regulatory capture”:
1) Unregulated, unenforced rules (particularly for derivatives)
2) license to “mark to model” (assign your own values to your assets)
3) ability to peg present value to irrational expected future returns (based on unlimited, exponential growth)
4) infinite leverage (no effective requirements for reserve capital in unregulated “shadow” markets)
5) massive size, so that the bank or company is "too big to fail"
6) non-transparency and non-accountability.
So here we have a system where you can 1) make up your own rules, 2) establish any value for any asset you choose, 3) inflate that value a hundred fold based on ostensible future value and returns, 4) leverage that inflated value another thousand or a million fold simply on your say-so, enough to buy up multi-billion dollar firms if you choose, 5) lean on taxpayer bailouts when you get into trouble, and 6) do this without any disclosure or accountability, all based upon a self-interested formula you concoct to enrich yourself.
To this we can now add:
7) effective take-over of national governance by private financial interests, meaning zero prosecution for large-scale control fraud, continuing complicity with and backdoor subsidies to big banks, and the stripping of national assets to pay for illegitimate debts.
8) making uncertain the very notion of private property by promoting illegal and nonsensical assignment and title processes in the mortgage market.
9) shameless annihilation of pensions and investor funds by simply leveraging those funds out of existence and charging enormous fees to do so.
How do we know this is going on? By looking at what is allowed to go on already, evaluating its profit potential, and multiplying those “market possibilities” by all the major players. If it can be done, and it maximizes profits (no matter how crazy from a systemic view), it will be done. The market for fraud is the most booming and has the highest profit potential. It pays far greater returns than any other market including precious metals.
Major players (Goldman Sachs, et. al) have the means, the motive, and the opportunity to expand the fraud market. In terms of brute gain they have been rewarded greatly (with no apparent downside) in cheating, hiding, conning, and now simply stealing.
What do you expect they will do going forward? There is no moral hazard as far as they are concerned. It’s all good for them. Therefore, they will exercise no restraint. They will accept no self-imposed limit to their asymmetric destruction of broader functioning capitalism because greater destruction maximizes private profit. If anything they will accelerate their demolition to get the greatest competitive share of what’s left.
Look at MERS (Mortgage Electronic Registration System) and MF Global. They provide the clearest evidence of how the peddlers of phantom wealth will continue to push their anarchy toward social and economic breaking points. No action is too outrageous any more.
MERS: “Sure we helped ‘get around’ fees and recording requirements and seem to have ‘lost track’ of who owns what in terms of real estate properties, but don’t blame us we are just a facilitator, a clearinghouse, an agent of transactions aimed at creating greater ‘flexibility’ in the mortgage market. Fraudclosure and those millions of forged documents that tried to retroactively record and assign titles, deeds, and transfers? Well, that is not our concern or our fault, though it is regrettable that nobody seems to know who owns what.”
MERS provided an avenue for investment banks to slice and dice mortgages into “mortgage backed securities” (MBS). When you combine this capability with the advent of essentially unlimited leverage and rehypothecation, it is highly likely that the same real estate collateral has been pledged to a multitude of different investment portfolios.
In not so many words, the same house has been sold to many different buyers. Since there is no way to trace true ownership through the shroud of “complexity” enabled by MERS, railroaded foreclosure proceedings, and exotic securities, sweetheart deals get cut between banks and the government that, yet again, amount to a slap on the wrist, enablement of violence against property rights, and kicking of the can down the road.
When will the madness stop? When someone finally has to pay. Your guess is as good as mine on this, since the technologies of avoidance have become so creative and interlinked. I’ve predicted some major movement in September/October of 2012 ( The Big Squeeze, Part 2: Abused Fundamentals and Fake Markets: How They Play Out [18]) but we will have to see.
MF Global: “We don’t know where 1.6 billion dollars of segregated accounts went.” Poof, gone. And yet no prosecution, no investigation? What if your personal bank said that? What if your pension said that?
Yet, don’t be surprised if you do hear this same “bewilderment” from Bank of America and CALPERS (California Public Employees’ Retirement System). In order to meet increasing obligations pensions have moved to invest in the unbacked promises of toxic derivatives, so-called “high return” junk vehicles that were rated “AAA” by Moody’s and Standard and Poor’s.
As we speak California’s public pension is insolvent, bankrupt. I guarantee it. In a classic Ponzi scheme it’s current obligations are being met with contributions, and the so-called investments that have been made to fund future obligations will be exposed as empty shells when push comes to shove. The money will be “unavailable.”
But don’t worry, I’m sure the federal government will try to rescue California with “debt restructuring” or printed fiat currency. If the government can bail out banks to the tune of 700 billion dollars up front (and many trillions through the back door) why not throw a 250 billion dollar federal bailout to the world’s tenth largest economy and one with the nation’s most electoral votes?
Since unregulated shadow investment banking has been collapsed with regulated investment there are no guarantees that market values will be realized or that promised monies will materialize when needed. Almost every unregulated investment scheme seems to be following the same Bernie Madoff model: A greater number of current contributors attracted by great (falsified) “returns on investments” are paying into an investment fund. Part of that contributor money is funneled to those currently liquidating their positions or requiring dividends.
The other parts go to fund financialized “churn”: profit-taking by the managing company and fees (transaction, maintenance, representation, and processing fees, etc). The managing company then simply substitutes promissory notes for the incoming cash as money-equivalent “value” in their reports and in your accounts. These promissory notes if inspected are likely based in nothing, backed by nothing, and answerable to nothing. But since unregulated markets are non-transparent we won’t be able to absolutely confirm their illusory value until those markets blow up in our faces.
We can look at patterns, though, and get a pretty good approximation of the scale of the theft. We can ask, “Where is the money coming from?” After the 2008 financial crash, Wall Street and its zombie banks were rewarding themselves with a near-record 144 billion dollars of compensation. If the money is not coming from them (since they just crashed), where is it coming from? It’s almost certainly coming from us, and not just from taxpayer bailouts, but pensions, deposits, real estate, and any other hard asset or currency that can be scavenged and replaced with mere numbers.
What are more general implications of fraud building upon fraud?
Ever-expanding debt: Lending money into circulation at interest in order to pay debt, creates more and more debt. The economy is forced to expand just to meet debt payments. Since there are limits to growth to real and productive economies, then unreal, parasitic, or shadow economies will grow to fill the void between skyrocketing debt obligations and normal production.
Unfunded social insurance, pension, and entitlement obligations: Population increases, coupled with a baby boomer population bubble, ballooning administrative bureaucracies, and governmental raiding of trusts (like social security) have catapulted costs and have stressed the medium- to long-term capacity of social insurances, pensions, and entitlements past the breaking point even as delivery of services and funds are maintained for the short term.
Austerity measures will be coming sooner than we think to cover future obligations: limited benefits, increased contributions, and delayed retirement, but they will still be a better deal than junk “AAA” derivatives that disappear once money has to be paid out.
Destabilized economies: The Fed’s current policy of interest-free money to banks appears to encourage excessive private risk-taking, which is converted into public liability in the form of bailouts, thus further destabilizing the economy and increasing national debt.
Conclusion:
How can this widening gap between multiplied debt and productivity-backed money be reconciled? The short answer is, “It cannot.” It is an inherently unsustainable system, where debt will eventually eclipse the entire value of all world resources, assets, and productive effort unless debt is simply forgiven at some point. (See my arguments for doing just that in Endgame: When Debt is Fraud, Debt Forgiveness is the Last and Only Remedy [19], with over 24,000 reads on Zero Hedge when reposted from Of Two Minds original post of Endgame [20]).
We can also see we must come to terms with the unjust and completely unsustainable nature of debt-based money.
If fraud is something from nothing, then solutions to fraud involve re-establishing exchange systems based upon something from something. These systems are already being developed with local currency experiments, bartering, and a host of other emerging alternate economic models and practices (see Part 5 of Unleashing the Future: Advancing Prosperity Through Debt Forgiveness with links to the five-part series [21]). These options need to be expanded and further developed.
Our task is to identify fraud in all its forms, stop our participation in them, pursue a counteroffensive and commit to moving our money, time, and value to genuine, prosperous, health-affirming, financial commitments and practices. We can see increasingly that we have nothing to lose and much to gain not only in terms of financial stability but personal and community fulfillment.