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When the Economy Implodes – An Interview with Dmitry Orlov

7:37 pm in Uncategorized by cmaukonen

Food Riots - flickr

This one of the better interviews with Orlov that I have listened to. With Jay Taylor, he goes more into what is happening now  and why things are not rosy the way the MSM likes to paint them.

For one you simply cannot apply the logic and solutions of the 1930s to today because as as Dmitry says it’s a totally different world today.  In the 30s we still had oil coming out of our ears and nation states were autonomous. But these days that is not the case. We import the majority of our oil and there is no longer financial autonomy. What effects one, now effects all.

He also makes the point that the banks cannot function with a contracting economy. Which is what we are experiencing now and will increase. And that food price/availability is the key reason to nearly all revolutions. Including the Arab Spring.

So here is the interview. Sorry I cannot imbed.

I know there are those who still think the system can be salvaged and repaired, so go ahead and fill you boots. If it it amuses you to do so.

Our Corrupt, Predatory, Pathological Financial System or It’s the investors, stupid.

6:41 pm in Uncategorized by cmaukonen

A hat tip to my cousin Brian for posting these links on Face book.  Charles Hugh Smith did a two part series on the global financial system. First giving the reason why it is doomed to collapse under the weight of it’s own fraudulent practices.  And why this is actually a desirable outcome.   And second why it’s inherently unstable.

I was recently challenged by a contributor to write something positive, and so I decided to write about the single most positive outcome of the current financial crisis in Europe: the complete collapse of the corrupt, predatory, pathological global banking sector and its dealers, the central banks. Exploring why this is so reveals the insurmountable internal conflicts in our current financial system, and also illuminates the systemic political propaganda which is deployed daily to prop up a parasitic, corrupting, pathologically destructive financial system.

Our first stop is modern finance itself. Modern financial “products” and “instruments” are often highly complex and abstract, but the entire edifice can be distilled down to this: the system is based on the assumption that all risk can be hedged, and the difference between the initial position’s yield/gain (i..e. placement of capital at risk for a gain) and the cost of hedging the risk of the wager to zero can be skimmed from the system risk-free.

That is the entire system in a nutshell, and we can immediately see the advantages of this system over traditional Capitalism, where risk can be hedged but never to zero, and the return is correlated to the risk taken on.

In modern finance, high-risk “investments” (wagers) with high returns can be taken on without worry because any and all risk can be hedged to zero, even in super high-risk wagers.

Well it sounded good on the surface.

Benoit Mandelbrot dismantled the notion that risk can be reduced to zero in his prescient masterpiece, The (Mis)behavior of Markets. The founder of fractal geometry showed that markets are fractal in nature, and are thus intrinsically prone to unpredictable disruptions. Simply put, risk cannot be massaged away.

Thus the fundamental premise of all modern finance is flat-out wrong, and this explains why systemic risk, rather than being eliminated, actually rises with every ratchet up in debt, leverage and counterparty hedging.

The entire global financial system is thus based on the equivalent of a perpetual motion machine: money can be borrowed or leveraged into existence in essentially unlimited quantities, and then deployed in risk-free skimming operations to harvest unlimited wealth.

What does this promise of using leveraged capital to skim risk-free fortunes do to the “real economy” of production and investment in plant and technology? It guts it. The risk of industrial Capitalism is real and cannot be hedged away; high-risk investments may blow up or they may return high yields. It literally makes no sense to risk real capital in productive Capitalism when a zero-risk skimming operation can be developed that essentially needs near-zero capital.

Thus financial capital has come to completely dominate industrial or productive capital. The pernicious consequences of this dominance have poisoned the economy and culture on multiple levels.

In the second article he quotes from contributors to his site who describe it as a fraud and financial cancer.

Your essay The Collapse of Our Corrupt, Predatory, Pathological Financial System Is Necessary and Positive was entirely correct about risk. But let me come at this from a different angle – namely fraud.

Finance skims a percentage off the real economy. Some part of the skim is legitimate reward for capital allocation – a necessary part of a capitalist system and part of what makes it more efficient than a command economy. But some part of the skim is fraud.

Where are we now? Let’s look at the sources of skim:

First there are the more legitimate skim sources – interest payments, management fees, IPO fees, M&A fees, trade commissions.

Then there are the less legitimate bank sources: penalty credit card interest rates, late fees, usage fees, over-the-limit fees, late payment fees, bounced check fees, low balance fees. And the capital markets sources – front-running, insider trading, account churning, manipulation of the news cycle, the captive analyst “ratings game”, trading against your own client’s order book, forex trades which are marked at the day high or low irrespective of when the trade took place, market manipulations at options expiration, stuffing your managed client accounts full of dubious IPOs and new issues that your organization is earning fees from originating.

Bucket shops and ponzi schemes take it even a step further – no actual financial activity takes place. Its simply robbery.

And now we add the new stuff: credit default swaps without margin, fraudulent loan origination, sliced & diced mortgages, mark to myth accounting, foreclosure halts to avoid realizing losses, extend & pretend, quote stuffing, HFT trading activity that boils down to denial of service attacks on exchange computers causing delays in pricing information, highly complex derivatives sold to unsuspecting but optimistic public servants, too big to fail status providing cheap backup in the event of trouble, and increased organizational size that facilitate cartel-like control over government and regulators.

But if that’s not enough, there is the structure itself: they aren’t doing this with saved capital, but rather with freshly printed and/or borrowed capital. Its all done with 12:1 leverage at a minimum. So only 8.3% of the gambling (optimistically anyway) is actual capital – saved surplus. And if Basel II says it’s risk-free, well there’s no need for reserves at all. It is just manufactured money, which effectively mean each bet is diluting the actual savings of real people. And if the bet goes bad, the Fed will ride to the rescue with low-cost money. But usually the bet goes well, because ordinarily the number of sources of fraud today is so HUGE, its practically impossible not to succeed.

Unless of course they get too greedy. Or the debt levels rise so high that large numbers of borrowers default. And guess where we are.

The financial system is supposed to allocate capital and take a modest skim as reward for helping society to be efficient. When they are doing this, they provide a net benefit to society because it’s a win-win proposition. They are making society more efficient, and they thus earn their percentage.

However, and this is the key point: fraud provides no net benefit to society.

And its cancerous façade.

I think the risk “hedging” can be split into two parts, first using/inventing “hedging” instruments who won’t live up to their name in a major event (CDS anyone?), and second hiding risks in existing allegedly time-tested limited risk systems/instruments.

You mostly covered the first part in your article.

Some more examples for the second variant, besides lowering the down payment on house mortgages, are: Gaming VaR models (so for a 1% VaR the risk in the 99 days remains the same, but the blowup in the 1-out-of-100 event becomes much much larger), or lowering of Fractional Reserve requirements, or Sweep accounts (deposits in checking accounts get sweeped into savings accounts, i.e. are put into money market funds where the risk is a [little] bit higher, but the owner of the capital [the depositor] doesn’t receive higher premiums), or student loans becoming non-dischargeable.

“So what happens when one counterparty (issuer of a hedge) somewhere in the chain runs into trouble? The entire chain collapses.”

Or the accounting rules are manipulated, so the entity next in line after the collapsed one is allowed to keep their risk valued at par on the books, even though their hedge just vanished (and they are not able to get replacement hedges at an acceptable price in the current market) and the ongoing collapse freezes in a state of suspended reality – but the trouble is not undone!

The system has not blown up yet because there are still some pockets of unimpaired, really low-risk capital available to game and loot.

In effect the financial system is still perfecting its ability to game and loot, just like a cancer which, due to non-self-restrained growth and fast mutation, continuously improves its ability to elude or withstand the immune system. Until the host cannot bear the strain anymore.

So just how did this come about ? Well I have some ideas.  The current situation came with the The Gramm–Leach–Bliley Act which not only discharged the Glass-Steagall but also allowed for bank holding companies to own other financial corporation. IE banks in other states etc.  But why this and why at that time.  I think the main reason was that investors themselves had run out of ways to effect get rich quick schemes. There had just been the stock market crash of 1987 under Reagan and the tech bubble was about to implode.  All those little high tech start ups – after the deregulation of the telcoms – where beginning to go sour. They had already raped what was left of the consumer electronics giants, the steel mills were closing faster than the doors on an inter urban train and the auto industry had long since run out of gas.  The military bases, along with the contracts, were being closed as well. Like a gambling addict who finds his casinos closing one after the other.

It was not only the greed of the institutions themselves but also (an I think primarily) the greed of the investors that brought about this situation.   Just as it did in the late 1920s before the crash of 29.

The use of Wall Street as a cash cow to become filthy rich has a long history. Now they know they can use governments too. But eventually this too will come to and end.



Uh Guys….IMF Advisor says the World Banking system is about to implode.

3:08 pm in Uncategorized by cmaukonen

And this guy is not know for sounding false alarms so we had better pay attention to what he says.

Hat Tip to Zero Hedge and RAW Story.

A week after the BBC exploded Alessio Rastani to the stage, it has just done it all over again. In an interview with IMF advisor Robert Shapiro, the bailout expert has pretty much said what, once again, is on everyone’s mind: “If they can not address [the financial crisis] in a credible way I believe within perhaps 2 to 3 weeks we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system. We are not just talking about a relatively small Belgian bank, we are talking about the largest banks in the world, the largest banks in Germany, the largest banks in France, that will spread to the United Kingdom, it will spread everywhere because the global financial system is so interconnected. All those banks are counterparties to every significant bank in the United States, and in Britain, and in Japan, and around the world. This would be a crisis that would be in my view more serrious than the crisis in 2008…. What we don’t know the state of credit default swaps held by banks against sovereign debt and against European banks, nor do we know the state of CDS held by British banks, nor are we certain of how certain the exposure of British banks is to the Ireland sovereign debt problems.”

The problem is that there are few – if any – of the population of Europe or Briton or US that is willing to have their respective governments pump any more money into these banks.

Despite all the happy talk coming from Washington and Wall Street and Berlin, we could very well have a financial melt down – world wide – the like of which has not ever been seen.

But no, Morgan Stanley does, or so they swear an unlimited number of times each day. And they say not to worry about anything because, you see, it is not like they have any upside in telling anyone the truth. Which is why for everyone hung up on the latest rumor of a plan about a plan about a plan spread by a newspaper whose very viability is tied in with that of the banks that pay for its advertising revenue, we have one thing to ask: “show us the actual plan please.” Because it is easy to say “recapitalize” this, and “bad bank” that. In practice, it is next to impossible. So yes, ladies and gentlemen, enjoy this brief relief rally driven by the fact that China is offline for the week and that the persistent source of overnight selling on Chinese “hard/crash landing” concerns has been gone simply due to an extended national holiday. Well, that holiday is coming to an end.

I know everyone is busy with the Wall Street protests going on everywhere, I do think this bares shifting ones attention to.

End of the Euro and the Market ? According to trader Alessio Rastani…

3:02 pm in Uncategorized by cmaukonen

It may happen and sooner than you think.

An interesting take on the situation.

“This problem cannot be solved,” he said. “I’m fairly confident that the Euro is going to crash, and it’s going to fall pretty hard.”

Rastani added: “Personally, I’ve been dreaming of this moment for three years. I have a confession, which is, I go to bed every night and I dream of another recession. I dream of another moment like this. Why? Because people don’t seem to really remember. The depression in the 30′s wasn’t just about a market crash. There were some people who were prepared to make money from that crash. I think anybody can do that.”

“What I would say to everybody is, get prepared. It’s not the time right now to, wishfully thinking the government’s going to sort things out. The governments don’t rule the world. Goldman Sachs rules the world. Goldman Sachs does not care about this rescue package, neither does the big funds.”

Default – Reprise…I was wrong.

1:32 pm in Uncategorized by cmaukonen

All right…OK…I’ll admit it. I was wrong in my original post. The consequences of a default  would be rather severe. And Robert Powell in Market watch explains further.

It’s no joke. The sky over the investment world and everything under it, including bonds, stocks, money markets, commodities, you name it, will fall unless lawmakers raise the $14.3 trillion Federal debt ceiling by Aug. 2.

It could be nothing less than catastrophic and worse than the financial meltdown of the late 2000s should Uncle Sam fail to raise the legal limit on government borrowing and default on U.S. debt, according to Greg McBride, a CFA charterholder and senior analyst with “There will be no safe haven,” said McBride, from his perch in Florida.
In a press conference Monday, President Obama called for compromise as party leaders seek to craft a deal that raises the legal limit on how much the U.S. government can borrow while slashing projected deficits over the next decade. Democratic and Republican leaders held talks Sunday, but discussions broke down over taxes.
Read the rest of this entry →

The Next Financial Crisis Will Make the Last One Look Like a Church Picnic.

2:08 pm in Uncategorized by cmaukonen

Yes I know we have heard it now a thousand times.  But when the story keeps showing up in the WSJ and on the Marketwatch page, it does give one pause. This analysis by Bret Arends gives ten reasons why he thinks that the next financial crisis will be worse than the last. A good deal worse.

1. We are learning the wrong lessons from the last one. Was the housing bubble really caused by Fannie Mae, Freddie Mac, the Community Reinvestment Act, Barney Frank, Bill Clinton, “liberals” and so on? That’s what a growing army of people now claim. There’s just one problem. If so, then how come there was a gigantic housing bubble in Spain as well? Did Barney Frank cause that, too (and while in the minority in Congress, no less!)? If so, how?

Or Australia or Ireland or Iceland or…..What’s really happening is that this spin is being given legs to keep people from thinking about who the real culprits are.

2. No one has been punished. Executives like Dick Fuld at Lehman Brothers and Angelo Mozilo at Countrywide , along with many others, cashed out hundreds of millions of dollars before the ship crashed into the rocks. Predatory lenders and crooked mortgage lenders walked away with millions in ill-gotten gains.

Not one. And the Crisis Commission was the biggest white wash since the Teapot Dome Scandal.

3. The incentives remain crooked. People outside finance — from respected political pundits like George Will to normal people on Main Street — still don’t fully get this. Wall Street rules aren’t like Main Street rules. The guy running a Wall Street bank isn’t in the same “risk/reward” situation as a guy running, say, a dry-cleaning shop. Read the rest of this entry →

The Chernobyl Cover Up – Bigger than we were told.

2:55 pm in Uncategorized by cmaukonen

The effects are much worse than is generally  reported as is stated in this video.

The real figures on those effected are closer to 1 million. And people are being effected still today. With increased incidents of cancer, heart disease, birth defects, lower than normal intellect and on and on. And all this information is being suppressed by the IAEA which is tied heavily to the nuclear industry.

One can only wonder how much damage Fukushima nuclear accident is causing right now.

Revealed: British government’s plan to play down Fukushima

8:53 pm in Uncategorized by cmaukonen

From the Guardian.

British government officials approached nuclear companies to draw up a co-ordinated public relations strategy to play down the Fukushima nuclear accident just two days after the earthquake and tsunami in Japan and before the extent of the radiation leak was known.

Internal emails seen by the Guardian show how the business and energy departments worked closely behind the scenes with the multinational companies EDF Energy, Areva and Westinghouse to try to ensure the accident did not derail their plans for a new generation of nuclear stations in the UK.

“This has the potential to set the nuclear industry back globally,” wrote one official at the Department for Business, Innovation and Skills (BIS), whose name has been redacted. “We need to ensure the anti-nuclear chaps and chapesses do not gain ground on this. We need to occupy the territory and hold it. We really need to show the safety of nuclear.”

Officials stressed the importance of preventing the incident from undermining public support for nuclear power.

The Conservative MP Zac Goldsmith, who sits on the Commons environmental audit committee, condemned the extent of co-ordination between the government and nuclear companies that the emails appear to reveal.

“The government has no business doing PR for the industry and it would be appalling if its departments have played down the impact of Fukushima,” he said.

And of course the NRC would never do such a thing here.

Or would they.

Fukushima – They Lied From The Very First.

7:31 pm in Uncategorized by cmaukonen