[Marxism] Confidence Games and Ponzi Schemes

[Bonnie Weinstein <giobon@xxxxxxxxxxx>]

Confidence Games and Ponzi Schemes
By Lynn Henderson
March/April 2009
http://www.socialistviewpoint.org/

The United States economy continues its plunge into the greatest  
financial crisis since the Great Depression of the 1930s, dragging in  
its wake the entire world's financial system. What is the cause of  
this now world-wide economic catastrophe? Without a clear  
understanding of its root causes we will not be able to find a way  
out. Rather the crisis itself will be used to inflict even greater  
damage on its chief victims, working people here and around the world.

The explanation initially floated by the economists, the Wall Street  
financial experts, Democratic and Republican politicians and the  
entire news media was-excesses of the deregulation movement. The lack  
of government regulation and oversight allowed for greedy and  
irresponsible actions in the major financial institutions of the  
country. This led to the proliferation of new risky, exotic financial  
instruments especially in the home mortgage sector of the economy.

These new instruments lacking "transparency" were too complicated for  
the market to accurately evaluate. The usually efficient, unerring,  
invisible hand of the free market, they explained, was unable to  
perform its normal functions and the economy fell into the financial  
crisis.

This explanation of the financial melt down had certain attractive  
features. It admitted to no intrinsic or systemic flaws within free  
market capitalism itself. Corrective action could be taken by  
punishing and holding to account those who had engaged in greedy,  
irresponsible actions and future crises would be avoided by the  
introduction of new government regulation and oversight. This, they  
also explained, would of course have to be "responsible" regulation,  
so as not to curb the creative, dynamic, entrepreneurial genius of  
free market capitalism.

But lately this explanation has been quietly set aside. For one, the  
idea that greed-driven, irresponsible capitalists had even an  
indirect role in the financial collapse cut a little too close to the  
bone.

But an even more important consideration required abandoning this  
initial explanation. It politically conflicted with the chosen  
bipartisan solution to the crisis-massive government bailouts of  
banks, brokerage firms, insurance companies and all other financial  
institutions "too big to fail." Rather than being "held to account"  
they were to be rewarded with the largest government subsidies in  
history. And the more deeply and directly they were involved in greed- 
driven, reckless economic behavior, the larger their bailout.

And who are the principle designers and administrators of these  
bailout packages? Treasury Secretary Henry M. Paulson Jr. under the  
Bush administration and Treasury Secretary Timothy Geithner, now  
under the Obama administration, both major architects of  
deregulation. Both were prominent promoters of the "new risky, exotic  
financial instruments" said to be at the heart of the financial  
collapse.

The reaction was a firestorm of anger and opposition from the U.S.  
population. They understand quite clearly that these bailouts and the  
ones to come are not for free, but will channel wealth out of the  
pockets of the vast majority into the coffers of the financial elite.  
A new explanation of the crisis more compatible with selling the  
bailout scam to the American middle class/working class had to be  
fashioned.

The source of the crisis was not predatory, reckless economic  
actions. The new root cause was a "crisis of confidence"-especially  
loss of confidence in our financial institutions, which creates fear,  
panic and uncertainty, paralyzing normal economic activity. And  
confidence in these institutions can only be restored by the  
application of massive government bailouts.

This is the line now being repeated at every level in the government  
and mass media. David Brooks, a regular Op-Ed columnist for the New  
York Times writes in his February 13th column: "The crisis was  
labeled an economic crisis, but it was really a psychological crisis.  
It was caused by a mood of fear and uncertainty, which led consumers  
to not spend, bankers to not lend and entrepreneurs to not risk."

Thomas L. Friedman, another regular New York Times Op-Ed columnist,  
wrote as far back as November 16: "If you are going to fight a global  
financial panic like this, you have to go at it with overwhelming  
force-an overwhelming stimulus that gets people shopping again and an  
overwhelming recapitalization of the banking system that gets it  
lending again.... Yes, that may mean rescuing some bankers who don't  
deserve rescuing.... No it's not fair. But fairness is not on the  
menu anymore."

The "crisis of confidence" line is not new or original. It was used  
by Franklin Delano Roosevelt in his first inaugural address in 1933  
during the Great Depression: "Let me assert my firm belief that the  
only thing we have to fear is fear itself-nameless, unreasoning,  
unjustified terror which paralyzes needed efforts to convert retreat  
into advance." A catchy speech line, but purposely devoid of any  
insight into the causes of the Great Depression or our present  
economic crisis.

The "crisis of confidence" scenario magically shifts the source of  
the problem away from economic and political actions to the realm of  
psychological aberration. It is certainly true that there is a  
growing mood of fear, uncertainty, panic and loss of confidence. But  
these are not the causes of the economic collapse; they are responses  
to it-and not irrational responses.

If you are a laid off worker in manufacturing with little prospect of  
re-employment, in a society that is shedding manufacturing jobs at an  
ever accelerating rate, it is not unreasonable for you to be afraid.

If you are a student about to graduate with little or no hope of  
finding a job, feelings of uncertainty are certainly justified.

If you are a white collar worker with a mortgage now larger than any  
possible amount you could sell your home for and fellow employees all  
around you are being laid off at an accelerating rate, a growing  
sense of panic is understandable.

And there is certainly a growing lack of confidence, especially among  
the ruling political and financial elite. The financial collapse  
caught them completely flat-footed. They have little idea as to what  
caused it or how to stop it. The crisis has shaken them to the core,  
creating a growing sense of panic and demoralization.

The real source of the economic crisis is insufficient consumer  
purchasing power to keep the U.S. economy on track. Economists  
calculate that approximately 80 percent of the economy is driven by  
consumer spending.

For some 50 years now the American working class, or the media's  
preferred euphemism, the American middle class, has been the target  
of an intense class war in which real wages and income have been  
relentlessly reduced. According to the most recent U.S. Bureau of  
Labor Statistics, real wages adjusted for inflation, from 1970 to the  
present have fallen more than 12 percent.

  This has been a one-sided class war with little effective  
resistance, especially from a hopelessly bureaucratized and  
conservatized trade union movement, which, in addition, has slavishly  
tied itself to one of the principle instruments of this class war,  
the Democratic Party.

But there is an obvious contradiction here. If real wages have been  
falling over the last 40 years, how has the economy, at least until  
recently, continued to expand and profits continue to grow?

This was accomplished by a number of strategies designed to offset  
the effect of falling real wages on consumer spending. The first of  
these was the simple expedient of drastically increasing the total  
number of hours worked. Overtime was increased, leisure time was  
decreased. The single wage earner family was largely eliminated. No  
longer did one partner work while the other, usually the female, took  
on the demanding job of running the home and caring for the children.

More family members were put to work, working longer hours at more  
full and part time jobs. This is why political and economic  
apologists for this policy no longer wish to measure individual wage  
rates over time but rather "household income." But lately even this  
deceptive measure has succumbed to the pressures of this one-sided  
class war. Fed officials recently estimated that the median family  
was 3.2 percent poorer as of October 2008 than it was at the end of  
2004.

The number of extra hours an individual can work is limited, as is  
the number of additional family members that can be put to work. New  
additional steps had to be taken to offset the effect falling wages  
had on consumer spending and the economy.

The next move was a massive expansion of consumer debt. The credit  
card industry was born. It was not so long ago that credit cards were  
mostly limited to business executives who did a lot of traveling. New  
federal legislation repealed all state usury laws and the nation was  
flooded with credit cards carrying 20 percent-plus interest rates, a  
return previously only available to Mafia loan operations. The  
average American family now holds seven of these cards. The banks  
issuing these cards made record profits and consumer debt soared to  
record levels. But it did mask the effects of falling real wages and  
produced a significant if temporary boost in consumer spending.

Paralleling the encouragement of ever more consumer debt was an even  
more risky policy, the massive and continuous expansion of government  
debt. These record deficit budgets of necessity fueled inflation and  
one way these inflationary pressures expressed themselves was an  
artificial rise in the dollar value of houses.

As credit cards maxed out and the size of consumer credit card debt  
became unsupportable, a final and particularly dangerous financial  
gimmick was floated. Consumers were encouraged, and driven by  
necessity, to take cash equity out of their inflated house value.  
Second mortgages, third mortgages, home equity loans, became the last  
desperate hope for keeping their heads above water-for meeting  
expenses and paying down credit card debt that was killing them with  
20 percent-plus interest rates.

New homebuyers were lured into predatory sub-prime and adjustable  
rate mortgages with the assurance that housing prices would continue  
to rise indefinitely, allowing them to refinance and even cash out  
increased equity in the foreseeable future. And again this  
artificially propped up consumer spending.

When the housing bubble burst, it triggered not just a crisis in the  
mortgage market but the collapse of a financial house of cards that  
had been building for decades. A house of cards built on the idea  
that you could on one hand relentlessly drive wages down and on the  
other hand maintain consumer spending by driving people into ever  
deeper debt.

Household debt hit a record 133 percent of disposable personable  
income by the end of 2007. This represented an enormous leap from  
average debt loads of 90 percent just a decade earlier. Debt levels  
that even then were considered dangerously high.

Lately we've heard much about "Ponzi" schemes-Bernie Madoff, Robert  
Allen Stanford and many others, and no doubt many more to come. These  
types of operations are always a part of the so-called capitalist  
free market. During an acute financial crisis they become more  
exposed and publicly visible, especially if some of their victims are  
among the very wealthy. There is an old Wall Street saying, "When the  
tide goes out, you see who has been swimming without a bathing suit."

But people like Bernie Madoff even with his 50-billion dollar "Ponzi"  
scheme are small potatoes compared to what has been going on in the  
broader economy. In reality the entire U.S. economy over the last 40  
years has operated as little more than a gigantic "Ponzi" scheme.  
Increase profits by relentlessly driving real wages down-maintain  
consumer spending by a continuous expansion of debt. Like all "Ponzi"  
schemes it was destined to eventually collapse.

How does the ruling elite intend to face this crisis? Their public  
strategy has two parts. One, save the principle financial institution  
of U.S. capitalism with a series of ever-more massive bailouts. Two,  
reverse the shrinking economy and stem soaring unemployment with a  
stimulus plan. This strategy has no chance of success.

For the capitalists, this crisis is now a crisis of excessive debt,  
which reached 355 percent of American gross domestic product. It  
cannot be solved with more debt.

President Obama claims his stimulus plan will save or create four  
million jobs in two years. In the last four months of 2008 alone,  
employment fell by 1.9 million and continues to escalate. Do the math.

But there is another non-public strategy. Use the crisis itself to  
dramatically intensify the class war against America's middle class/ 
working class. Use it to "reform" so-called entitlements. Cut Social  
Security, Medicare and other hard won social gains. Use the crisis to  
drive real wages even lower.

The Obama administration like Bush before it, demands that the UAW,  
in order to save the American auto industry, must reduce wage levels  
to those of nonunion workers. Obama has already made "entitlement  
reform" a key goal of his administration. Obama will end up as Field  
Marshal of this intensified class war no matter what his present  
intentions may be. As head of the Democratic Party he can do no other.

Winston Churchill, then Prime Minister of Britain during WWII  
famously said in a speech in 1942, "I have not become the King's  
First Minister in order to preside over the liquidation of the  
British Empire." Despite his considerable political and oratorical  
skills, Churchill ended up presiding over the liquidation of the  
British Empire. Events drove him, he did not drive events. Obama  
finds himself in a similar historical situation today.

This class war can no longer remain a one-sided class war. The  
American middle class/working class will have to resist; they will  
have no choice. This will not be easy. They will have to abandon many  
dangerous illusions, not the least of which, the Obama cult and the  
progressive nature of the Democratic Party. They will have to forge  
new political and organizational institutions capable of fighting back.


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