[Marxism] Confidence Games and Ponzi Schemes

[David Walsh <davidrail68@xxxxxxxxx>]

Confidence Games and Ponzi Schemes
By Lynn Henderson < 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 
worldâs 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 
wasâexcesses 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 âtransparencyâ 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 âresponsibleâ 
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 crisisâmassive government bailouts of banks, brokerage firms, insurance 
companies and all other financial institutions âtoo big to fail.â Rather 
than being âheld to accountâ 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 
ânew risky, exotic financial instrumentsâ 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 âcrisis of confidenceââespecially 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: âThe 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.â

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

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

The âcrisis of confidenceâ 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 itâand 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 mediaâs 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 
âhousehold income.â 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 
waterâfor 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 weâve heard much about âPonziâ schemesâBernie 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, âWhen the tide goes out, you see who has been swimming 
without a bathing suit.â

But people like Bernie Madoff even with his 50-billion dollar âPonziâ 
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 âPonziâ scheme. Increase profits by 
relentlessly driving real wages downâmaintain consumer spending by a 
continuous expansion of debt. Like all âPonziâ 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 Americaâs middle class/working class. Use it 
to âreformâ 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 âentitlement reformâ 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, âI have not become the Kingâs First Minister in order to 
preside over the liquidation of the British Empire.â 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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