Tuesday, January 6, 2009

Ponzi Schemes

Carlo aka Charles Ponzi was a famous swindler from the 1920's who used an elaborate pyramid scheme to reward earlier investors by using newer investor money, much the same way as Bernie Madoff did. Because of the scale of things, I think $50 billion trumps a few million and we should rename it a Madoff Scheme. But maybe we should call it a Federal Reserve Scheme or a Treasury Scheme or a Bernanke Scheme.
Bernie Madoff kept his operation going by choosing his investors carefully and by absolute secrecy of his methods much the same way of Bernanke and his Pals at the Fed. We call it the Federal Reserve but guess what? I recently realized there's nothing Federal about it. It's the Private Reserve. Bloomberg Financial News recently sued the NY Federal Reserve Bank to find out where a bit more than $2 Trillion dollars had gone that was dispensed by Chairman Bernanke. They used a Freedom of Information statute designed to pry previously secret information from the government. Bloomberg simply wanted to know which banks got how much of our taxpayer money. But the Federal Courts turned Bloomberg down. Why? Because the NY Fed is not part of the government.!!! Whaaat? Yup. How can that be? We have zillions and trillions of money going to god knows who from taxpayers administered by government employees to private firms and nobody but Bernanke and his goons know how it's being dispensed? When Bernanke was asked why he wouldn't release this information he said something to the effect that releasing that sort of information could erode confidence in said incompetent banks!! Who said we had any confidence? It was eroded a long time ago! The more I looked into this mess, the worse the smell. A lot of investment advisers and conservative libertarian bloggers have spouted these anti-fed sentiments over the years but lately some pretty responsible investment columnists like Bill Flenstein and Jim Jubak at MSMMoney have spilled some data which has given me pause.http://articles.moneycentral.msn.com/Investing/JubaksJournal/5-reasons-the-fed-is-obsolete.aspx?page=2
Jubak mentioned in a recent column as did Fleckenstein that the Fed has been buying up T Bills and notes and competing with institutional and private investors. The Fed is also buying agency debt such as Freddy's fannie paper, corporate bonds and stock as well as well as spending trillions filling up the coffers of criminally incompetent private banks that have brought the world financial system to the brink of ruin....and he is still doing it. Good luck trying to find out how much. I wont even suggest going to the federal (oops Private) Reserve website to try to find out anything. Jubak estimates that this buying of government securities is up 160% from last year and now totals something on the order of $2 to $3 Trillion. This is on top of an estimated o $8.5 trillion which has gone secretly to essentially insolvent banks. Kathleen Pender, “Government Bailout Hits $8.5 Trillion,” San Francisco Chronicle (November 26, 2008). The Fed used to track the different measures of money supply, M1, M2, M3 etc but has withdrawn the data. M2 survives as a measure of money in circulation and was about $8 Trillion last month. In just a matter of months, in a sense, the private Federal reserve has doubled our money supply It's our money they are giving to these thieves, right? Well, not exactly. It's more like the future of your money. The treasury floats bonds and notes and the Fed runs the printing presses. Federal reserve notes, Right? The Constitution has granted the right to print and oversee the money supply to our government. But the Fed is not our government. Does that mean that this consortium of private banks along with a passel of government appointed board members are our government? See what I mean by smell? Even Fannie and Freddy are not government. They are Quasi-Government entities, whatever that means.My head is spinning trying to understand this and so must be your head as well, but there is one thing which is becoming very clear to me. Our entire banking system is at the root of our troubles, Quasi- or not. The Fractional Reserve system(see Wiki: http://en.wikipedia.org/wiki/Fractional_reserve.......
is the system by which a certain amount of money is deposited in a bank and the bank can then loan out a Multiple of that deposit, maybe say 3 or 4 times the amount. The bank has to keep a certain amount handy on reserve to cover withdrawals, but only a fraction of the original deposit. Here is where the Ponzi part starts to kick in. If you have a loss of confidence in the bank, depositors may show up and demand their money back but because the bank only has a fraction of those deposits, it can only return a fraction of those deposits. So you now have a bank failure. The Federal Reserve can then step in with money if it chooses and provide reserves. The Fed is then part of the new money component of a ponzi pyramid scheme, at least as I see it. Of course if the bank has time it can sell off assets it had invested in but if those assets were Collateralized Debt Obligations of toxic mortgages which it had purchased on margin of say 20 or 40:1.......well then Houston.We have a problem.Nobody in their right mind will touch the stuff. It just gets more and more complicated because banks and investors had purchased "insurance" on their investments from the unregulated "derivatives" market. The whole complicated system was and is incestuous and interconnected and at high risk of instability or failure.
And now as the worst administration in the nation's history is packing its bags, things will improve. Right. I'm as optimistic as the next clod but I think I see the same play with different actors. The congress cares only about its reelection prospects and finding campaign money and most of the members of even the Banking Committees are either stupid or incompetent. The public is clueless and the whole corrupt unregulated incompetent quasi financial system of debt creation remains in place rolling along on a destiny that can only lead to collapse. Oh by the way, Happy New Year. I have been out of the country for a month and it has been pure pleasure not to have thought about the Great Delamination going on back home.

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