Posted initially at Of Two Minds blog (http://www.oftwominds.com/blogfeb12/Greece-default-Zeus02-12.html)
The First Dominoes: Greece, Reality, and Cascading Default
(Guest Essay) (February 13, 2012)
I asked frequent contributor Zeus Yiamouyiannis to comment on the coming Greek default. Here is his insightful response.
Greece is the epicenter of a drama that threatens to unwind with all the intrigue and subterfuge of ancient Greek myths and tragedies. As with the legend of Icarus, big, and now bigger, transnational banks provoked the gods with their wax-and-feather financial fabrications to create the appearance of soaring wealth. Now that they have flown too close to the sun and their wings have melted, these banks are being brought to earth by the obligations and consequences imposed by their fabrications.
Rather than take responsibility, these banks seek to appease the gods by sacrificing taxpayers. In fact, if one looks closely, these banks aspire to be gods themselves. They clothe themselves in their indispensability and shield themselves from accountability with tales about how many innocent citizens will be hurt if they don’t get their next bailout. It is as if they say, “We are above the law… We are the law.” Mathematics, legal enforcement, restraint, humility all must fall under the sword of their hubris.
In the end, just as with a Greek tragedy or a Yeats poem, this center cannot hold and things fall apart. When one abuses the laws and principles of mathematics and capitalism, claiming to be a faithful servant, consequence and accountability eventually catch up. The breaking point inexorably nears. Citizens are beginning to think, voice, and act: “We can do without the false idols that call themselves banks. In fact, we need them to be dissolved for us to survive and thrive.”
Reality is the revenge of the gods.
Not just about fairness: Everything unwinds
This is not just about fairness anymore; it is about the exposure of central, global illusions that affect everyone, not just banks. For the last three plus decades, debt-fueled “growth” has instilled a life sense that everyone gets rich, values always go up, and no one has to pay. If those illusions evaporate than those citizens complicit in this failed fantasy may actually join forces with the realists (those who knew it was a scam all along) to produce unified citizen revolt. Hell hath no fury like the people spurned and lied to, even if many had some responsibility in welcoming and fanning those lies.
The implicit deal was this: We will collude so everyone gets rich going forward. We will collude so no one has to pay if there is any unwinding. (But, hey, it’s a new era, and that’s not going to happen!) Open default breaks the illusion, and austerity breaks up the collusion. This is why default has to be hidden, deferred, restructured. It is not just about chaos around party/counterparty risk (in particular, cascading claims that are not backed by anything). It is not even just about finance. It’s about all the other things that will unwind, culturally, politically, and psychologically, if Greece defaults and sets into motion the necessity of someone actually paying up. In short, recognition of reality has disastrous consequences for the status quo and its control myths.
The infinite growth meme unwinds: The cancerous economic obsession with infinite growth in a finite world is already unwinding, but will hit full force with cascading defaults. It is one thing to have a “slowdown,” and another to have your economic brakes lock up on you and your gears slammed into reverse. About the only thing that seems to be growing currently is the number of people partially employed or permanently unemployed. As a humorous aside, the situation is getting so pronounced that quality of life might actually have to replace quantity of possessions as the cultural indicator of the good life, and what would that do to the economy?
Politicians’ power of the purse unwinds: Greek politicians, like many other Western politicians, will do almost anything to get re-elected. The easiest way to do this is to pay people off, particularly government workers and constituents, in the form of generous benefits or pet projects. What happens if your tax base will not support this? You sell your political soul, defer, and/or hide the true costs of your largesse behind undisclosed derivative deals with Goldman Sachs that eventually put your entire country’s sovereignty in jeopardy. As a result, Greece’s former prime minister, George Papandreou, is now out after a very short term in favor of a unity government. Shady deals funded unsustainable perks that not only inflated popular expectations but created catastrophic debt and risk.
Guaranteed entitlements unwind: So now that the illusion of infinite growth is being exposed, the corresponding ballooning entitlements that enticed the larger public to become complicit in the illusion are becoming unglued. It would take almost a decade of gross national product to pay off the U.S. unfunded liabilities for Social Security, Medicare, and Medicaid, which exceed the staggering sum of 100 trillion dollars.
Retirement and health benefits cannot be paid out of fake prosperity and “notional” (i.e. imaginary) values. They require real services and products and an accepted public medium of exchange. (I will leave off the argument as to what constitutes “real” and “accepted” since even fiat currencies are dubious in this regard.) People will be forced to adjust their expectations and adapt their realities. With public and private pension plans also complicit in derivative scams to fund benefits, it will be no surprise if many pensions simply declare themselves bankrupt in the next decade.
The maximum profit mandate unwinds: We have reached such heights in our hysteria about growth and our psychological addiction to more-more-more, that we have seen stock prices fall, even with record revenues, if the corresponding company doesn’t meet expectations of even higher growth and revenue. It is getting to the point where a company cannot simply have a solid year and just pay out its dividends and maintain its good health. Instead companies have to be ever hopped-up on economic steroids and cost-cutting (i.e. shipping jobs to virtual slave labor in China) so as to not fall short of expectations.
These steroidal practices are destroying the companies and the means by which consumers can afford products and services. A relentless short-term focus serves no one in the end. “Maximum” less and less corresponds with “optimum,” because present assets can be cannibalized or revaluated to give short-term boosts to numbers, creating medium- and long-term systemic and foundational deficits that destroy the health of a company and its surrounding society. Hopefully the idea and practice of optimum profit will replace maximum profit as the Great Unwinding continues.
The central question:
The central question, obscured by all the hand wringing and crocodile tears is simply this: Why should public citizens who have no stake in private enterprises, who received no profits or dividends, who had nothing to do with creating losses, be forced to pay for private losses? The only legitimate answer is, “They shouldn’t.” Period. Anything that does not acknowledge this tenet is not functioning capitalism, and if it is functioning capitalism it cannot violate this tenet.
Yet we witness apologist expert after expert excusing this fatal breach in capital practice as “regrettable but necessary to save the system.” They seem not to have noticed that the system has already killed itself by violating its own foundational laws and principles. If anything, current conventional practice might be accurately described as an all-out anti-capitalist assault on democratic free enterprise.
So now the follow-up question is easy to answer: “Why are we paying for something we did not buy and had no hand in creating?” The answer: We no longer have functioning capitalism. Call it what you want— corporate socialism, crony capitalism, cancer capitalism, plutocracy, kleptocracy, oligarchy, neofeudalism— the system we have now is the equivalent of an individual going up to a complete stranger on the street and shaking that stranger down for “protection money” to pay for the individual’s underwater house mortgage.
As this simple fact grips the population, and people wake up to the present economic reality, there will be increasingly organized moves toward civil disobedience and alternative economy. “Cannot pay” will merge with “will not pay” since the only way to re-establish health and integrity in a corrupted economic system is to starve the cancers that have taken it over. This has already started with Occupy Wall Street, strategic defaults, and riots in Greece.
So if someone asks you, seeking to appeal to your fear, self-interest, and need for approval, if you are willing to “be responsible for bringing down the global system,” your answer should be an emphatic, “Yes.” “Are you asking if I want to bring down fraud, theft, abuse and the cancer that global finance has become for me, my neighbors, my children, and my children’s children? Are you asking me if I want to replace the current broken system with something that serves actual people? Not only, ‘yes,’ but ‘heck, yes.’”
By Zeus Yiamouyiannis, copyright February, 2012
Sunday, February 12, 2012
New posting: Counterfeit Value Derivatives: Follow the Bouncing Ball
Here is an essay I posted with my good friend Charles Hugh Smith over at Of Two Minds (another great alternative economy website): http://www.oftwominds.com/blogfeb12/counterfeit-derivatives-Zeus02-12.html
Counterfeit Value Derivatives: Follow the Bouncing Ball (Guest Essay) (February 3, 2012)
This guest essay on derivatives was written by frequent contributor Zeus Yiamouyiannis.
Here is how the counterfeit value derivative con works. It’s a game of “I pretend, you pretend, we all pretend, and the taxpayer will pay in the end”.
1) I’ll create an instrument, say a credit default swap (CDS), an unregulated insurance with no capital requirements, with a certain “notional” value. Notional value is just something I assign. It does not have to be attached to or backed by any real asset or actual money/principal, but I can pretend as if it is. (Notional amount.)
2) As a seller, I will just declare that this swap covers the full value X of this company, contract, etc. if credit event Y happens. I receive lucrative insurance premiums and fees for my unbacked promise. The CDS’s value is based in nothing more than my promise to pay. I don’t have to have adequate capital reserves on hand, but I can pretend as if I do perhaps with some mini-reserves based on objective-seeming risk ratios calculated by my mathematical models. (credit default swap.)
3) As a buyer, you can then buy as many of these CDS’s as you want, even for a single default. If you are really sure something is going to tank you can insure it 30 times over (or a 100 or 1,000) and get 30 (or 100 or 1,000) times the return when it goes bust! In regulated insurance it is unacceptable to insure beyond the full replacement value of the underlying asset. Not so with CDS’s. The seller has gotten 30x the premiums and the buyer gets 30x value in the event of default. As a buyer of this phony “insurance” you don’t have a stake in the affected properties, but you can essentially pretend you do.
4) As buyer and seller of CDS’s either one of us can assign our risks to a third party through another contract, and pretend as if we are covered in case our own game playing blows up in our faces. This allows us to retain even less reserve capital and spend freed-up funds on more high-risk, high-(pseudo) return speculation. (The monster that ate Wall Street.)
5) We can purchase and sell of these derivative contracts to each other at unlimited rates to generate massive volume and huge fees and profits. We can simply hyper-cycle risk and take our chunk each time.
According to the Bank of International Settlements, as of June 2011 total over-the-counter derivatives contracts have an outstanding notional value of 707.57 trillion dollars, ( 32.4 trillion dollars in CDS’s alone). Where does this kind of money come from, and what does it refer to? We don’t really know, because over-the-counter derivatives are not transparent or regulated.
With regulated economic markets, when an underlying real asset is impaired (i.e. the company in question is bankrupt, the mortgage has defaulted, etc.), market value is assessed, default insurance is paid up to replacement or full value, bond holders and stock holders make claims on remaining value and the account is closed. There is no need for bailouts because order and proportion of compensation has been established and everything is attached to the value of the underlying asset.
When the unreal, counterfeit economy intrudes, you now have a situation where a person can put in an unregulated, but recognized, claim to be paid a thousand times over in case of impairment. Say market participants have negotiated for a bankrupt company a 70% payback for bondholders and (36% payback for insurance claims), and I come with not one but rather 1,000 CDS claims demanding to be paid for each CDS.
Where does that money come from? Well if it were regulated insurance, I would have to be invested in the company in some way, my bond or stock payout would be limited by the actual asset value of the company, and my insurance payout would be limited as well. However, since I am unregulated and unrestrained, the money due me has to come from the CDS seller and my contractual agreements with that company (say AIG).
AIG could easily have sold 1,000 different unregulated insurance policies to the same person or a million CDS’s to a hedge fund, and when AIG could not pay up, it was threatened with insolvency, under which both its regulated and unregulated insurance policies and investments would become impaired. In fact there is abundant evidence that hedge funds (i.e. Magnetar) did in fact multi-insure certain portfolios while simultaneously pressuring the portfolio managers to select risky investments to ensure that the portfolios would crash. This is the opposite of a traditional “stake,” and this is the disease that modern derivatives bring—profit from intentional market destruction.
This chaotic state of affairs and its cascading implications for other interlinked parties and counterparties (read “too big to fail banks”), essentially resulted in economic extortion to force a huge public bailout of the whole crooked mess (totaling somewhere in the neighborhood of 10 – 14 trillion dollars in giveaways, loans and guarantees starting in 2008 in the U.S. alone.) Instead of agreeing to the extortion temporarily to prevent collapse and then aggressively pursuing orderly investigation, prosecution, and receivership, regulators and world leaders have simply covered up the events and even rewarded the perpetrators.
No wonder the market goes up dramatically when there is talk about another quantitative easing (Fed bailout) or emergency rescue (government/taxpayer bailout). These financial game players already know that an open public spigot is on its way, pouring real capital directly into their pockets.
In regulatory actions and legal courts, unregulated insurance claims should simply be declared null and void when applied to real assets and real compensation. “You have no stake, therefore you have no claim. Your agreement was with a third party that did not have adequate capital to pay for a contract with you. Take them to court.” Or “You have an imaginary claim for imaginary damage. Here’s your imaginary money. Your deal was private and unregulated, then it should be settled in private between companies without public intervention or support.”
Did that happen? No, because AIG had collapsed its unregulated private and regulated public functions and Congress had allowed it to do so with the repeal of the Glass-Steagall Act. Because the wall came down between regulated and unregulated activity, transparent and “shadow” markets, traditional and investment banking, this private fiat virus broke quarantine and the resulting contagion cannot be put back in the lab.
Because world leaders and their regulators blinked and did nothing, counterfeit private fiat (backed by nothing) has metastasized and infiltrated “genuine” public fiat (backed by country’s productivity if not by gold), and more and more actual money and productivity in the form of austerity is being thrown at a gargantuan and unrecoverable sea of counterfeit obligation.
How can you exceed 700 trillion dollars in unregulated derivatives alone? This is easy when market players are buying and selling from each other and when people can buy an infinite number of claims, insurances, and guarantees on credit events rather than assets. When banks are allowed to mark-to-model and then claim somehow that their back-and-forth trading and abstract multiplication of asset value is real, then all bets are off (or “on” depending upon which side of the fence your sitting).
Is it any wonder that the market for derivatives has grown another 100 trillion over the last two years? “We’ll concoct value and you’ll pay us real money for it? Of course we are going to keep doing it! Why not another 100 trillion!”
This probably is not going to stop until there is massive world-wide outcry and political change, a “black swan event,” or both. Let’s hope the first gains steam along with some long-overdue accountability for fraudsters before these nefarious banks destroy the body politic with their hubris and greed.
by Zeus Yiamouyiannis, copyright 2012
Counterfeit Value Derivatives: Follow the Bouncing Ball (Guest Essay) (February 3, 2012)
This guest essay on derivatives was written by frequent contributor Zeus Yiamouyiannis.
Here is how the counterfeit value derivative con works. It’s a game of “I pretend, you pretend, we all pretend, and the taxpayer will pay in the end”.
1) I’ll create an instrument, say a credit default swap (CDS), an unregulated insurance with no capital requirements, with a certain “notional” value. Notional value is just something I assign. It does not have to be attached to or backed by any real asset or actual money/principal, but I can pretend as if it is. (Notional amount.)
2) As a seller, I will just declare that this swap covers the full value X of this company, contract, etc. if credit event Y happens. I receive lucrative insurance premiums and fees for my unbacked promise. The CDS’s value is based in nothing more than my promise to pay. I don’t have to have adequate capital reserves on hand, but I can pretend as if I do perhaps with some mini-reserves based on objective-seeming risk ratios calculated by my mathematical models. (credit default swap.)
3) As a buyer, you can then buy as many of these CDS’s as you want, even for a single default. If you are really sure something is going to tank you can insure it 30 times over (or a 100 or 1,000) and get 30 (or 100 or 1,000) times the return when it goes bust! In regulated insurance it is unacceptable to insure beyond the full replacement value of the underlying asset. Not so with CDS’s. The seller has gotten 30x the premiums and the buyer gets 30x value in the event of default. As a buyer of this phony “insurance” you don’t have a stake in the affected properties, but you can essentially pretend you do.
4) As buyer and seller of CDS’s either one of us can assign our risks to a third party through another contract, and pretend as if we are covered in case our own game playing blows up in our faces. This allows us to retain even less reserve capital and spend freed-up funds on more high-risk, high-(pseudo) return speculation. (The monster that ate Wall Street.)
5) We can purchase and sell of these derivative contracts to each other at unlimited rates to generate massive volume and huge fees and profits. We can simply hyper-cycle risk and take our chunk each time.
According to the Bank of International Settlements, as of June 2011 total over-the-counter derivatives contracts have an outstanding notional value of 707.57 trillion dollars, ( 32.4 trillion dollars in CDS’s alone). Where does this kind of money come from, and what does it refer to? We don’t really know, because over-the-counter derivatives are not transparent or regulated.
With regulated economic markets, when an underlying real asset is impaired (i.e. the company in question is bankrupt, the mortgage has defaulted, etc.), market value is assessed, default insurance is paid up to replacement or full value, bond holders and stock holders make claims on remaining value and the account is closed. There is no need for bailouts because order and proportion of compensation has been established and everything is attached to the value of the underlying asset.
When the unreal, counterfeit economy intrudes, you now have a situation where a person can put in an unregulated, but recognized, claim to be paid a thousand times over in case of impairment. Say market participants have negotiated for a bankrupt company a 70% payback for bondholders and (36% payback for insurance claims), and I come with not one but rather 1,000 CDS claims demanding to be paid for each CDS.
Where does that money come from? Well if it were regulated insurance, I would have to be invested in the company in some way, my bond or stock payout would be limited by the actual asset value of the company, and my insurance payout would be limited as well. However, since I am unregulated and unrestrained, the money due me has to come from the CDS seller and my contractual agreements with that company (say AIG).
AIG could easily have sold 1,000 different unregulated insurance policies to the same person or a million CDS’s to a hedge fund, and when AIG could not pay up, it was threatened with insolvency, under which both its regulated and unregulated insurance policies and investments would become impaired. In fact there is abundant evidence that hedge funds (i.e. Magnetar) did in fact multi-insure certain portfolios while simultaneously pressuring the portfolio managers to select risky investments to ensure that the portfolios would crash. This is the opposite of a traditional “stake,” and this is the disease that modern derivatives bring—profit from intentional market destruction.
This chaotic state of affairs and its cascading implications for other interlinked parties and counterparties (read “too big to fail banks”), essentially resulted in economic extortion to force a huge public bailout of the whole crooked mess (totaling somewhere in the neighborhood of 10 – 14 trillion dollars in giveaways, loans and guarantees starting in 2008 in the U.S. alone.) Instead of agreeing to the extortion temporarily to prevent collapse and then aggressively pursuing orderly investigation, prosecution, and receivership, regulators and world leaders have simply covered up the events and even rewarded the perpetrators.
No wonder the market goes up dramatically when there is talk about another quantitative easing (Fed bailout) or emergency rescue (government/taxpayer bailout). These financial game players already know that an open public spigot is on its way, pouring real capital directly into their pockets.
In regulatory actions and legal courts, unregulated insurance claims should simply be declared null and void when applied to real assets and real compensation. “You have no stake, therefore you have no claim. Your agreement was with a third party that did not have adequate capital to pay for a contract with you. Take them to court.” Or “You have an imaginary claim for imaginary damage. Here’s your imaginary money. Your deal was private and unregulated, then it should be settled in private between companies without public intervention or support.”
Did that happen? No, because AIG had collapsed its unregulated private and regulated public functions and Congress had allowed it to do so with the repeal of the Glass-Steagall Act. Because the wall came down between regulated and unregulated activity, transparent and “shadow” markets, traditional and investment banking, this private fiat virus broke quarantine and the resulting contagion cannot be put back in the lab.
Because world leaders and their regulators blinked and did nothing, counterfeit private fiat (backed by nothing) has metastasized and infiltrated “genuine” public fiat (backed by country’s productivity if not by gold), and more and more actual money and productivity in the form of austerity is being thrown at a gargantuan and unrecoverable sea of counterfeit obligation.
How can you exceed 700 trillion dollars in unregulated derivatives alone? This is easy when market players are buying and selling from each other and when people can buy an infinite number of claims, insurances, and guarantees on credit events rather than assets. When banks are allowed to mark-to-model and then claim somehow that their back-and-forth trading and abstract multiplication of asset value is real, then all bets are off (or “on” depending upon which side of the fence your sitting).
Is it any wonder that the market for derivatives has grown another 100 trillion over the last two years? “We’ll concoct value and you’ll pay us real money for it? Of course we are going to keep doing it! Why not another 100 trillion!”
This probably is not going to stop until there is massive world-wide outcry and political change, a “black swan event,” or both. Let’s hope the first gains steam along with some long-overdue accountability for fraudsters before these nefarious banks destroy the body politic with their hubris and greed.
by Zeus Yiamouyiannis, copyright 2012
Wednesday, November 30, 2011
Metamorphosis: Transforming the Human Economy
I am preparing to create an e-book out of my articles for the Of Two Minds website. Charles Hugh Smith has graciously offered to assist me. I have a few more essays I'd like to write to round out my contributions into a coherent book (and book length), in addition to an outline of an intro. I believe it will be quite predictive and timely given the pattern of recent events and trends. I encourage you all to give a look when I put it out for self-publication through Amazon. Best regards, Zeus
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