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Pinto Beings
The financial crisis of 2008 is back, assuming it ever went away

by Bryan Zepp Jamieson
May 8, 2010

The oil spill in the Gulf of Mexico isn't the only stream of toxic waste that is spreading rapidly and threatening to engulf innocent people miles away. The global financial crisis is also threatening to do the same—and it has the potential to do even more damage in the long run.

It never really did go away in 2009. Sure, the bailout package did stabilize the markets and, to a lesser degree, the banks. (It propped up the big banks. Small banks are still dying like red shirts in a Star Trek parody show). Most of the national economies pulled out of recession – America with the help of a stimulus package.

But the fundamental problems that caused the global meltdown in the first place are all still in place, the flaws not addressed.

And most Americans are unaware of it, because the corporate media has a vested interest in pretending all is fine, because profits of their parent corporations are riding on an illusion of economic stability.

Credit Default Swaps and other derivatives still make up the vast majority of a phantom world economy that doesn't actually really exist. The actual world economy is about $60 trillion a year, and the derivatives market, which consists mostly of insurance policies betting that chunks of the real economy WILL fail, is about ten times that amount.

If you have a beat up old Ford Pinto, and you find an insurance company willing to insure it for ten million dollars against it being totaled, the first thing you're going to do is run that Pinto into a crusher and collect your ten million. That's assuming of course, that an insurance company would write such a policy, and not provide incentives for you to hold on the the rolling wreck. That's where the magic of derivatives comes in.

The bank is selling you an outlandish policy like that because the premiums are a percentage of the amount of the policy. They probably have policies of their own on the Pinto, one for $50,000 that says it will still be running on a certain date, and another for TWENTY million in case it gets totaled. The company willing to ensure it for Twenty million (premiums are three million a year) probably has it insured as well.

By the time that Pinto coughs and dies, several hundred million might be riding on it. And you, the owner of this Pinto, haven't totaled it yet because, with all that money on it, you've been able to secure some nice big fat loans, with that multi-million Pinto as collateral. That $200 Pinto is now an “asset” of over ten million dollars.

You also have a sneaking hunch that if it did die, you might see little or none of the sum payout offered, and like any gambler, will stay in the game in hopes of “covering your losses”. Of course, now you're using that vaporous asset, the solid gold-like Pinto, to back those loans.

When you have sums of money equal to roughly 1,000% of the amount of money that actually exists in the world tied up that way, the result isn't a real stable economic structure.

Another big part of the problem is that debt is so attractive to politicians and banks. For politicians with no scruples whatever, deficit spending is a good way to produce an illusion of prosperity without having to pay for it. In the US, that suicidal practice began with Reagan (most people, subjected to endless propaganda about how the New Deal and Great Society caused all our debt, are amazed to learn that the national debt was only 7% of what it is now back in 1980.) In Britain, it was Maggie Thatcher. They both ensured that much of the debt would be privatized, and made it all worth while by relaxing the usury laws to the point where banks could charge a vig that would make Tony Soprano blush. Banks and the financial sector love debt. They make a fortune off of it.

It leads to an incredible contraction of wealth. The five banks regarded as “too big to fail” in America control over 60% of the country's wealth, and that's not even including all the imaginary wealth in the derivatives.

It's not a tenable situation. Capitalism, by its nature, will eliminate competition, create a captive market, and siphon off ever-increasing amounts of the wealth. That's why any sensible society regulates it, because the only outcome of unregulated capitalism is an economic implosion, followed by widespread poverty.

Although you usually see revolutions before that happens.

Greece, crowded into an austerity program by bankers anxious to protect their vig, is seeing riots. No telling what that situation might develop into. The people of Greece didn't create the situation, and see no reason why they should have to suffer for it.

When (not if) it's America's turn, you'll see riots here, too.

Because the Eurozone dithered over helping Greece, and passed on several opportunities to do it relatively painlessly, they now have a situation where it may be too late to prevent the Greek economic convulsions from tipping the rest of the European economies. And the offer is so unpalatable that Greece may have to reject it out of hand, which should lead to a collapse of the Euro. Germany's Angela Merkel is quite put out by all this, especially since she is the main reason it came to this extreme. She wasn't willing to help the Greeks in any way as long as Germany could avoid the contagion, which is about the same as refusing to help get a victim of pneumonic plague to the hospital before you start getting a skin rash yourself.

The United Kingdom had an election Thursday and hung their Parliament. This doesn't involve hemp ropes and scaffolding such as you might see in more sensible nations; it means that no one party got 50% of the seats, and so one of the two major parties will have to form a coalition with the left-leaning Liberal Democrats in order to govern. Otherwise they will have another election in the very near future, and the country will be effectively paralyzed in the interim. With no guarantee that any of the parties will get half the seats in the next election, right. (Canadians have a more civilized approach: they don't hang their Parliament; instead, they have “minority government”, which sounds like they are sharing with the less fortunate, but is actually the exact same as hanging the Parliament.)

It doesn't help that in America, the Republicans are stonewalling any attempts to overhaul the financial system which nearly destroyed the country just 18 months earlier. For the rest of the world, acutely aware that America's out-of-control financial sector is what caused all the trouble in the first place (and outside of America, nobody believes, or has even heard, the myth that poor people getting mortgages caused the collapse), see this as a sign that the main underlying problem with the world markets is both unresolved and still out of control. Thanks to the filibuster, and the ability of any Senator to block legislation through the personal “hold”, America is in a permanent state of having a hung government. The crazies of the far right, convinced that government serves no useful purpose, think this is a good thing, and will be outraged when they find out it is not.

Even America's out-of-control financial sector is nervous. Something happened Thursday – the story is a day trader made a typo on his computer and typed “billion” where he meant to type “million” on a trade – and the Dow instantly plummeted a thousand points – about a trillion dollars – over the next few minutes. It bounced back up within a half hour, doubtlessly leaving a number of cardiac arrests in its wake.

Regulators are looking into that, to try and determine what happened and how it could have happened, but the answer is really quite simple: the markets are afraid of the monster they have given birth to. Even Wall Street is doubting the myth that unregulated capitalism is good for a society.

Other countries are teetering. Japan, the second biggest economy in the world, is worrying openly that they may have a crash. China, the biggest bubble in the world these days, is getting ready to pop, and when that happens, may demand the US make good on some three trillion in IOUs in order to prop China up. That, in turn, would wreck the dollar. India, missing Europe and America, its biggest customers, and with no real domestic consumer base, would fall next.

End result: widespread poverty and chaos, and a small group of people with land, and a bunch of currency that is no longer worth anything.

The good news is that twenty million dollar Pinto will be revalued to a more sensible amount. You might be able to get it for 10 chickens and a goat. You wouldn't be able to drive it, of course, but it would make a nice cozy shelter, since by then you would be out of work, your house would be taken by the bank and sitting empty, and gasoline would be a week's salary a gallon.

But no worries. The capitalists, those “productive members” of society, won't miss any meals, and will be anxious to enlist your support in the next election.

They might even agree to buy your Pinto for ten chickens and TWO goats, provided you give them six eggs a month interest.

Posted: May 13, 2010

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