The Rot Runs Deep - How The Financial Industry Became A Rigged Gambling Den PARTS 1, 2 & 3

http://www.oftwominds.com/blog.html

A brilliant set of articles - detailing the corrosive corruption of the rich world's financial architecture - by Charles Hugh-Smith...presented in their entirety.  The rot has set in, and now it is just a matter of time before the entire edifice of Western Finance collapses, taking most of the rich Western economies down with it.  "There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved." Ludwig von Mises

The Rot Runs Deep 1: The Federal Reserve Is A Parasitic Wealth Transfer Machine

The Federal Reserve is a wealth transfer machine, skimming wealth from the productive many and transferring it to the parasitic few.

Today I launch a series entitled "The Rot Runs Deep" that examines the moral and financial rot at the core of American finance, politics and culture. We have reached a unique junction of American history: the confluence of Big Lie propaganda, neofeudalism and the worship of false financial gods.

The Big Lie propaganda machine of corporate media and the Central State has perfected Orwell's nightmare vision of centralized media and a fascist centralized State which turn lies into self-serving "truth."

Since the Federal Reserve is once again expected to "save" a crumbling, exploitative Status Quo, let's use the Fed as an example. The propaganda machine would have us believe that the Federal Reserve, the privately owned central bank of the U.S., has "saved" the Status Quo from financial ruin on numerous occasions by "smoothing out" the business cycle (credit expands and contracts) and by "stimulating aggregate demand" by lowering interest rates and pumping money into the economy (quantitative easing).

We are constantly prompted to worship the Federal Reserve's supposedly god-like powers to rescue a corrupt and venal Status Quo from the black hole of recession and collapse, and this Big Lie masks its real nature: The Fed is nothing but a parastic wealth transfer machine, skimming wealth from the many and transferring it to the few.

In effect, the Fed is the "enforcer" of neofeudalism in America: the feudal Lords of Finance control the for-sale political system and skim tribute from the 99.5% toiling in the fields below their castles. The Fed enforces this parasitic transfer of wealth by manipulating interest rates to enrich the banks and provides "free money" to the Financial Lords which is then used to buy assets and lend at interest.

The mechanisms of the Fed's parasitic transfer of wealth are well-known. Here's one: the Fed "loans" money to the Feudal Lords at 0% interest. the Lords then loan this free money out to peasants, students and other debt-serfs at high rates of interest. The interest "earned," courtesy of the parasitic Fed, is theirs to keep.

If they can't find enough debt-serfs who can pay more interest, they can always deposit the free money back at the Fed and earn interest from the Fed itself.

Here's another: the Fed "loans" free money (0% interest) to the Financial Lords, who then buy low-risk long-term U.S. Treasury bonds paying 3%. When the Lords spot a better skimming opportunity, they sell the bonds to the Fed, who buys the bonds from the Lords as part of its "Operation Twist."

Peasants who have arduously saved up capital (cash) earn next to nothing as a result of Fed policy, but the Fed insures Feudal Lords earn a guaranteed return on money they obtained for free. The suppression of interest income to near-zero (a negative return once inflation is factored in) is a massive transfer of wealth from savers to Fed-backed speculator Lords and banks.

As a direct and intentional result of the Fed's quantitative easing, huge sums of "free money" slosh into the "risk-on" stock market, where the money provides liquidity for the Lords' high-frequency trading (HFT) skimming operations.

The losers are the peasants who have been locked into 401K plans that divert their earnings into the stock market, where the Lords' HFT can skim billions from the 401K plans.

The Fed guarantees the Lords free money, and also supports the Financial Lords' speculative bets in the stock market; whenever the market threatens to swoon, the Fed intervenes and manipulates the markets up to levels where the HFT machines will trigger momentum buying.

What do we call a power center that enables and enforces neofeudal exploitation and predation? We call it evil. The Federal Reserve is a force of evil that should be abolished at once. Its purpose--enabling and enforcing a neofeudal transfer of wealth from the productive many to the unproductive, parasitic few--is evil. Those within it are serving evil. Those who defend it are serving evil. Those who worship its power are serving evil. Those who mask its true nature are also serving evil.

In a society and culture that has lost its moral compass, a culture of greed, self-serving lies and corrupt vested interests, the word "evil" has lost its power. It has been reduced to a cartoonish label, a cynic's smarmy joke.

The Soviet Empire was evil, and President Reagan was mocked by "sophisticates" for labeling our global competitor evil. In the relativist terms of propaganda, the only difference between the U.S. and the U.S.S.R. were two letters; this is the mindset created by a reliance on propaganda. There is no good or evil, there is only the paycheck "earned" by serving one master or another.

Anyone daring to label the widely worshipped Federal Reserve as a false god, a purveyor and enforcer of predation and exploitation, will also be mocked by presumptive "sophisticates" of the many Cargo Cults that depend on the neofeudal skimming, exploitation and lies for their own share of the spoils. Their self aggrandizement and share of the swag demands obedience to the Fed's godlike power to skim from the many and distribute to the few.

Since they are among the few, they will do anything for their Master, the Federal Reserve, for it has the power they worship: the power to transfer vast wealth from the productive many to the parasitic few.

Should we be surprised that the parasites in the media, academia, politics and finance support the evil that enables their own predation and exploitation? Of course not, for self-service and self-justification are the ultimate American gods.

The Rot Runs Deep 2: Don't Call Out My Scam And I Won't Call Out Yours

Complicity reigns supreme as everyone benefiting from a scam keeps quiet about everyone else's skim lest their own share of the spoils fall under the harsh light of inquiry.

The uncomfortable truth is that America has become a nation of skimmers and scammers. The rot runs deep not just in the upper reaches of the financial and political Elites, but in the bottom 99.5% as well.

America can now be summarized by this phrase: "don't call out my scam and I won't call out yours." In other words, all the skimmers and scammers have become complicit, not just in protecting their own scam from the light of day, but in protecting everyone else's scams, too, lest those who lose their swag unmask someone else's scam in revenge.

Examples of skimming and scamming abound in finance and government. It's almost tiresome to even list examples; fortunately for us, tireless truthseeker "George Washington" has amassed a list of bank fraud and malfeasance (reprinted by the equally indefatigable Barry Ritholtz).

It's easy to skewer the financial and political Elites' abuses of power, but few look at all the rot below. The fraud and embezzlement-riddled mortgage market of the previous decade included not just investment bankers but non-Elite Americans who lied about their income, debt, and other material facts in order to obtain a fraudulent mortgage.

Another "middle class" scam is practiced by public workers nearing retirement. (Please don't claim this doesn't happen, I have first-hand accounts from cousins with 30-year careers in fire and police departments.) Since the pensions are based on the top three years of pay, soon-to-retire workers pile up the overtime to amass much higher pay in their last years. Everyone involved helps make this happen because they expect to pull the same scam when their time comes.

To sweeten the already enlarged pension pot, they then declare (with the seal of approval by a complicit doctor) that their work left them with a disability of some sort (a heart murmur is apparently a favorite excuse) that makes their pensions tax-free. (Millions of "the rest of us" also have heart murmurs. Where's our tax-free pensions?)

In the lower rungs of the social-financial order, claiming disability is high on the list of skims and scams, as evidenced by the astonishing rise in the number of suddenly disabled people once the 99 weeks of unemployment ran out. Food stamps can be applied for online, and despite bolded warnings of severe penalties for misstating facts, it's safe to assume that "fudging the numbers" is unlikely to lead to any investigation or prosecution.

The rot runs deep in every nook and cranny of the nation. Longtime correspondent Kevin K. recently submitted this telling account of blatant scamming. (PG&E is Pacific Gas & Electric, northern California's utility.)

Two weeks ago we stopped by to see the new home a childhood friend bought in an upscale neighborhood. As we were talking he proudly let me know that he was still on the PG&E CARE program (that cuts his PG&E bill in half). It turns out that a few years ago after taking some losses on investments he had a taxable income for the year of ~$25,000. Soon after filing he got a letter (at his ~$2 million home) about the CARE program. He filled it out with his actual 1040 income to see what would happen.

To his surprise he was accepted into the program and his PG&E bills dropped in half (saving him over $1,000 a year). He said he was certain his savings would end when he called to transfer service to the ~$3 million home he just bought, but no one ever asked about his income and he is still in the CARE program. He said he has told a lot of people (that make a lot of money and live in $1mm + homes) about the program who have either lied about their income (there is no system to check) or put the PG&E account in the name of a nanny or cleaning lady to get in the program to save money.

The justification for all this skimming and scamming is always the same: "everybody else is doing it." As noted yesterday, self-service and self-justification are the ultimate American gods that we now worship, but nonetheless the moral disintegration reflected by this rationalization is still remarkable.

There is another dynamic: desperation. Beneath the placid surface of the "recovery," millions of people are desperate and feel that skimming, scamming and lying are their "only hope" to 1) keep what they have 2) gain much-desired upper-middle class perquisites or 3) keep body and soul together and not end up living in a cardboard box.

These dynamics of moral rot and desperation have created a society in which the spirit of the law is blatantly violated but "all is well" as long as the letter of the law has only been scratched. We see this in every level of society, from legalist parser in chief Bill Clinton's obtuse defense, to the classic phrase that the "dancing" (i.e. the fraud and embezzlement) goes on until the music stops, to the disability recipient who "does whatever it takes" to get free money for life.

Expectations are impossibly high. It's no longer enough for the Federal Reserve to issue a $1 trillion injection of financial cocaine to the stock market every year; now the market needs a $1 trillion injection every six months lest it crash.

Parents want their children to join the top 10% and enjoy a security and wealth that is as illusory as the pathway they have been sold: if only you get into an Ivy League university, if only you get a 4.+ grade point average, if only you earn a law degree--yet none of these guarantee anything beyond an enormous expense and a shot at a roulette wheel with too many players and not enough winners.

Rather than accept that the postwar boom based on cheap abundant oil, industrialization and globalization is over, and the financialization bubble of the past 30 years cannot be re-inflated, we continue to maintain unrealistic expectations of an economy with structural imbalances, rising friction and declining surpluses.

It is no surprise that economic hardship leads to increases in crime and social unrest. The wave of instability resulting from economic decline has repeated throughout history, a process described by the seminal book The Great Wave: Price Revolutions and the Rhythm of History. In this sense, moral rot is to be expected as economic surpluses vanish and entire economies must live within means that have shriveled for structural reasons.

Can an economy that has become dependent on lies, misrepresentation, "fudging" of numbers, fraud, embezzlement and a multitude of skimming and scamming operations escape the moral and financial black hole it has created? The self-evident answer is "no."

 

The Rot Runs Deep 3: The Capture of the Professional Class

A rotten-to-the-core system continues grinding on because it has effectively co-opted (captured) the professional/managerial class with promises of phantom wealth and security.

The Status Quo depends on the professional/managerial class to maintain order and keep the machine running. Since this class has more options in life than less educated lower-income workers, their belief in the fairness and stability of the Status Quo is essential: should their belief in the Status Quo weaken, so would their commitment to positions that require long work days and abundant stress.

I addressed this dependence on the professional/managerial class over four years ago in When Belief in the System Fades (March 12, 2008):

The corollary to this structural need for highly motivated, dedicated people to work the gears is that if their belief in the machine fades, then the machine grinds to a halt.

This belief is far more vulnerable than the Powers That Be seem to understand.

In a way, a belief in the value, transparency, trust and reciprocity of the System is like a religious belief. The converts, the true believers, are the ones who work like crazy for the company or agency. And when the veil of illusion is tugged from their eyes, then the Believer does a reversal, and becomes a devout non-believer in the System. He or she drops out, moves to a lower position, or "retires" to some lower level of employment.

 When the most dedicated servants of the system awaken to the realization that they are not benefitting from their service as they'd once believed, that their near-religious faith in the System has been bruised by the grim knowledge that the few are benefitting from the lives and sacrifices of the many, then they simply quit, or move down the chain to an undemanding position.

At that point--a point I anticipate will come to pass in the next 5-10 years--then the Elites' machine grinds to a crawl. People don't have to throw their bodies on the gears of the machine--they just have to stop believing, stop taking that promotion, and stop wanting to trade their entire lives for a thin slice of more more more.

The belief that the Status Quo is fair, just, stable and sustainable is wearing thin, and so the response of the Neofeudal Status Quo has been to "capture" the essential managerial/professional class and effectively chain them to their grindstones.

This phenomenon of "capture" is discussed in the following essay by correspondent Lonn Gary Schwartz, O.D.:

Many are familiar with the concept, regulatory capture, a term generally referring to an industry gaining control over, or capturing, those agencies mandated to regulate their business activities/conduct. A common example is Wall Street and the Too Big To Fail banks that, over the past several years, have been accused of capturing their appointed federal regulators.

I would like to suggest that a similar process applies to the entire American professional class, those highly educated, advanced degreed group of intellectuals designated –legislated - to administrate The System. Except in this case, it is outside - corporate/government - influence that has altered the dynamic of the “self-regulated” professions.

Although this professional capture mostly involves the professions’ elite, once these “thought leaders” capitulate to the needs of the predominant external interests, the bulk of their flock quickly fall into line, understanding that these are not times when fighting The System leads to highly satisfactory outcomes.

Instead of carrying out their professional responsibility of self-regulating their field of expertise - i.e. protecting the interests of their patients/clients/customers - these doctors, lawyers, accountants, educators, etc., have been - in many cases - manipulated, both from without and from within, at times acting completely antithetically to their legislated responsibilities.

Let’s take health care as an example, although this would apply to all professions.

It should come as no great surprise that with the decades-long corporate/government takeover of the American health care system, individual health care providers lost a great deal of professional autonomy.

As this forfeiture revealed itself in decreasing control over patient-care as well as declining real incomes, it becomes easier to understand how professional and economic pressures began to subject health professionals to a variety of external influences.

Accordingly, outside control in health care emerged in several forms. Perhaps the most influential was - and still is - the insurance company provider agreement, a contract that spells out exactly what is expected of the practitioner in terms of clinical care and, in the same breath, stipulates compensation levels.

In other words, not only has the insurance company - in many cases - determined for the practitioner what is best for their patients, but they have also decided how much they are going to be reimbursed for providing these services. They have, de facto, taken over the health practitioner’s business model, a nearly complete loss of both professional and fiscal autonomy.

Whether this can actually work for individual providers - or their patients - seems lost on the insurance companies, as they have judged what works best for their corporate bottom-line, and since they control much of the market, what they say, goes. The result is that both the patient and doctor lose, the insurance company wins.

The greatest degree of external control, though, is exacted by government, whose laws, regulations, taxes, fees, and all the rest, have not only created a bureaucratic nightmare but has sanctioned - through regulation - the private insurance companies and their anti-free market practices [see Obamacare].

Therefore, the current corporate-government coalition in health care has created the worst of all worlds: distorted markets, incredible inefficiencies, skyrocketing costs, tremendous mal-investment, a health [sick] care system designed in the primary interests of ROI [return on investment] in the corporate sector, and a loss of professional control, i.e. professional capture.

The sad reality is - and as a direct result of the above policies - that it has become incredibly difficult to practice ethically and profitably on any level commensurate with the cost of a professional education/investment in a quality practice environment. Indeed, in an increasing number of health [sub] specialties, the insurance companies and government have financialzed and regulated health practitioners right out of existence!

In other words, booming corporate profits and an ever expanding government presence in health care have come at the expense of the patient - increasing insurance premiums/taxes - AND the doctor - loss of professional control/decreasing reimbursements - not to mention declining health care quality levels.

Although the government-sanctioned corporate take over of American life has certainly given us a nearly unlimited selection of mass produced consumer products, at what price has this material frenzy come?

The cost has been the obliteration of our national moral compass, elevating ROI above personal ethics to the point where not only have the professions been sacrificed to the alter of maximum corporate profit, but our very sense of who we are as Americans is being seriously questioned.

When it becomes nearly impossible to do business because of the plethora of laws, regulations, fees, taxes, financialization, and all the rest, highly trained, well-intentioned professionals succumb to the financial pressures and subject themselves to the degradation/humiliation of acquiescing to a system run by hooligans adherent only to the legally mandated corporate bottom-line.

Wealth creation based on widely accepted moral standards is what made the United States the great country it is, but if you can not practice your profession/carry out your business in a way that expresses your true professional nature, treats your patients/clients/customers with high levels of respect, while at the same time, deriving a socially acceptable return on your investment in a professional education/practice capital investment, then what’s the point?

It is time for the leaders of the professions to stand up and say, “ENOUGH IS ENOUGH!!” It is within the power of the professions to bring serious change to this country by acting in the direct interests of the American people.

Whether it is in health care, the legal system, corporate/government accounting, education, or any other professions, massive change is necessary to restore a balance to our national purpose.

It simply takes COURAGE and LEADERSHIP, and a willingness to look at the simple truth that it is time to make the interests of all Americans, PRIMARY.

It is time for those in positions of power and influence to put away the toys and pick up the tools that will enable us to rebuild the foundation of this great country so that future generations of Americans can enjoy what we have almost completely squandered.

The American people need help, and they need help NOW.

The process of capture involves many of the dynamics I have long discussed in the blog and in my books. Wealth is power, and if you want a slice of the wealth then you toe the line and keep quiet. There's a word for for this "voluntary capture": co-option.

At every juncture where a decision to opt out (quit) or continue serving the Status Quo arises, the believer is co-opted by their desire to "stay in the game" for the promised slice of wealth and security. The risk-return calculus is heavily skewed to complicity, because the options for wealth and security outside the machine are meager and loaded with risk.

It is my contention that the wealth and security promised by the machine in exchange for subservience are phantom, and the risk of the promises not being kept is much higher than generally assumed. ironically, those who opt out and accept the risk and lower compensation are actually more secure and much wealthier (in terms of well-being and autonomy) than those who submit to voluntary capture.

 

Print this post

Do you like this post?

Showing 3 reactions


commented 2012-09-04 19:41:07 -0400 · Flag
At some point, one must break through the Bizarro Mirror World, rather than continue to try to navigate according to accepting how everything looks in that mirror.

Runaway fiat money made the value of everything become a fetish. The basic ways that we understand everything else in the universe are energy laws, and general systems theory. It is possible to understand human society and money systems in those ways too … BUT, EVERYTHING IS BACKWARDS WHEN WE DO!

The “rot” goes deep into the philosophy of science! (& In a technological society, the philosophy of science is a very important thing.) Our basic understanding of living things is that they are entropic pumps. Groups of human beings in a civilization become one vast integrated entropic pump. Most of economics is running around to find the fuels to keep our fires burning. Since thermodynamics blends into information theory, as mathematically continuous, the basic ideas of measurements and money, and so forth, all track back to energy laws and general systems theories.

When the entropy equations were being developed, an arbitrary minus sign was inserted at the beginning, so that their values for power and information would be expressed as positive numbers, rather than negative numbers.

That arbitrary minus sign reversed the true meaning of all power and information, which is that they are ALL inherently negative values.

The fundamental concept that I use is SUBTRACTION.

After relatively subtracting anything from the Whole, we then have boundaries to that thing, across which energy must be conserved. Therefore, from the basic idea of relative subtraction (i.e. from the operation of all human language to name things and understand our world) there then follows the idea of ROBBERY.

Scientific understanding of society should be based on those ideas of SUBTRACTION AND ROBBERY. Human societies are ALWAYS organized systems of lies, operating organized robbery.

Thus, the problem with an article like this is that it becomes more and more cynical, without finally shattering the Bizarro Mirror World of impossible ideals and false fundamental dichotomies. It reverts to what I call being a “reactionary revolutionary.”

The spiritual way out of the trap of language is the ancient mystical way: everything we “know” is necessarily a relative illusion. Everything we “know” actually has a negative value, not a positive value. After we separate ourselves, or others, from the Whole, then us and them must be always engaged in robberies to live. After we relatively subtract ourselves or others from our environment, everything we do is necessarily acts of robbery, to take what we need to survive.

Social conventions have created a host of arbitrary distinctions between good and evil, whereas, a better scientific understanding is that there are no good guys, only different kinds of bad guys.

I repeat, a good analysis of reality ALWAYS results in perceiving organized systems of lies operating organized robberies.

Thus, the problem with this article is that is still keeps some impossible small percent out of that system, whereas, there is 0% that are not necessarily living through some system of organized lies and robbery.

We should break through the Bizarro Mirror view of reality based on false fundamental dichotomies! We should stop being cynical about impossible ideals, and start to understand why those ideals were always impossible to ever actually exist in the real world.

The spiritual way is always there, from ancient mysticism, to escape from the trap of language. However, as long as we define anything, as long as we measure anything, then everything thereafter must necessarily be built as systems of lies and robberies.

Thus, this series of articles is interesting in that it attempts deeper and more thorough analysis and understanding. However, in the end it still collapses back to false fundamental dichotomies. The paradox of having our physics and biology advance through paradigm change after paradigm change, but still having political science based on the old-fashioned biggest bullies’ bullshit social stories, keeps on getting worse and worse.

People tend to superficially understand the frauds of the banksters, and how, therefore, everyone is being sucked into the black hole of those frauds. However, they then tend, in the last few percent of their article, after doing mostly good historical analysis of the real situations, to collapse back to the impossible ideals and false fundamental dichotomies, when proposing their “solutions.”

At some point, we need to reverse our understanding of those “black holes!” Lots of good physics has been doing that, but almost nothing like that, which I am aware of, exists in the social world of monetary theories, and their corresponding human bahaviours.

The theoretical solutions are to become better wolves, not better sheep. The solutions are to become our own banksters. The solutions are to become our own central banks. The solutions are to negotiate better death and debt controls, within better murder and money systems, in which we accept the basic premise that everyone must necessarily operate some system of organized lies and robbery in order to survive.
@TheIntlChronicl tweeted link to this page. 2012-09-04 17:47:37 -0400
A brilliant set of articles - detailing the corrosive corruption of the rich world's financial architecture - by... http://t.co/k59anoai
@TheIntlChronicl tweeted link to this page. 2012-09-04 17:44:00 -0400
A brilliant set of articles - detailing the corrosive corruption of the rich world's financial architecture - by... http://t.co/s9xs1Qoe