The Big Con

May 12, 2009 


The level of propaganda spewing out of the U.S. government and the financial press/mass media is unprecedented in my lifetime (55 years). Public support for policies based on distorted statistics will crash once reality intrudes.

The U.S. government and its financial Plutocracy Overlords have undertaken an unprecedented propaganda campaign to convince the U.S. public that their looting of public treasure has "worked" and we can all start borrowing and spending again.

Having been cursed by a completely useless interest in politics since the age of 10 (the 1964 presidential election campaign) I can state without hesitation that the grand deceptions, Big Lies and blatant propaganda campaigns of the past pale in comparison to the current orchestration of phony statistics and "it's all fixed now, start spending."

What's breath-taking is they seem to be close to getting away with it.Here's the plan, brilliant, desperate, or simply "we have no other option": rather than actually make the fundamental reforms to our corrupt and venal financial system which democracy and capitalism both demand, our government and its Plutocratic handlers (money-center and investment banks--you know, the retired CEOs who sit on the NY Fed board) are gambling on The Big Con.

The Big Con is simple: if they can convince the American public that "green shoots" will soon grow into mighty oaks, then the public will save the financial system from its richly deserved impoverishment by starting to borrow and spend again on the same old grandiose scale we've grown accustomed to as "normal."

Even if it's all lies, deceptions, fraud and statistical trickery, if the public believes The Big Con then the financial sector will be "saved" from the pain of actual reform.

Want to know why the bank stocks all skyrocketed in the last month? No, it's not because they "made a healthy profit." That was a stupendously blatant lie, as noted here last week:

Over the last week a number of banks have reported first quarter earnings, which was a pleasant surprise. Citigroup said it made $1.6 billion. One of the ways Citigroup achieved this gain was booking a profit of $2.7 billion on the decline in Citi's own debt. Say what? Under accounting rules, Citi was allowed to book a one-time gain equivalent to the decline in its bonds because, in theory, it could buy back its debt cheaply and save $2.7 billion over time. Of course, Citi didn't actually do that. Even though more consumer loans went bad in the first quarter, Citi reduced its loan loss reserve from $3.4 billion in the fourth quarter to $2.1 billion in the first quarter, thereby picking up another $1.3 billion of 'earnings'. And the recent change in mark to market accounting enabled Citi to book an additional $413 million in 'profit' on impaired assets. Without these one-time adjustments, Citi's $1.6 billion in first quarter profit becomes a $2.8 billion loss. (CHS--emphasis added)

No, the real reason is that the Fed and Treasury--on the hook for trillions of dollars in bailouts and guarantees of speculative debt--and the insolvent banks needed very desperately to raise new capital. The faint mewling of public outrage over the trillions already squandered could be heard in the distance, so the Fed and Treasury felt slightly constrained in what they could engineer in the light of day.

The "solution" was to declare the banks "solvent", goose their stocks and then sell new stock to credulous private investors. When the Bank of America's stock was $3, raising capital by selling shares would have seriously diluted insiders' holdings; much better to goose the stock with Fed and Treasury connivance and then sell the rubes and fools more stock at $12--literally four times the probable "real value" of the shares.

I picked up this compelling thesis from the excellent blog THE HOUSING TIME BOMB. The mechanism is simple: the trading desks of the big banks account for up to half of all trading each and every day--rumor has it Goldman Sachs' desk accounted for fully 25% of all trading activity on its own.

How do you goose your own stock? Easy. Buy huge blocks above the bid and trigger institutional and hedge fund "buy" programs. Once you detect short selling, squeeze the shorts with relentless buying, forcing them to cover, which effectively boosts the stock by leaps and bounds.

All of this was laid out decades ago by legendary trader Jesse Livermore inReminiscences of a Stock Operator and nothing has changed since except the level of deception and obfuscation has grown.

Now that the big banks have sold millions of shares at artificially pumped-up prices, then they can start dumping their own shares to other rubes on the open market.

Lyndon Johnson kicked off the peacetime exploitation of propaganda, deception and misrepresentation in 1964 with his public proclamations that "Asian wars are for Asian boys" even as he prepared to authorize sending combat troops to Vietnam.

As noted here yesterday, The Big Con then was that the Vietnam War was not only winnable but we were winning it, no problem, light at the end of the tunnel, etc. The Tet Offensive broke the back of that particular con and the American public began to lose trust in its government.

The Nixon administration--the first "imperial" or "unitary" presidency--continued the deceit about the war and then added fiscal deception to the mix, launching various "innovations" which remain in place today such as "core inflation" and tossing the Social Security Trust Fund into the government's budget so the Social Security surplus would (deceptively) offset rising deficits.

The following administrations continued refining the legerdemain and accounting tricks with the result that very little of the key data issued by the government is trustworthy. Need to foster the illusion that jobs are being created in the hundreds of thousands? Just create them out of thin air via the "birth-death model". For more on this subject, please visit Shadow Government Statistics.

Speaking of shadows: not only do we have a shadow government (black ops, the Fed, etc.) but we also have a shadow financial sector, the "shadow banking system" in which assets and liabilities are held off balance sheet and priced according to whim, myth, need or hmm, greed.

For more on this, please read:

Confessions of an Economic Hit Man

Fiasco: The Inside Story of a Wall Street Trader

Greed, Fraud & Ignorance: A Subprime Insider's Look at the Mortgage Collapse

Many commentators view the current financial meltdown as a "surprise" outlier, a "Black Swan" event. They are wrong. The "crisis" was easily foreseen and predicted as inevitable by many, myself included. The real "Black Swan" has yet to swoop in.

What all those perpetrating the financial fraud--both in private banks and their government enablers--fail to recognize is that they have not eliminated risk from the system, they have only cloaked it temporarily. For more on why this is so, please read The Misbehavior of Markets .

What no one anticipates at this point in the bogus "recovery" is a full-blown crash: a crash in equities, bonds and perhaps public confidence. I try to read a variety of analyses and the consensus has puddled into two camps: we are out of the woods and the economy will start growing later this year, or the stock market has one more leg higher, then it will take a breather and start climbing robustly in summer and fall as the "reality" (barf) of the "recovery" becomes evident.

Few if any commentators (to my knowledge) expect a near-term crash of this nascent faith in complete "recovery" and that in itself suggests it is more likely than the rosier scenarios gaining near-total mindshare. For if we can say one thing about markets, it is that they rarely move in the direction of overwhelming consensus.

I will close with this prescient comment by frequent contributor Harun I.:

The con only works because people want to believe.

They want to believe that government can keep them in a home they cannot afford. They want to believe that that taxpayers should subsidize the purchase of homes they cannot afford ($8000 tax credit). They want to believe that government can provide whatever service they want regardless the cost and have low productivity and low taxes. They want to believe that their stocks, 401K's, mutual fund and bond portfolios buying power is not decimated. They want to believe that the USD hegemony can and will continue regardless of our economic decline into stupendous debt can never be repaid. They want to believe that the rest of the world will except this arrangement indefinitely.

At some point reality is going to impose.

In Readers Journal: Thought-provoking New essay by Zeus Y. 

Tortured Democracy (Zeus Y.) 

"Good faith" may have limited application in contract law, but it has no place in constitutional law. If you flout the highest law of the land, especially if you are a top-level decision-maker, you should be brought to justice. If you provably condoned, approved, and justified torture against established national and international law, you should be prosecuted.

And a darned clever new poem by Mike Dakota:

IF ROMEO AND JULIET

I bet if Romeo and Juliet
had a phone they would have text'd
and their early demise not met
or let
two families suffer regret
full of tears salty and wet
and William's plot made thinner yet.

Our previous list of hot reading (check them out at your local library if you don't want to own a copy) can be found at Books and Films. 

Thank you, Umakant G. ($20), for your very generous contribution to this site. I am greatly honored by your support and readership.