Friday, January 1, 2010

1983 'Ponzi Game' prediction

I'm reading William Greider's 1989 book 'The Secrets of the Temple - How the Federal Reserve Runs the Country' and came across the following acknowledgement and prediction of and for a global 'ponzi scheme' playing out to an ultimate crisis.

"A genuine solution, [US Federal Reserve governor] Philip Coldwell predicted, would not be acceptable, either to bankers or politicians, until the consequences of the LDC debt reached a sufficiently frightening level of crisis - when the "Ponzi game" broke down and everyone was forced to acknowledge it. Like all illusions, this one might continue for quite a long time, perhaps many years, but it could also collapse abruptly at any time shattered by random events.

"The way out of this thing is a shift in the way we treat the LDC debt," Coldwell argued. "The banks would have to take a big hit on their balance sheets, but then it's over. If you give them a definitive hit, then they could say it's behind us. If you get down to a crisis stage, the banks would accept that. They would have no choice."[1]

Looking at contemporary economic history it seems clear that the beginning of the current global financial crisis can be traced at least as far back to the Johnson administration in the early-mid 1960s. This is when inflation and accompanying inflationary expectations were set in concrete by huge military expenditures on the Vietnam War as well as through what is arguably, an accompanied global oil price hike that was deliberately manipulated to help pay for it.[2][3] It was also the time the evolution to bigness in capitalism made it possible for large firms to: (i)increase their prices as a response to a rise in inflation, (ii)increase their prices in response to a general drop in demand for their services and products, (iii) increase their prices in response to losses caused by speculative activities gone wrong, (iv) generate revenue from activities not linked to employment nor the creation of wealth.

Permanent recession and economic zero sum games played out as astounding levels of economic concentration became commonplace both in the industrialised nations and around the globe.
“Between 1950 and 1971 the 200 leading U.S. corporations increased their control of all U.S. manufacturing assets from 46 to 87 percent. By 1971 the assets of the top 100 equaled those of the other 194,000 corporations. [4]”

The US Federal Reserve - whose key staff are often former corporate CEOs - worked intimately with global transnational corporations (with the latter's origins based in the US).[5] From the mid 1960s to late 1979 the Fed's focus was on hitting its interest rates targets (the price of money) over and above controlling the quantity of money. [6] The resulting inflation foreshortened horizons in thinking and led to increases in debt and increases in long-term interest rates. Creditors received negative returns on loans that were contracted at times when inflation was lower. Corporations began to engage in much deeper levels of exploitation through globalisation where imprudent loans were pushed on third world nations to recycle the massive increase in excess US dollars resulting from the oil shocks of the 1970s.

By 1979 that game was up. By that time negative real interest rates couldn't be sustained. and the US dollar had come under severe speculative attack.
"The dollar-based monetary system was about to collapse. The core of the problem was that for the second time in a year corporations, banks, central banks and other investors (including moneyed Arab interests) had stopped accepting dollars as the universal currency. Instead, there was heavy dollar selling on a global scale and the proceeds were going into gold, silver, deutsche marks, Swiss francs and even art and real estate." [7].

The Carter administration instituted the Money Control Act of 1980, lifting controls of interest rates and making usury legal. The new Fed chairman Paul Volker took advantage of the ability of the US to freely decide the price of the world’s trading and reserve currency and increased global interest rates to levels that were unprecedented. Third World debt [8] had escalated already because of high oil prices and the extraordinary rise in the global interest rate (denominated in US dollars) became essentially unpayable for them.

This is the background to the Ponzi scheme described by Coldwell in 1983. It's ironic that in a time of such overproduction of money that a small minority of creditors took all the power and forced up interest rates across the world, permanently damaging their economies. Nothing much has changed since then. In the early 1980s:
"Volker and his international aides worked assiduously to protect the earnings of the banks, particularly the money-center banks which were most exposed [to third world nation default]. In the negotiations over new loans, Volcker usually supported the bankers in their persistent refusal to make any concessions on interest rates. The Fed also took care to instruct its bank examiners to treat the huge portfolios of questionable LDC loans with special solicitude. If the rules were applied to strictly, major banks might be confronted with huge loan write-offs that would wipe out their capital.

The central bank, as regulator and protector, had worked itself into a compromising position. On the one hand, the Fed was trying to gradually extricate the largest banks from their overexposure and preaching sterner discipline for the future. On the other hand, the Fed was bending the banking standards and pressuring hundreds of other wary bankers to make new loans they regarded as dubious....when the [smaller regional] bankers balked at committing more money to the new loan packages, they were pressured by the major banks. If that didn't work, they received a friendly call from the president of the local Federal Reserve Bank, urging them to reconsider."

In most cases, William Greider takes care to point out, such successful persuasion "implied an unstated guarantee by the government."

This observation leads to yet another powerful phrophecy in Greider's book:
"The problem is that by the time the crisis ends, the regulatory authorities may be so deeply compromised by the concessions that they have made to the banks that there is no return."[9]

As we now see, the gambling in the world's financial markets went on and on and increased. It didn't ever stop because of government intervention. History shows, wrote Michael Moffit, that eventually the game will end. Vast abused freedom on the part of US government administrations - Democrat and Republican alike - and of that of global TNCs have shackled both them and us.

We are all among the losers now.

[1] William Greider. 'The Secrets of the Temple - How the Federal Reserve Runs the Country' Touchstone 1989. Page 549

[2] See William Endaghl 'The Fake Oil Crisis of 1973'

[3] The ex-ambassador to Saudi Arabia, James E. Akins… argued [around 1980] that Kissinger acquiesced in the Shah-led oil price hikes beginning in 1974 to provide Iran with the finances to help out ailing Northrup, McDonnell Douglas, General Dynamics, Boeing, Grumman and Litton Industries.
The Multinational Monitor
Business In the Shah's Iran
by John Cavanagh

[4] Quoted from: American Global Enterprise and Asia
Journal article by Mark Selden; Bulletin of Concerned Asian Scholars, Vol. 7, 1975

[5] In 1975 it was reported that "“A recent survey of 1,029 executives of leading U.S. global corporations, for example, found just 19 foreign citizens.”
American Global Enterprise and Asia
Journal article by Mark Selden; Bulletin of Concerned Asian Scholars, Vol. 7, 1975

[6] "the Fed [as a monopolist] cannot control both the price of money...and the quantity of the same time."
Maxwell Newton 'The Fed - Inside the Federal Reserve, the Secret Power Center that Controls the American Economy' Times Books, 1983. Page 211

[7] Michael Moffit 'The World's Money' 1983. Page 196

[8] These were syndicated loans originating from the concentrated financial markets of Wall Street.

[9] Karen Lissakers 'Dateline Wall Street: Faustian Finance', Foreign Policy, Summer 1983.


Shag from Brookline said...

While it may have started with LBJ's "guns and butter," Bush/Cheney pushed it up a notch with "guns, butter and tax cuts."

run75441 said...

Hi Brenda:

I am going to add something to this which I believe is the initial start of the climb in interest rates and the transition of money from manufacturing to financial: Marquette National Bank vs. First of Omaha Service Corp.

What this SCOTUS ruling did was strike down all state usury laws in favor of the laws in which a particular National Bank was chartered. Hence the rise of Delaware and South Dakota. SCOTUS affirmed the National Banking Act takes precidence over state usury laws and that it was Congress's intent to have a National Banking system. The problem with this analysis was Congress never put the underlying foundation in to govern a national banking system and it was left to chartering states such as South Dakota and Delaware.

Anonymous said...

The 'The Secrets of the Temple - How the Federal Reserve Runs the Country', is a great book, and gives some insight into the current economic problems.

Greider also states that the FED is a captured regulator. The existence of the FED is de jure, but the power is by the banks, for the banks.
The refusal of the FED to allow for the failure, and Greider makes note, of the Illinois bank failure as a foreshadowing event. The banks were encouraged to lend, because they could not fail.(How could a bank fail at the that time, 15% interest rates?)

The discussion about the destabilized world banking system after the collapse of Bretton Woods is mentioned in the book, but I feel that Mr. Greider could have went further into the implications of the breakdown of that system and the LDC debt problems.

Tom said...

I suppose it's serendipitous that we are now also the LDC in question....

- TomOfTheNorth

Walker said...

Speaking of William Greider, I think it would be timely to revisit Paul Krugman's now pathetically out-of-date review of Greider's One World< Ready or Not: The Manic Logic of Global Capitalism. Krugman employed a little simplistic economic theorizing and a lot of hubris and disdain to pooh-pooh Greider's warnings about the looming downside of globalization.

And Greider's theorizing is all the more speculative and simplistic because he is an accidental theorist, a theorist despite himself--because he and his unwary readers imagine that his conclusions simply emerge from the facts, unaware that they are driven by implicit assumptions that could not survive the light of day.

Whereas Krugman's un-accidental theorizing allows his conclusions to emerge from equally implicit but canonical assumptions that couldn't survive the light of day (or even of a flashlight with a dieing battery).

Anonymous said...

"Looking at contemporary economic history it seems clear that the beginning of the current global financial crisis can be traced at least as far back to the Johnson administration in the early-mid 1960s."


Actually, the date can be given with absolute certainty: 30 September 1950.

This, of course, was the day President Truman authorized implementation of NSC-68, with all the political, economic and international consequences which have followed.

The global financial crisis grows directly out of the problem of financing the policies contained in NSC-68.

Brenda Rosser said...

Tom (Walker)
Thanks for the Krugman link. Krugman wrote:

“…what entitles me to assume that consumer demand will rise enough to absorb all the additional production? One good answer is: Why not? If production were to double, and all that production were to be sold, then total income would double too; so why wouldn't consumption double? That is, why should there be a shortfall in consumption merely because the economy produces more?

Here again, however, there is a deeper answer. It is possible for economies to suffer from an overall inadequacy of demand--recessions do happen. However, such slumps are essentially monetary--they come about because people try in the aggregate to hold more cash than there actually is in circulation. (That insight is the essence of Keynesian economics.) And they can usually be cured by issuing more money--full stop, end of story. An overall excess of production capacity (compared to what?) has nothing at all to do with it.”

How extraordinary! He obviously needs to come to Tasmania and see the mountains of woodchip piles sitting on the docks here. I would like to think it's because people have switched from paper (made from tree monocultures) to readily-available alternatives (like cloth for napkins etc).

When people get more money, maybe people will go back to buying products that absolutely destroy the soil, air and water again. That may not be for a long time though, unless Krugman is suggesting that people be given lots of money NOW to pay off their mortgages so they can get back to the business of consuming the planet.

Brenda Rosser said...

Anonymous, thanks for the NSC-68 linkup.

"For several centuries it had proved impossible for any one nation to gain such preponderant strength that a coalition of other nations could not in time face it with greater strength. The international scene was marked by recurring periods of violence and war, but a system of sovereign and independent states was maintained, over which no state was able to achieve hegemony. "

Obviously NSC-68 put paid to that situation. Pity our US hegemony isn't noted for its benevolence.

Brenda Rosser said...

It's interesting to observe also that 1978 also saw the deregulation of the US domestic oil price (see weblink below). Higher oil prices/higher price for money.

A good way to disintegrate a global economy.

Thanks for the link.

Oil Price History and Analysis
James L. Williams

" A controlled disintegration in the world economy is a legitimate object for the 1980s. "
Paul Volcker in 1978. 'The Political Economy of the Dollar'

Anonymous said...

Not close to complete but Dovetails w/your post.


Brenda Rosser said...

Juan: “If price of oils was determined by cost of production/supply/demand rather than trade in financial instruments, I would place more weight on ‘refusal to participate’."

Thanks for providing the link to your interesting post.

The hike in oil in the 1970s didn't seem to have much to do with 'financial instruments'. I doubt, whether they (and supply-demand) have played much of a role all along. More of a strategy to limit supply and let the price escalate, in the knowledge that ready alternatives remain unavailable.

Anonymous said...

Brenda, over the course of the industry there have been different price regimes - the 1970s saw the establishment of an OPEC administered price which, owing to the rise in non-OPEC production, global recession and intra-OPEC competition broke down and was, in 1987, replaced by a price regime centered in the futures markets so began opening the door to the type of speculative price rises we saw during the oughts.