Don't Just Blame on Bernie

Courtesy of Garyvarvel.com

My colleague Aidis Zunde’s post on Madoff is very funny. I thought I might just add one picture and a more serious and sober note here.

If we generalize the process here, it is always to pay early investors with money from late investors. Which our social program is not like that? Social security, medicare, pension plan, even our insurance policies. When there is a slight sign of trouble, everything they promise to us suddenly disappears from the horizon right away.

To extend this process further, any bubble forming could be regarded as a Ponzi scheme as well. Stock market going higher is caused by more money from late investors to pay for shares sold by early investors. Same on real estate, a house going for higher price is because the late investors are willing to pay for it with the hope that there is buyer later at an even higher price.

It is so laughable when you see headline at the Wall Street Journal yesterday: “The Fed Didn’t Cause the Housing Bubble.”  Can you guess who the author was?  Madoff, no, even worse, it is Alan Greenspan, the creator of global Ponzi scheme. Did he forget he used every chance to promote ARMs during his tenure, and bragged about how he made housing “affordable” for the unaffordable.  And earlier, he fearlessly promoted the so-called "productivity" paradigm shift during the hi-tech bubble? As one blogger put it: It’s like Michael Corleone testifying that he knew nothing about the deaths of Sollozzo, Tattaglia, Cuneo and Barzini.

It is even more laughable when you hear the CEO said Citi was making money for the 1^st 2 months of this year. Maybe they made $10-20 millions for 2 months, but have they always written off $10-20 billions at the 3^rd month of the quarter to wipe out their whole equities? Ok, maybe they will hold off for this quarter to make the numbers look good, how about next quarter? Or the yearend? How long can they hide? No wonder they now want to change the mark to market accounting rules. As I said long time ago, when you put a salesman of toxic structured products from Morgan Stanley to rescue Citi, it is like hiring a used car salesman as CEO to save GM.

In addition, many of the appointed finance officials in the current administration are part of this global Ponzi scheme on mortgage securitization, credit derivatives, structured products, risk manipulation, etc. etc. Jeremy Grantham of GMO has read all the minutes of past Fed meetings, none of these “capable” guys/ladies have ever raised a single concern or question for a very long time on the forming of the housing bubble, or the earlier tech bubble, both of which seems so obvious even to a 15 years old.

The fact is that several other Fed governors who are not in the current administration had raised concerns repeatedly according to meeting minutes, no wonder they are not selected since they are not the “yes’ man type. How could we expect these officials will solve the problem they are responsible for.  As Jim Rogers put it: “They are part of the problem from the very beginning”. Sometimes even worse, you don't even know the real purpose of their rescue plan, especially when you find out the bailout money for AIG (at least that is what they said in public) is really going to Goldman Saches since Goldman is their largest credit default swap (CDS) counterparty. So if AIG goes under, Goldman would not get paid even they are on the winning side of the wild casino CDS bets. Nothing beats a well-meshed political connection, or should we call it political protection?

The only way to resolve this is to earn our way back slowly and gradually, as Japan did for the last 20 years. We need to change our past strategy of profit maximization to debt minimization. Both enterprises and households should put our earnings (if any) to minimize our debt, nothing else, until all debt are paid off. Meanwhile government should not only get rid of budget deficit, but gradually pay back all our national debt since we won’t be able to afford paying interests to foreigners for much too long. This restructuring process is likely the trend lasting for at least one generation in this country, if not longer.  

Comments

[Top Dog]

Damn Thomas! I didn't know you could riffle off relevant Godfather allusions like that. You've gotten high marks from me all along, but now you're off the scale. Great article and great perspective as always Thank you!

[Aidis Zunde]

I always suspected something at the IRS... Thomas, you are even more pessimistic than I am... So much so, it is scary. I would, however, not blame the current state of affairs on a global Ponzi scheme, but rather on a toxic combination of greed, hubris, and short-sightedness. Unfortunately, as with Bernie, those who got out early did quite well for themselves. Of those, the trick would be to determine which investors were insightful and which were stupid but lucky, as well as which managers were bright but unlucky, which were criminally negligent, and which were just criminal...

[Thomas]

Thanks, guys. In Madoff's case, Aidis,I think the people who had redempted their money early might not be very safe. There has been talks that the late investors might go after them to recoupe some of their money back.