classical economics
for analysis,  forecasting
and policy design

End of Decade Lookabout


From Pinnacle to Pit in 20 Years
By Wayne Jett © December 31, 2010
    The past decade began with nearly three years of financial rape of the productive class by the dominant elite and ended the same way. The crash of 2000-2002 took the Dow Jones Industrial Average from 11,497  to 7,592. Following a brief, vigorous recovery, the collapse of 2007-2010 took the DJIA from 13,930 to 7,063 and wiped out more shareholders’ capital in major financial firms than the Crash of 1929 and the Great Depression combined.
Since 1990 -- What Happened?
    In 1990, the U. S. emerged from four decades of Cold War as the only global super-power, with greater economic and military preeminence than any nation in history. Federal debt was about half of gross domestic product, the DJIA was 2,634 and the dollar ended the year at $393/oz of gold. In 2000, federal debt was below 60% of GDP, the DJIA was 10,788 (up 310% over the decade), and the dollar was 44% more valuable at $273/oz. In 2005, federal debt was 65% of GDP, and the DJIA was 10,718, with the dollar weaker at $513/oz.
    Six months later, Goldman Sachs CEO Henry Paulson Jr. came to Treasury, and then was succeeded in January, 2009, by former president of the Federal Reserve Bank of New York, Timothy Geithner. At year-end 2010, thanks largely to Wall Street, Paulson and Geithner, U. S. debt is about 100% of GDP, the DJIA is 11,620 and the dollar lies at $1,400/oz of gold.
     One dollar in 2010 buys a mere 19.5% as much gold as in the year 2000.
The DJIA was worth 39.5 ounces of gold in 2000, 20.9 ounces in 2005, and is worth 8.3 ounces now. Stocks in the Dow Jones 30 Industrials now have 21% of their intrinsic value ten years ago. This evidences very significant losses for Americans during the past ten years in asset values and standard of living.
    U. S. prospects have not been so bleak since the War of 1812, if then. This dismal national outlook occurs only 20 years after the apparent zenith of American power and less than five years following the onset of reversals. What or who knocked the American superpower to its knees in so brief a time and, so far as we know, without firing a shot?
    War is not the answer, at least not to this question. Despite serious damage done by terrorist attacks on September 11, 2001, and costs of military and diplomatic actions in Afghanistan and Iraq, those amounts pale in comparison to Treasury and Federal Reserve  spending related to financial sector losses since 2008. The U. S. financial sector, not China, Russia, Iran, Iraq or Afghanistan, wages the assault which threatens to fell American political rights and constitutional government.
Financial Racketeering Enterprises
    As extreme as this allegation may sound to the uninitiated, it is no longer news to anyone paying attention. When former Fed chairman Alan Greenspan concedes publicly that effective enforcement of existing criminal laws against financial fraud is the most important “reform” necessary, you can be sure the last horse is out of the barn. The U. S. financial sector operates as a monstrous racketeering enterprise, and the federal government is helpless to stop it.
    Harry Markopolos, quantitative financial analyst and former president of the Boston CFA society, tried for eight years to persuade the SEC to stop Bernard Madoff’s financial fraud, but he was stiff-armed by the federal agency with discretion to enforce securities laws. Markopolos testified to Congress he is presently black-balled for life from working in the financial sector (he presently investigates insurance claims) because he tried to expose Madoff's fraud. The legislators responded “tsk, tsk.” Congress, Treasury, the SEC, the CFTC and, yes, the White House, appear to be tools of the racketeering enterprise.
    Two weeks ago, Goldman Sachs and Merrill Lynch were named in a California civil lawsuit as co-conspirators with certain market makers in an alleged racketeering enterprise to drive down share prices of a NASDAQ-traded company by means of intentional failure-to-deliver shares sold short; i.e., by naked short selling. Redacted testimony filed with the court indicates the complaining company was not the only target of the scheme. Proof was obtained through years of expensive digging called litigation “discovery,” with no cooperation from Goldman or Merrill and with no help from the SEC or any other government entity except the judicial system.
    For its part, the SEC merely names such target companies on its Reg SHO “threshold list” so those wishing to join in the bear raids have an easy time finding the victims. At year end 2010, the SEC has zero to show for any efforts the agency has made more than two years after the most flagrantly fraudulent market manipulations in history.
Queen of Financial Chess
     The Federal Reserve System is ubiquitous queen on the financial chessboard, striking in any direction at any distance to obliterate opponents of the king’s (read “dominant elite’s”) interests. A privately owned bank controlled by the dominant elite, the Fed wields extraordinary powers bestowed by Congress to issue currency, to regulate operations of other private banks, and now even to regulate and manipulate financial markets.
The Fed charges for use of its currency, spends what it chooses and pays dividends to its owners. Anything remaining is delivered to the Treasury. Once the Fed came to be, Superman must have been conceived shortly thereafter, because mere mortals can only observe its superhuman powers in awestruck wonder.
    Using super-powers to push the private economy one way and the other, the Fed wears a cape as humanity’s benefactor while shoveling capital into vaults of the world’s most ruthless predators. How better to describe the Fed-wrought deflation of 1996-2002, which erased corporate profits across dollar-using nations of Asia and then the U. S. itself?
Profits-turned-to-losses by deflation were the perfect excuse for hedge fund managers to naked-short-sell the eyeballs out of NYSE/NASDAQ/OTC stocks during 2000-2002. Nothing is better than inside information from the Fed on mysticism like intentional deflation to make a money manager appear to be a genius. It fits hand-in-glove with Goldman Sachs’ customary gentle kindness shown during that time in allowing its hedge fund clients direct access trading so they could mark their own short sales as long, thereby avoiding the inconvenient up-tick rule through two-and-a-half years of cascading market crashes.
Setting the Table for 2008
     While Greenspan accomplished all this, in 1999-2000 he capitalized on elite media’s adoration to persuade Congress no regulation of derivatives or crude oil trading was best. But, we ask in retrospect, best for whom? Best for the Fed chairman’s bosses – the same predators who control the Fed and profit so grandly from inside information at the expense of other market investors.
    By 2005, the Fed inverted the yield curve, shutting off bank lending to small and medium business and shunting liquidity towards big financial firms. Like a charm, employment stopped growing and started falling. Housing turned from robust to anemic, and mortgages gradually came to be called toxic instead of dynamic. Again, the coincidental timing with creation of ICE’s dark market in crude oil futures by Goldman Sachs and Morgan Stanley, and their creation of the ABX.HE subprime MBS index, and the fortuitous adoption of FASB Rule 157 mark-to-market accounting for financial assets like mortgage backed securities, could not have been better.
    With Goldman Sachs’ Henry Paulson conducting the federal policy symphony at Treasury, the crescendo built as the housing industry came down. Then the mortgage industry vaporized, followed by banking (with fireworks and bailouts), spiking crude oil prices and global economic collapse, credit and commercial paper seizures, automobile failures and government overriding of investors’ rights.
    Through it all, the Fed created money in unprecedented sums to assure outcomes demanded by the dominant elite and enforced by federal officials. As Congress and the White House incurred popular wrath by spending unconscionably for ill-defined purposes, the Fed spent in even greater proportions without asking, without telling and without defining objectives or beneficiaries – all at the expense of American middle class producers. Now the Fed is creating $600 billion-plus more to expedite higher federal debt to be repaid by future middle class (all those who work).
Confrontation or Cataclysm
    As the new decade begins, these causes of the ending decade’s debacles remain entirely uncured. The Dodd-Frank financial “reform” law made matters worse, not better. The biggest, most predatory financial firms were empowered, not limited, as they now choose and write rules of casino clearinghouses for their derivatives gaming.  Naked short selling is practically enshrined among “natural law” rights of Wall Street players, while manipulations continue apace in crude oil, silver and every security.
    Dominant elite own the Federal Reserve and control Congress, the White House, Treasury and every regulator. Their agenda serves their own pecuniary and social objectives, not the public good. The coming decade cannot be assessed positively unless and until real progress towards overcoming this epochal malady is in evidence. May those with good will towards others have success in preserving this last best hope of mankind. ~