American Economic System; Bubbles and “Socialism” for the Rich

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by Sami Jamil Jadallah

 

The late Gore Vidal once described the American capitalist system as “ socialism for the rich and free enterprise for the rest” and Republicans are by definition the “socialists” in this country notwithstanding their lies. The bailout of Wall Street is a confirmation of such “socialism” for the rich while millions lost their homes to foreclosure, lost their jobs or businesses were subject to the rules of free enterprise.

That bring us to the current fluctuation in the price of oil down from a high of $120 to $50 and it has a lot to do with politics much more than economic cycles and the impacts are felt around the world from South Dakota, Alberta, Iran and Moscow certainly with the Ukraine and Wall Street.

Over the last several months, Middle East treasuries were fleeced to the tune of $500 billion with Gulf stock markets losing more than $100 billion in the last few weeks. The Russian economy is in tailspin with the ruble losing more than 50% of its value.

The present American capitalist system is no longer governed or influenced by “economic cycles” we learned about while in graduate school, now our capitalist system is governed and is influenced by “bubble” cycles of economic boom and bust that for the most part has nothing to do with well known economic theories such as supply and demands, or with “Keynesianism” but has every thing to do with greedy crooks of Wall Streets.

I am sure that most of us heard of the different theories governments deal with to address cycles of inflation, unemployment, high interest rates, and other factors that has to do with fluctuations of supply and demand, upturns, downturns and side turns among other.

There are few well known “economic cycles such as Joseph Kitchins (3-5 years), Jular Fixed-Investment (7-11 years), Kuznets Infrastructure Investment Cycle (15-25 years) and Kondratiev Investment Cycles (45-60 Years) among others.

For many years we heard presidential economic advisors talk about “economic cycles” well known among them is Milton Friedman of the University of Chicago who was key advisor to Ronald Reagan the king of the “voodoo economics”.

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Most notable but much lesser known of his “opinions” is his demands for “abolition” of the Federal Reserve System, however he was well known for his theory on “monetarism” and his “natural” rate of unemployment. Keeping in mind his devastating influence on the many economies of Latin America in the 70’s and 80’s when his students became masters of Latin American economies.

Of course all of us remember Argentine and Chile among others. Milton Friedman believed in the “Free Market” economic system with minimal intervention that includes monetary policy, taxation, privatization and deregulation.

Since deregulation, this country has gone through so many “economic bubbles” boom and bust, man made at best and for sure greedy and crooked Wall Street financiers has every thing to do with it.

1. Saving and Loan Association Crisis (1980’s-1990):

I am sure all of us remember these so called “thrift” local banks that take deposits and give out house and car loans. Well because crooks took over management of these saving and loan associations, 1,043 out of 3,234 went bust. This was a time when any one with money, like doctors and lawyers and drug dealers were looking for tax shelters and there was non other than real estate. But then greedy crooks took over major banks milking them for the cash they have or financing private real estate without the necessary collateral.

We all should remember Silverado Saving and Loan, Mid West Federal Saving and Loan, Lincoln Saving and Loan and Charles Keating and the Keating Five. Senators who were the major beneficiaries of Keating $300,000 generosity. Alan Cranston (D-CA), Don Riegle (D-MI), Dennis DeConcini (D-AZ), John Glen ( D-OH) and John McCain (R-AZ). Of course this pales to the tens of millions the likes of Sheldon Edelson contributes to his “Israeli First” senatorial and presidential candidates. This “bubble” costs the taxpayers over $150 billion.

The Japanese and the Arabs were lured to the real estate market with the Japanese buying such prime real estate as the Rockefeller Center and major golf course only to walk away few years later from their $2 billion investment.

2. Junk Bond- High Yield Bonds:

In the words of Christopher Mathews of Time Magazine, “America has been afflicted with one financial scandal after another over the past generation – culminating in the 2008 financial panic, the effects of which we are still suffering under. It has widely been assumed that each of these scandals have had disparate causes, but in their new paper Bratton and Levitin argue that three of the most notorious scandals of the past generation — Michael Milken’s junk-bond-related securities fraud in the 1980s, the Enron scandal of the early 2000s, and the subprime mortgage meltdown of 2007-08 — are all linked by their use of an esoteric accounting mechanism called a “special purpose entity,” or SPE. When used dishonestly, SPEs are nothing more than financial sleight of hand, the clever shifting around of assets to trick regulators and investors into seeing something that isn’t there.”

Soon after taking over major companies through friendly or hostile take over, Wall Street financier simply loot the companies out of its cash or sell cash cow subsidiaries and through their friends on Wall Street issue “junk bonds” literally junk or garbage financial instruments. Companies were looted; stockholders were fleeced with Wall Street rogues laughing all the way to the banks, yes, some went to prison, but the majority are enjoying their billions.

I am sure we all remember the likes of Michael Milken and Ivan Boesky, Meshhulam Riklis of Schenley Industries, Carl Linder of American Finance Corporation, Victor Posner of Sharon Steel, Saul Steinberg of Leasco Reliance, Laurence Tisch of Loews Theaters and Kent Cigarettes and Fred Carr of Enterprise Mutual Funds among others. American stockholders lost hundreds of billions of dollars as a result of the looting and fleecing that took place with the active help from Wall Street and indifference from the White House and Capital Hill.

3. Fraud and Lies of Accounting Scandals:

Thanks to an organization called Accounting-Degree.org I was able to find a very well organized summary listing major and big times lies, frauds and cheating among America’s big and leading corporations. I am sure all of us remember these major crisis that cost American stockholders and pensioners several hundred billion. Major among these are:

– Waste Management (1998) when the management of Dean L. Buntrock listed $1.7 billions in false income. The company ended up paying $475 millions in fine.
– Enron Scandal (2001) when the management of Ken Lay (friend of George Bush) and Jeff Skilling falsified books, fleeced Californian consumers of billions in electrical billings ending with shareholders loosing $74 billions. Tens of thousand lost their lifetime pension.

– WorldCom (2002) or better known as MCI when Bernie Ebbers inflated assets by $11 billion leading to the loss of 30,000 jobs and the stockholders lost $180 billion.

– TYCO Scandal (2002) where non other than CEO/CFO Dennis Kozlowski stole $150 million including throwing a $2 million birthday party for his wife in Sardinia. Not sure how much stockholders lost, but it is in the billions.

– HealthSouth Scandal (2003) here CEO Richard Scushy inflated earning by $1.4 billion and as the American justice system works he was acquitted on all 36 counts but was convicted of bribing the governor of Alabama.

– American Insurance Group better known as AIG (2005) ran into deep trouble when its top executive was caught cheating to the tune of $3.9 billion in accounting fraud and bidding rigs. Hank Greenberg was fired and AIG end up paying $1.64 billions in fines to the SEC and paid $115 to the Louisianan Pension Fund and $725 million to the Ohio Pension Fund.

However, all of that did not stop top executives at AIG here in the US and overseas from gambling with the investor’s money knowing well that Uncle Sam is always on the side of the big guys, remember socialism for the rich.

Because of undeclared and hidden losses in derivatives, AIG lost $ 85 billion and its shares tumbled 60%. Of course Uncle Sam, always generous with our social security money stepped in and bailed AIG to the tune of $182 billion, the biggest bail out ever. To reward its top executive for the excellent job they did in losing that much money, AIG paid $165 million in bonuses to its executives, only to increase that to $450 million.

– Lehman Brothers (2008): This private banking organization, not for you and me but for the big and rich guys, is a well-established financial icon on Wall Street for over 160 years. Its top management simply hid $50 billion in loans disguised as “sales” and of course when the big lie was discovered the bank executive sought help and for one reason or another, the Secretary of the Treasury at the time Henry Paulson, former CEO of Goldman Sacks, decided not to come to the rescue and the bank went belly up. Keeping in mind that its Chief Executive Officer Richard S. Fuld earned over $500 million in the last 8 years heading the bank.

– Columbia/HCA (1997): Now this health service company and provider did what it does best, cheating Medicare and tax payers and was charged with 14 counts of felonies and agreed to pay $600 million in fine. As it happens, its top executive Richard Scott (Florida Governor twice) was able to use the hundreds of millions of dollars he made heading Columbia /HCA and turn it into a successful political career as the Republican Governor of Florida.

– Bernie Madoff (2008): Bernie the darling of Wall Street and of the largest and most powerful Jewish charities and groups. In fact, the rich and the powerful needed a good word from someone in the Madoff inner circles to get him to take them on as clients.

The guy was so successful in getting his clients a return on their investments, unmatched by any one on Wall Street, 10, 20 and 30 percent return. And of course with that kind of return who would not go to Bernie to invest their money.

As it turned out and while the SEC was under sedation and in a coma, Mr. Madoff tricked his investors to the tune of $64.8 billion in a Ponzi scheme unmatched and unequal in history.

Mr. Bernie ended given 150 years jail sentence in one of the government 5 stars jails and was ordered to repay $ 70 billions in restitution. The question is how can a guy who succeeded in paying such high returns has the funds to repay $70 billion? His clients will never be able to recover their investments.

4. The Big Internet Bubble:

Please do not stop here, since the bubbles continue with what is known as the dot.com bubble starting in 1997 and peaking in 2000, better known as “ prefix investing”.

Here Wall Street and the initial investors made a killing with the NASDAQ peaking at 5,132.42. Wall Street and its executives made tens of billions of dollars while investors lost hundreds of billions. “Companies saw their stocks skyrocket because they added “e” prefix or a .com to their names. Speculators were all over the place”. America’s economies became economies of speculation, fraud, lies, false accounting and greed.

Economist Andrew Smith argued that IPO or “individual public offering “ tended to benefit banks and initial investors rather than companies, with high profitability of the IPO to Wall Street was a significant factor.”

This was a crazy time when 16 dot.com companies each spent $2 million for 30 seconds ads at Super Ball XXXIV. State and local governments were bending forward and backward trying to lure these dot.com companies offering substantial tax incentives to these startup companies.

In the Washington DC area, one only need to drive up and down the Washington Dulles Toll Road to see these dot.com companies all over the corridor. Many disappeared since then.

While companies such Amazon, ebay, Google, SISCO survived and flourished while many companies had a different fate. North Point Communications, Global Crossing, JDS Uniphase, XO Communication did not fare well.

Here the business model developed was to operate at “ sustained net loss to build market share” a business model that saw some companies like Boo.Com spending $188 millions in 6 months. Companies like Books-A-Million stock rose more than 1000% simply because “ it updated its website” with its stock going from $3 to $38.94 to $44 then crashing to $3.

Another company like e. Digital Corporation saw its stock going in January 1999 from $0.06 to 2.91 in December to a high of $ 24.50 in January 2000, and then crashing down to $0.07 settling steady at $0.165 in 2010.

Companies like INKTOMI, which was valued at $ 25 billion, was bought by MATTEL for $3.5 billion in 1999, later it was sold for $27.3 millions in 2000. InfoSpace saw its stock going up to $1,305 in March 2000 only to go down to $22 in April of 2001.

5. The Subprime Mortgage Bubble:

With the housing boom every one was looking for opportunities to make a fast buck. Wall Street was leading the way followed by homeowners and would be home buyers who were also attracted to very creative “mortgage packages” that allowed borrowers, many “unqualified” to buy homes, paying interests only for few years with the expectations that they resell the homes and make a killing.

Wall Street knew very well the American psychology and greed and as such they did every thing it could to create what the former Chairman of the Feds Alan Greenspan called “ creative financial instruments” which were in reality nothing more than big lies, fraud and financial garbage.

Wall Street began to invest heavily in what is called mortgage-backed securities (MBS) and colateralized debt obligation (DCO) with very attractive rate of return fueled by high interest rates on mortgages.

However mortgage companies, making commissions of $15,000 or more on each loan, only to repackage such loans and selling it to Wall Street which in turn sold it to Fannie Mai and Freddie Mac, without any legal recourse or liability, were eager to make most of this opportunities began to actively seek potential home buyers with lower credit rating, lower income unable to sustain monthly payments, offering different mortgage rates to lure greedy borrowers and consumers dying to join the American dream of buying and owning a home. Home owners no lesser greedy than Wall Street were eager to flip the house they bought under questionable conditions were hoping to make tens of thousands even hundreds. Mortgage companies were offering adjustable mortgage rates and interest only rates among others. Subprime lending went from a low of 8% in 2004 to a high of 20% in 2006 with adjustable mortgage rates accounting for 90% of the loans.

Bankers, economists, financial experts and even average consumers knew well that this “housing economy is unsustainable” and was bound to implode like other bubbles. With the crash of the housing prices demands for mortgage securities “evaporated” . . . “with companies like Bearn Stearns announced its two hedge funds imploded”.

Not only did Wall Street take America and its taxpayers and homeowners to the abyss, but it also took international banks even countries to bankruptcies.

The US housing market and mortgage-backed securities attracted foreign investments from fast growing economies in Southeast Asia to oil producing and exporting countries, with low interest rates even banks borrowed money to get into the act.

Meanwhile the abolition of the Glass–Steagall Act of 1933 which established a wall between commercial banks and securities and investment bank at the behest of Wall Street was abolished by Congress, and was repealed by the Gramm- Leach-Bliley Act which allowed commercial banks to get into the securities business and with securities companies going into commercial banking. Hence AIG, Bank of America, Merrill Lynch, and Lehman Brothers all went into the mortgage business.

These Wall Street institutions were lending trillions of dollars worth of mortgages when they had almost nothing to back it up other than the imploding values of housing.

“Between 1st January and 11th October, US investors in the stock market lost over $ 8 Trillions when the value of their investment went from $ 20 Trillions to $12 Trillions”.

The Federal Reserve is never the people’s bank, but is rather the bankers bank, it stepped in and rescued many of the too big to fail Wall Street securities and commercial banks even allowing a bank like Bank of America to shift its “portfolio of dangerous bets to a set-aside company insured by the FDIC putting tax payers money at risk to the tune of $55 trillions”.

Of course no need here to go into the numbers of banks, mortgage companies, and financial institutions that went belly up and imploded because of the greed and recklessness of Wall Street and the irresponsible, if not the criminal, acts of our Congress, a key party to the crime against tax payers and investors.

Nations around the world went into default with Greece, Spain and other countries suffering huge financial losses that put tens of millions of people out of their jobs and homes.

Here in the US the situation was no better. Millions of people lost their homes, those who deserve it, greedy and unqualified buyers and those who found themselves out of their job because of the economic down turn.

The Federal government, and both the Bush and Obama administrations stepped in to save the too big to fail Wall Street which made hundreds of billions in profits with executives making billions in bonuses found support from our government, while tax payers and owners of foreclosed homes were left to their fate. Wall Street paid over $100 billion in legal fees to avoid making homeowners whole. This is true only in the American economic system: socialism is for the rich, free enterprise for the poor.

In closings, if we think that Obama runs the US or Putin runs Russia, we need to keep in mind that it is Wall Street that rules the world. Goldman Sacks runs the world economic and financial system through its network of former executives who run the world economies from Spain and Portugal to Greece to Hungry to the EU. Goldman Sacks invented a financial instrument called ABACUS, a lesser financial instrument than a junk bond, and was able to get a AAA rating for it and sold it worldwide. The Industrial Bank of Dusseldorf was one of the unfortunate banks that bought $300 million of this financial garbage. When Wall Street went belly up, the bank found its ABACUS investment not worth the paper it is on; the bank had to close down with its stockholders losing every thing. Gore Vidal was true describing America’s capitalist system as “socialism for the rich and free enterprise for the rest”.

Special Notes of thanks:

Accounting –degree.org, Forbes, Times, NY Times and Washington Post, Wikipedia for the valuable information and sources which was used in this article.

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