Turn Stock Market into a Ponzi Scheme: The Easy Way

Today, Goldman Sachs comes out with an upgrade of Capital One bank and Wells Fargo.
The Banks rally 5%. Broad market rallies 1.5%.

[UPDATE: 10/18/2009 Two weeks after the revelation (below), stocks as measured by S&P 500 went straight up for 10 business days, gaining a total of 5% additionally. All conclusions below are confirmed. The only deviation I found was Bank of America reporting $2B Q3, 2009 loss, quite honest, huh. If you are still in stocks like I am, be cautioned!]

After a huge 50-60% run up of the stocks since March 12 2009, you'd think stocks are up for a correction. After the house selling Summer high, you'd expect banks are up for a rough Fall and Winter. After banks hiding their liabilities off the balance sheet a-la Enron, you'd think someday they'll have to show their 'toxic' hidden assets and account for them.

After the top contrarian trend-forecasting stars Dent, Celente, Prechter, and others are seeing an imminent downturn of the stock market, nope, it keeps going up.

But no, the day of reckoning ain't coming just yet. Why not?

I'm following the broad stock market more closely than usual because I found some extra stocks in my Roth IRA that I never sold. It's been 10 years since I seriously looked at the portfolio. It is basically all S&P 500 and guess what, it hasn't made me but a few percent profit after 10 years! Counting for true inflation, it's lost a lot.

Back to the topic. Stock Market a Ponzi Scheme? Madoff reincarnated on a huge scale? And it is easy to turn Stock Market into a Ponzi Scheme? What do you mean Matt?

For the longest time I couldn't understand why, in 2007, establishments such as Washington Mutual were still offering subprime loans to folks even though the subprime market was collapsing all around them. They are in the business of subprime loans and they don't see the calamity has already arrived? Strange. But it is possible to understand why now.

At the last week's IMF meeting, Janet Tavakoli, an expert on structured finance and derivatives, said (quote credit: prisonplanet.com):

Wall Street gave mortgage lenders large credit lines (similar to credit card debt) and packaged the loans into private-label residential mortgage backed securities (RMBS). Most of the RMBS was rated “AAA” … But many RMBSs were backed by portfolios comprising risky fraud-riddled loans. Most of the “AAA” investment was imperiled, and subordinated “investment grade” components were worthless. Wall Street disguised these toxic “investments” with new value-destroying securitizations and derivatives.

Meanwhile, collapsing mortgage lenders paid high dividends to shareholders (old investors) and interest on credit lines to Wall Street (old investors) with money raised from new investors in doomed securities. New money allowed Wall Street to temporarily hide losses and pay enormous bonuses. This is a classic Ponzi scheme…

A large share of certain banks’ tax-subsidized profits is due as reparation to unsophisticated investors, the U.S. taxpayers...By the end of 2006, public reports of implosions of large mortgage lenders eliminated CEOs’ plausible deniability. By January 2007, many (including me) publicly challenged the failure to account for losses. Instead, toxic securitization accelerated in the first half of 2007—classic malfeasance as a Ponzi scheme collapses…

Bottom line, in order to keep the Ponzi scheme running, it has to accelerate in the final stages. That is a sure sign of it being ready to collapse.

How to turn stock market into a Ponzi scheme? Easy. Couple of steps:

- Banks hide toxic assets off the balance sheets
- Mainstream Media publishes great outlook from well known names on how great the banks are doing (Goldman Sachs example, the bank books are looking great if you remove off-balance-sheet assets)
- Mainstream Media touts "Recovery"
- The FED keeps the rates at about 0% keeping bank loans expenses practically at zero
- The government allows printing of Trillions of Dollars through bailouts and stimuli packages, mostly going to the banks who turn around and play with the cash in the stock market
- The government publishes heavily doctored data on unemployment, so it doesn't look as bad as it is.

Well there are maybe a few more steps needed but you get the picture. And I can't give you more details, I'm not working at Wall Street!

Banks are "looking pretty", and "everyone knows", the way the banks go stock market goes.

However, remember, it is a Ponzi scheme. It is based on taking money from Peter and giving it to Paul. There is no value created or consumed. Eventually, this Ponzi scheme Stock Market will pop. But it may go (much) higher before it pops. And you and I won't know when that will be, because it is not you and I who are running the Scheme.

So if you are invested in a stock market, watch your investment carefully. It may rise substantially before it pops. If you have no patience and have better things to do, get out of the market and buy back at half the value or less. Or don't buy back, ever.

Audit the Fed Mass Action Day Sept 15!

Got this today from John Tate, President of Campaign For Liberty. You see, the FEDs tax audit you every year. There are all kinds of other audit programs in place. It is time to get up and show that we want to audit the FED. We've got internet banking, online checking accounts and online savings accounts. These accounts are fully transparent with the bank. So why would the FED need to be secretive? Secretive banking got us into troubles. Transparent banking is possible and is a way out! -Matt

September 7, 2009

Dear Friend of Liberty,

Seventy-five percent of Americans agree with us that it's time to thoroughly and completely audit the Federal Reserve System.

Every Republican and over one hundred Democrats in the House of Representatives have signed on as cosponsors of HR 1207. Almost a quarter of the Senate has gotten on board with S 604.

So what does this tell us?

It's time to go get the rest!!

Last month, I announced that we would be holding an Audit the Fed Mass Action Event starting in the last couple weeks of August and culminating in a nationwide Mass Action Day on September 15.

Since then, C4L members have been knocking on doors, standing outside stores, attending county fairs, and gathering petition signatures in support of S 604.

On September 15, C4L National will deliver over 100,000 petitions to Capitol Hill while members across the country deliver the petitions they've collected to their senators' local offices. Many of your fellow members will be holding rallies outside those offices, and several have contacted local media about covering the event.

Here are three ways you can help ensure the success of this Mass Action Event:

1.) Gather petitions – Hit the streets! Make sure your senators hear from as many people in your state as possible. Let's spread the word and add to the seventy-five percent of Americans who support our cause. You can download petitions at CampaignforLiberty.com and AuditTheFed.com.

2.) Call your senators – Starting Tuesday, September 8, C4L members will be calling their senators' offices to urge them to cosponsor S 604. Our objective is to keep their phones ringing off the hook by having members call every day for the week leading up to the petition drop. Commit to calling your senators by signing up here.

3.) Show up on September 15 - Congress counts on grassroots activists being content with just calling and sending petitions. To make sure they get our message that it's time to Audit the Fed, we're going to take our cause right to their offices in person. These events will be as effective as you make them. Show your senators that you are serious about real reform by rallying with your fellow members right outside their offices.

State and local coordinators and leaders have been working hard to create the most effective and efficient plans for September 15's petition drop. Click here to find out how to take action in your area.

We were able to secure the support of almost two thirds of the House with your hard work gathering petitions, calling, and showing up at your representative's offices. This could be the event that tips the scales in the Senate!

As we also announced last month, we're adding an extra incentive. The person who gathers the most signatures in each state will win a pocket Constitution and a copy of Dr. Paul’s new book, End the Fed, both autographed by Congressman Paul himself.

And whichever state collects the most signatures (as a percentage of population) will win a $1,500 gift certificate to the Campaign for Liberty store!

Our representatives and senators are expecting to settle back in to business as usual when they return to D.C. after Labor Day. They think that they can leave your opinions and concerns behind in their districts while they continue to work on completely taking over our health care and finding other new ways to run our lives.

Let's show them that their top priority should be finding out how the Federal Reserve has doled out trillions of our dollars, what deals they have locked us into with foreign central banks and governments, and why they refuse to disclose the details.

The day after our petition drop will mark the official release of End the Fed. This comprehensive look at the Federal Reserve System and its disastrous effects on our lives and country is sure to be a powerful tool with which to convince your family, friends, and neighbors that it's time to restore our economy by reinstituting a sound money system.

A year ago, no one would have said we could make an audit of the Fed into a national, mainstream issue. Join us on September 15 as we show the political establishment, entrenched bureaucrats, and the media that our grassroots Revolution is more energized and determined to take back our country than ever before.

In Liberty,

John Tate

President

P.S. Together, we can see Audit the Fed signed into law. But to do so, we have to take action to grow and secure our support in the House and Senate. Download our petitions and other materials, spread the word, call your senators, and join us on September 15 as we come together across the country to fight to Audit the Fed!

Ron Paul's Answer to the President

Dear Friends:

The financial meltdown the economists of the Austrian School predicted has arrived.

We are in this crisis because of an excess of artificially created credit at the hands of the Federal Reserve System. The solution being proposed? More artificial credit by the Federal Reserve. No liquidation of bad debt and malinvestment is to be allowed. By doing more of the same, we will only continue and intensify the distortions in our economy - all the capital misallocation, all the malinvestment - and prevent the market's attempt to re-establish rational pricing of houses and other assets.

Last night the president addressed the nation about the financial crisis. There is no point in going through his remarks line by line, since I'd only be repeating what I've been saying over and over - not just for the past several days, but for years and even decades.

Still, at least a few observations are necessary.

The president assures us that his administration "is working with Congress to address the root cause behind much of the instability in our markets." Care to take a guess at whether the Federal Reserve and its money creation spree were even mentioned?

We are told that "low interest rates" led to excessive borrowing, but we are not told how these low interest rates came about. They were a deliberate policy of the Federal Reserve. As always, artificially low interest rates distort the market. Entrepreneurs engage in malinvestments - investments that do not make sense in light of current resource availability, that occur in more temporally remote stages of the capital structure than the pattern of consumer demand can support, and that would not have been made at all if the interest rate had been permitted to tell the truth instead of being toyed with by the Fed.

Not a word about any of that, of course, because Americans might then discover how the great wise men in Washington caused this great debacle. Better to keep scapegoating the mortgage industry or "wildcat capitalism" (as if we actually have a pure free market!).

Speaking about Fannie Mae and Freddie Mac, the president said: "Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk."

Doesn't that prove the foolishness of chartering Fannie and Freddie in the first place? Doesn't that suggest that maybe, just maybe, government may have contributed to this mess? And of course, by bailing out Fannie and Freddie, hasn't the federal government shown that the "many" who "believed they were guaranteed by the federal government" were in fact correct?

Then come the scare tactics. If we don't give dictatorial powers to the Treasury Secretary "the stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet." Left unsaid, naturally, is that with the bailout and all the money and credit that must be produced out of thin air to fund it, the value of your retirement account will drop anyway, because the value of the dollar will suffer a precipitous decline. As for home prices, they are obviously much too high, and supply and demand cannot equilibrate if government insists on propping them up.

It's the same destructive strategy that government tried during the Great Depression: prop up prices at all costs. The Depression went on for over a decade. On the other hand, when liquidation was allowed to occur in the equally devastating downturn of 1921, the economy recovered within less than a year.

The president also tells us that Senators McCain and Obama will join him at the White House today in order to figure out how to get the bipartisan bailout passed. The two senators would do their country much more good if they stayed on the campaign trail debating who the bigger celebrity is, or whatever it is that occupies their attention these days.

F.A. Hayek won the Nobel Prize for showing how central banks' manipulation of interest rates creates the boom-bust cycle with which we are sadly familiar. In 1932, in the depths of the Great Depression, he described the foolish policies being pursued in his day - and which are being proposed, just as destructively, in our own:

Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.

To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection - a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end... It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.

The only thing we learn from history, I am afraid, is that we do not learn from history.

The very people who have spent the past several years assuring us that the economy is fundamentally sound, and who themselves foolishly cheered the extension of all these novel kinds of mortgages, are the ones who now claim to be the experts who will restore prosperity! Just how spectacularly wrong, how utterly without a clue, does someone have to be before his expert status is called into question?

Oh, and did you notice that the bailout is now being called a "rescue plan"? I guess "bailout" wasn't sitting too well with the American people.

The very people who with somber faces tell us of their deep concern for the spread of democracy around the world are the ones most insistent on forcing a bill through Congress that the American people overwhelmingly oppose. The very fact that some of you seem to think you're supposed to have a voice in all this actually seems to annoy them.

I continue to urge you to contact your representatives and give them a piece of your mind. I myself am doing everything I can to promote the correct point of view on the crisis. Be sure also to educate yourselves on these subjects - the Campaign for Liberty blog is an excellent place to start. Read the posts, ask questions in the comment section, and learn.

H.G. Wells once said that civilization was in a race between education and catastrophe. Let us learn the truth and spread it as far and wide as our circumstances allow. For the truth is the greatest weapon we have.

In liberty,

Ron Paul