Sunday, March 15, 2009

"He who controls the present, controls the past... He who controls the past, controls the future."

The US Government is utterly corrupt beyond redemption....

Si vous voulez savoir quels sont les vrais maîtres des sociétés démocratiques, posez-vous simplement cette question : Quels sont ceux que nous n'avons pas le droit de critiquer... ?

Deficit-Catalyzed Capacities

With the election of Ronald Reagan in 1980, belief in a supply side mindset displaced
faith in a demand side paradigm that informed policy making for a half-century. That
dramatic shift in perspective was promoted by advocacy featured in The Wall Street
Journal. 1

In the 1930s, Washington used deficit spending to catalyze consumer demand in a
Depression-era economy. With those funds, the New Deal employed and paid people.
WWII used deficit financing to defeat an earlier form of fascism when the U.S.
mobilized its capacity to wage war.

In Michigan, the Ford Motor Company’s Willow Run plant was retooled to produce a
B-24 bomber every 63 minutes around the clock. By 1945, America was home to half
the world’s industrial capacity. That deficit-financed stimulus to productive power
enshrined the dollar as the world’s strongest currency and earned U.S.-issued bonds
the top credit rating for borrowing funds worldwide.

As WWII wound down, full employment became national policy and jobs the
preferred means for stimulating the widespread consumer spending on which
markets depend.

In 1981, deficit spending was again embraced to catalyze investment spending.
Stagflation was then headline news along with the misery index, measuring the
combined effect of inflation and unemployment.

When Jimmy Carter lost the presidency to Ronald Reagan in 1980, bonded federal
debt totaled $908 billion. Reagan’s supply-side catalyst came with a fiscal cost of
$872 billion over five years. Though portions were pared back in later years, his
proposal proved that fiscal conservatives could double the national debt in one bill –
provided they believe in the model.

Left unsaid was how those deficits were destined to reward the few at great risk to
the many. Nor was it explained how the long-term impact was certain to undermine
U.S. national security. To grasp how requires a closer look at the linkage between
law and finance.

Free Cash Flow
When tax laws allowed investors to write off the cost of a building in 15 years instead
of 45, more buildings were built. By allowing the bulk of those tax write-offs in the
first few years, even more cash became available to invest. At Reagan’s urging, the
U.S. Treasury pledged our full faith and credit as we borrowed funds abroad to afford
investment subsidies at home.

More cash also meant more capacity to repay debt. The leveraged buyout (LBO)
traces its steady ascent from this supply-side era as does the rise of private equity
funds. As the LBO went global, private equity funds began their ascent. By 2006,
American private equity funds raised $254 billion in one year. European funds raised
another $101 billion.

The supply-side era also saw the rise of well-to-do campaign contributors from Wall
Street determined to see more public subsidies for private-sector finance.

Congress accommodated that request with a deficit-financed surge in defense
spending and changes to the lending rules governing the thrift industry. Those
changes pre-staged the first nationwide financial crisis in which Alan Greenspan
played a key role.

With the extra cash provided by supply-side deficits, a debt-free balance sheet came
to signify managers inattentive to how leverage could boost shareholder returns.
Finance-ability became the new performance norm and ‘free cash flow’ the new loan

That free cash was pledged as collateral to secure funds borrowed to pay down the
loan. As a critic noted, we got the mortgage (the deficits) while they got the cash to
buy the house. The deficits became ours; the assets acquired with those deficits
became theirs.2

With the economy-wide availability of this additional cash flow, financial markets
sent managers a clear message: either leverage the firm you manage or someone
else might. As debt became imperative, financial leverage became addictive – as did

The pace of LBOs quickened as it became clear this deficit-financed cash flow could
be used not just to fund new investments but also to finance mergers and
acquisitions. In neither case was there a concern that the financial benefits would
flow largely to the few. Yet, as we shall see, that result was foreseeable by anyone
knowledgeable about finance.

That deficit-financed cash also helped afford high interest rates paid on ‘junk’ bonds
sold to finance LBOs. Bond broker Michael Milken emerged as the ‘junk bond king’
when his commissions for 1987 totaled $550 million.

Two decades later, mortgage brokers used the Milken model to bundle subprime
mortgages for sale as high interest-paying securities. Like junk bonds, commissions
on junk loans were rich and the results of no concern to those packaging the loans
for resale. Brokers often lured homeowners to assume debt they could not afford.
Investors were then induced to purchase junk loan-backed securities awarded ultra-
safe AAA ratings, akin to U.S. bonds.
Local Gains, Globalized Losses
With the globalization of finance, investors worldwide are now struggling to identify
and absorb losses whose magnitude remains unknown. Though losses may total
hundreds of billions of dollars, Federal Reserve Board chairman Ben Bernake
anticipates only $100 billion. At least 10 million Americans are expected to owe more
on their mortgages than their homes are worth.

Public and private pension plans were key junk loan buyers, along with university
endowments and investment pools used by local governments for short-term
investments. The turmoil left towns and school districts in Florida unable to meet
teacher payrolls or pay their bills. A community in Norway saw its annual budget cut
by 25% when $40 million was lost by investing its short-term cash in what town
officials believed were safe securities.

Pension costs were already causing states to cut education and health programs as
they struggle with liabilities incurred decades ago. Nationwide, the 50 states have
promised to pay some $2.7 trillion in pensions and retiree health benefits over the
next three decades. Even well funded pension plans are feeling the effects as junk
loan losses become apparent.

Baby Boomers will be particularly hard hit. Pension plans held $16.6 trillion in assets
as of April 2007, up from $2.4 trillion since 1985. Pension losses are particularly
costly because retirement plans are subsidized each year with $150 billion in tax
incentives.3 Homeowners are also allowed a personal tax deduction for interest paid
on home equity loans, a key inducement to borrow.

Our Debt, Their Equity
As more firms became the target of LBOs, staffing was reduced along with cutbacks
in pensions and health care. Moving production abroad further reduced expenses
while retaining access to the U.S. for:
• Purchasing power – to repay debt,
• Capital markets – to sell junk bonds, and
• Fiscal subsidies – for free cash flow to repay debt and retire junk bonds.
Wealth concentrated at a blistering pace as the U.S. borrowed abroad to afford the
supply-side cash used to subsidize investments at home. In 1982, $91 million was
required for inclusion on the first annual Forbes 400 list of richest Americans.
Average wealth was then $200 million and the list featured 13 billionaires.

By 1986, average wealth was $500 million. From 1983 to 1998, 53% of market gains
flowed to the top 1% of households. By 2000, $725 million was required for inclusion
on a Forbes list that featured 274 billionaires and an average wealth of $1.2 billion.

As LBO debt was repaid, lower costs drove competitors down the same path. As
more production moved offshore, pressure grew for free trade agreements and fewer
barriers to financial flows. It was during this period that Alan Greenspan emerged to
play a series of key roles prior to being nominated by Reagan as chairman of the
Federal Reserve Board in 1987.4

In January 1983, the Greenspan Commission urged reform of Social Security by
raising the retirement age and increasing the Social Security payroll tax. Washington
then borrowed that tax revenue, relieving some of the fiscal pressure of supply-side
deficits. The Social Security payroll tax is now the largest tax paid by 80% of
Americans (90% of Generation X).

The Greenspan Effect
From their origins in the 1800s, savings and loans (S&Ls) could make only a limited
range of loans, mostly home mortgages. In federally chartered thrifts, depositors’
accounts were insured at a low threshold. During the Carter and Reagan
presidencies, S&Ls were transformed into subsidized investment vehicles that could
buy the riskiest of Michael Milken’s junk bonds.

S&Ls were then allowed to sell their loans, bundling them for sale like junk bonds
and subprime mortgages only with a key difference: losses were backed by our full
and faith and credit – akin to the government-guaranteed debt incurred to fund
supply-side subsidies.

As the people in between pocketed commissions and fees by originating, packaging
and reselling the AAA-rated loans of S&Ls, loan losses grew to more than $150
billion. Taxpayers were obliged to cover $125 billion of those losses with funds that
Washington borrowed – backed by our full faith and credit.

As Congress sought to reform the S&Ls and stop spiraling fiscal costs, Greenspan
was hired by S&L executive Charles Keating to write a report describing how
Phoenix-based Lincoln S&L (led by Keating) was “a financially strong institution that
presents no foreseeable risk to depositors or the government.” The future Fed
chairman was also retained to produce similar reports on other thrifts that, like
Lincoln, soon failed.

More than 21,000 investors, mostly pensioners, lost $285 million when the parent
corporation of Lincoln S&L went bankrupt. Taxpayers covered losses of $3.4 billion
on the Keating-led fraud after Greenspan wrote an opinion lauding its managers for
bringing Lincoln “to a vibrant and healthy state, with a strong net worth position.”

With Greenspan’s assistance, Keating recruited five U.S. Senators (The Keating Five)
to stall S&L reform, deepening the crisis and increasing bailout costs for taxpayers.
At the urging of Michael Milken, Keating hired Dan Fischel whose solvency opinion
rated Lincoln’s risk of insolvency at less than one in a million.

In retrospect, we now know that Lincoln’s insolvency was assured.5 Fischel praised
Greenspan’s assistance in recruiting the Keating Five as “a model of how democracy
is supposed to work.” Mirroring Greenspan’s belief in the perfection of free markets,6
Fischel assured legislators, regulators and depositors that fraud in the S&L industry
was not just unlikely but impossible.7

Fischel then published Payback (1995) charging that the federal prosecution of
Michael Milken was ‘anti-Semitic.’ Fischel was then appointed dean of the University
of Chicago School of Law. The ‘Chicago model’ was fine-tuned there before evolving
into the ‘Washington’ consensus.8

The S&L fraud led to the government auction of a $400 billion real estate portfolio at
knockdown prices. The process was overseen by William Seidman, chairman of the
Resolution Trust Corporation. Seidman had previously chaired the Federal Deposit
Insurance Corporation for Reagan.

A primary purchaser was Sam “The Grave Dancer” Zell from Chicago. Equity Office
Properties, Zell’s real estate investment trust, was acquired in November 2006 for
$36 billion, then the largest-ever leveraged buyout. By then, Zell’s REIT owned 590
buildings and over 105 million square feet of office space in major metropolitan
markets. Many of those properties were paid for with help from the free cash flow
provided by supply-side policies.

The purchaser was the Blackstone Group, a private equity firm led by Stephen
Schwarzman.9 Zell then invested $315 million to acquire control of the Tribune
Company in a $8.2 billion transaction that involved $13 billion in debt financed
through an employee stock ownership plan.

The deal leaves Zell with the right to buy up to 40% of the company in the future. As
of December 20, 2007, Zell controls the Chicago Tribune, the Los Angeles Times and
30 other newspapers and TV stations.10

In 1998, Greenspan emerged again to oversee the Federal Reserve-coordinated
rescue of Long Term Credit Management (LTCM). With $4.7 billion in equity and
$124.5 billion in borrowed funds, LTCM leveraged its operations into financial
derivative positions totaling $1.25 trillion.11

When LTCM’s position turned sour, triggered by a default on Russian government
bonds, the New York Fed brokered a bailout fearful this misstep might destabilize
global financial markets. In 2007, the subprime meltdown reignited fears of systemic
disorder, instability and insecurity.

By maintaining low interest rates for a lengthy period (2002-2006), Greenspan
ensured a steady rise in home equity values against which homeowners could
borrow. That household version of deficit financing made it appear the economy was
booming as more home equity loans stimulated more consumer spending. The
dotcom market crash of 2000 was soon forgotten.

Though Greenspan was cautioned repeatedly that deception was increasing and
unscrupulous mortgage-lending practices were spreading, the Fed chairman said he
placed a higher value on ‘financial innovation’ and the ‘ownership society.’ In his
memoir, Greenspan explains, “I believed then, as now, that the benefits of
broadened home ownership are worth the risk.”

Despite stiff prepayment penalties on home mortgages, the combination of low initial
teaser rates, no money-down and easy credit terms enabled subprime lenders to sell
$540 billion in mortgages by 2004 and $625 billion at their peak in 2006. Large loan
origination commissions kept lenders happy.

In this shadow banking system of leveraged lending, Countrywide Financial emerged
as a $500 billion mortgage-generating machine operating out of 900 offices

Founded by David Loeb, a New York mortgage banker, and Angelo Mozilo, a
butcher’s son, Countrywide brokers were paid $30,000 commissions for persuading
borrowers to sign up for lengthy prepayment penalties that generated $268 million in
2006 revenue plus $285 million in late charges for a $600 million profit in 2006.

The business model behind this opaque world enabled the dispersion of risk into
financial markets where it could be neither identified nor quantified. Yet the lending
may have accounted for half of all new credit creation in the past two years.

Despite portraying the overheated housing markets as a sign of “irrational
exuberance,” Greenspan maintained the Fed’s low interest policies as home equity
values surged along with loans secured by those inflated values. This crisis did not
appear unexpectedly.

After the bursting of the bubble that he helped inflate, Greenspan urged that
Washington provide cash assistance to homeowners facing foreclosure. To pay for it,
he recommended deficit spending while warning that the U.S. is seeing early
symptoms of stagflation and recession. He also conceded that losses on subprime
securities could total $400 billion.

Grave dancers nationwide are eyeing this latest pump-and-dump as yet another
opportunity to buy properties at knockdown prices while taxpayers are again urged
to absorb the losses. As the winners and the losers are sorted out, two clear winners
are Lehman Brothers and Goldman Sachs.

The People in Between
Though Lehman was the nation’s biggest underwriter of mortgage bonds, the firm
offset the bulk of its holdings with hedging strategies. Likewise Goldman Sachs
whose staff divided a $20 billion year-end bonus pool in December 2007 after the
firm announced that it made more on its subprime hedges than it lost on its
subprime investments. Goldman’s CEO was paid $67.9 million for 2007. Lehman’s
top executive received a $35 million bonus.

On December 12, central banks in North America and Europe announced the most
aggressive infusion of capital into the global financial system since the terrorist
attacks of September 2001. The Federal Reserve led a coordinated effort to improve
investor confidence in the banking system with a $64 billion liquidity injection
through central banks in North America and Europe.

A week later, conceding a need to “improve the confidence of the banking sector,”
the European Bank pumped $500 billion more into the financial system to ease a
global lending crisis catalyzed by junk loan securities. Though the loans originated in
the U.S., the impact quickly dispersed worldwide through global financial markets.

With key investment banks reeling from record losses, Bear Stearns and Morgan
Stanley turned to China to replenish their capital. After acknowledging $17.4 billion
in subprime losses, Citigroup turned to the Abu Dhabi Investment Authority, a
sovereign wealth fund with reserves believed to exceed $900 billion.

A $7.5 billion infusion helped restore a reported $30 billion shortfall in Citigroup’s
capital requirements. Merrill Lynch is negotiating a $5 billion capital infusion from
Temasek Holdings, the finance ministry managers of foreign exchange reserves for
the Singapore government.

As U.S. purchasing power flowed abroad under free trade policies, these bailouts
confirmed how dependent the U.S. has become on funds provided by foreign
investors, especially sovereign wealth funds.

With the solvency of U.S. financial sectors ever more clearly dependent on foreign
capital, the joke on trading room floors is: “Shanghai, Dubai, Mumbai or goodbye.”
This crisis did not appear unexpectedly.

The subprime shakeout is not over. Merrill’s write-downs for 2007 may reach $18
billion. Bear Stearns is being sued by Barclays Bank for loading one of its hedge
funds with $500 million in junk loan securities just before it and another Bear
Stearns fund collapsed. Plus Bear Stearns owns 29% of a struggling bond insurance
firm that guaranteed $26 billion in mortgage securities. Merrill anticipates a $2 billion
loss in that firm.

Pre-staging Unconventional Warfare
Trends suggests that China will emerge as the strategic winner in this latest financial
meltdown. Private equity funds are waiting for the optimum time to acquire U.S firms
in the embattled financial services industry. Or to shore up their balance sheets
alongside Abu Dhabi, Singapore, China and others.

China Investment Corp. already owns a 10% stake in the Blackstone Group,
specialists in LBOs, and 9.9% in Morgan Stanley. As the U.S. becomes more
dependent on foreign capital, objections to foreign ownership are receding.

Citic Securities, China’s largest securities firm, owns 6.6% of Bear Stearns. That
stake could grow if, as appears likely, the liquidity problems at Bear Stearns are a
sign of pending insolvency and a partner is required to restore their balance sheet.
With access to financial markets in Hong Kong, Shanghai and on the mainland, Citic
could emerge as a major player in America’s fifth-largest securities firm.12

Based on the extent of government intervention in financial markets, it will be a long
time before Washington again has the credibility to lecture others on the virtues of
free financial markets. As markets struggle to quantify the mis-priced risk of junk
loan securities, emerging markets are now seen as a safer place to invest than U.S.
mortgages, long considered a low-risk investment.

Lehman Brothers and Goldman Sachs registered strong earnings from selling
subprime mortgages to others while protecting the value of their own holdings with
what critics called the “Houdini hedge” against potential losses. Their earnings came
from playing two sides against the middle while positioning their firms to profit off
the misery of both, a common tactical maneuver by the people in between that will
be documented in Criminal State.

Litigators expect the financial fallout to exceed lawsuits that surrounded claims
against banks and investment firms for their role in the collapse of Enron. Loses from
junk loans are far greater in magnitude plus their effects reach worldwide. Once
Baby Boomers realize the scope of the damage, class action suits against Lehman,
Goldman and others may seek to recover losses imposed on the pensions and the
prospects for healthcare for the post-WWII generation.

The 78 million Americans born between 1946 and 1964 can already calculate the
burden imposed on caregivers when someone retires with modest assets. In caring
for an elderly relative, the typical caregiver spends 10% of their income (20% for
those making less than $25,000).

That commitment is typically funded with personal loans, a draw down of savings,
skipped vacations and ignoring the caregiver’s own health care needs. When an
outraged generation grasps the impact of this loss on the quality of their retirement
years, they may look to hold accountable the people in between.

Protracted litigation will further weaken top-tier banks and investment banking firms,
making them even more vulnerable to takeover. As ownership shifts gradually into
foreign hands, the tax base attributable to such firms will gradually move offshore,
further weakening our fiscal condition. Yet little concern was heard when Abu Dhabi
acquired 20% of the Carlyle Group, a private equity/LBO firm with $75 billion under

Given the scope and scale of losses suffered by banks, they will in time come under
the same pressures now felt by investment banks. An Australian firm sued Lehman
Brothers over losses due to Lehman’s sale of collateralized debt obligations. In a
repeat of the nationwide S&L fraud and the bankruptcies that followed, those who
specialize in ‘distressed assets’ are acquiring loan portfolios for cents on the dollar.

Profiting from Losses
In October, WL Ross & Co. agreed to pay $435 million for the right to collect
payments on $45.3 billion in mortgages held by American Home Mortgage, a
subprime lender. That interim step may hasten the pace of foreign ownership. A
specialist in restructurings and LBOs, Ross turned an $80 million investment in
Cleveland steelmaker LTV into $4.5 billion when International Steel Group was sold
to Indian billionaire Lakshami Mittal in April 2005.13

Akin to periodic bank runs that deepened the Great Depression of the 1930s, any
attempt by investors to liquidate their securitized loans will put more pressure on the
capital sufficiency of banks worldwide, leading banks to search abroad for capital to
shore up their finances. Because many of those securities were repackaged to form
the basis of other securities, confidence in the entire U.S. financial sector could slip.

That insecurity (entropy) will only further weaken the U.S. economy. The unwinding
of this systemic risk will continue to ripple through financial markets. With the
inventory of unsold homes at its highest level since 1992, a recession in the U.S.
housing industry has only just begun. Optimists portray this shakeout as a healthy
market correction.

Realists point to the weakness in the dollar that was at a ten-year low against major
currencies before the subprime woes began in earnest.14 A weakening dollar will
require that higher interest be paid on U.S.-issued debt. By January 2009, that debt
will total $10 trillion. Each one percent increase in the interest rate will add another
$100 billion per year to our interest expense on debt backed by our full faith and

The U.S. Treasury estimates that foreigners receive three-quarters of the interest on
the $1.7 trillion in U.S. bonds sold since January 2001. The dollar will slip as China
holds less of a weakening currency.15 Or if, instead of petro-dollars, OPEC countries
should prefer petro-euros or some broader blend of currencies from economies that
are gaining rather than losing strength.

With U.S. credit markets faltering, the role of sovereign wealth funds will grow as
they invest dollars we sent abroad to buy goods and oil. China’s role in Barclays’
failed $93.4 billion bid for ABN Amro suggests that Beijing’s hoard of free trade-
generated cash will hasten transfers of ownership to the Chinese government of
firms worldwide.

As western central banks scramble to restore liquidity, the liquidity potential in
China’s investor base is such that U.S. firms in need of capital may find it
advantageous to list their securities for sale not in New York or London but in
Shanghai or Hong Kong.16

States of Ownership
Sovereign funds, worth an estimated $2.7 trillion in the fall of 2007, could exceed
$17.5 trillion in a decade. On December 21st, Saudi Arabia announced a fund that
could dwarf Abu Dhabi’s. Oil proceeds and revenues from trade-fueled growth will
gradually transform those funds into powerful vehicles of strategic advantage in an
environment where, by consensus, a global public believes that financial values
should take precedence.

In time, an informed public will grasp the impact of loading private leverage (debt)
on top of public leverage (deficits).17 When they realize the quarter-century role
played by lawmakers in using our full faith and credit to finance private assets for
others – and for foreign governments – the public may seek accountability from
legislators and redress from the people in between.

As financial sophisticates thrived, the financial health of families and communities
declined along with the nation’s fiscal health, a major factor in the systemic entropy
that endangers national security. Could America respond effectively if faced with a
genuine threat to its security after the military was ordered to commit its resources
to wage a war on false pretenses? Could we confidently finance another war?18

Cumulative Entropy
The boost in the Social Security payroll tax urged by Greenspan also helped mask
massive deficit-financed defense outlays. During the Reagan era, Pentagon spending
soared in response to a widely shared belief that U.S. national security was
threatened by a ‘missile gap’ with Moscow. As with Iraqi WMD, the magnitude of the
Soviet missile threat was based on false and flawed intelligence.

Only much later did objective intelligence assessments confirm the U.S.S.R. was far
weaker and far less likely to go to war than Americans were led to believe.19 Russia
suffered 6,650,000 casualties in WWI (1.7 million killed) and lost 27,000,000 dead in
WWII, 14% of their population (one in seven).

To counter the threat of Soviet expansionism, the U.S. adopted a policy of
containment. From 1948 to 1989, U.S. taxpayers invested $12.7 trillion in that
policy, including the funding of major armed conflicts in Korea and Vietnam. The cost
of Cold War insecurity commenced three years after the U.S. waged a global war at a
cost of $3 trillion (in 2006 dollars).20

President Reagan portrayed the Soviet Union as an ‘Evil Empire.’ That rhetoric
resurfaced two decades later in a speech written by David Frum for President G.W.
Bush in which Iran, Iraq and North Korea were portrayed as an ‘Axis of Evil’ that
posed a threat to U.S. national security.21

That saber-rattling rhetoric proved useful in rallying support for the U.S. invasion of
Iraq as part of The Clash of Civilizations. In a September 2002 Washington Post/ABC
poll, 70% of those surveyed believed that Saddam Hussein was involved in the
attacks of September 11, 2001.

In much the same way, Americans were induced to believe that the secular Saddam
Hussein had substantive ties to the religious fundamentalists of Al Qaeda. The
irrationality of that belief did little to deter people from putting their faith in a
strategic lie deployed by the people in between.

In September 7, 2006 remarks to the Council on Foreign Relations, Director of
Central Intelligence Michael Hayden acknowledged we are fighting more of an
intelligence war than a military one.....but the US still doesn't know who the real
enemy is....since the advent of the Siamese twins CIA2/MOSSAD/MI6/JSOC/DIA/OSP....

The U.S. discredited itself (and its leadership) with its irrational response to the False
flag ops. of 9/11. That response also accelerated the pace at which fiscal pressures
endanger the nation’s ability to respond to real threats to national security....

If 75,000 U.S. troops remain in that theater of operations over the next decade, the
Congressional Budget Office estimates a cost of $2.4 trillion. The interest expense on
those deficit-financed funds is projected to total $705 billion.

Yet the real war remains on the inside of our government where an enemy can win
without firing a shot. We are indebted for $10 trillion. Tens of millions of us are
retiring while we face the prospect of funding a perpetual war. All at a time when
commonsense says we need to focus our national will on other crises, including the
environment, hunger, poverty and the indignity of deprivation – recurring sources of
disorder, instability and insecurity.

This war cannot be won until we acknowledge its source. In military terms, finance is
a forward projected power. Debt imposes obligations on the future by setting
priorities and limits on the uses to which we can apply a key national asset: our full
faith and credit.

In the same way that our energy systems are out of alignment with the ecological
systems that sustain life, our financial systems are out of synch with the societal
systems required to sustain communities.

Closed System Finance
To return to where this special report began, it helps to visualize (below) how private
sector finance operates as a ‘closed system.’ Even without supply-side subsidies, this
system guaranteed that oligarchies would emerge as a dominant feature on the
globalization landscape.22

By injecting borrowed cash into this closed system, Reagan-nomics was certain to
quicken the pace at which wealth and income flowed to the few. And the pace at
which production and jobs moved abroad. Both trends were catalyzed by deficits that
saw bonded government debt expand from less than $1 trillion in 1980 to more than
$10 trillion by early 2009.
Sources of Funds – Today’s Closed System of Finance23 ....

How Consensus Finance Creates Oligarchies


RETAINED EARNINGS AND PROFITS – Reinvested for current
DEPRECIATION RESERVES – Reinvested for current owners


DEBT – Repaid on behalf of current owners
EQUITY – Most affordable by current owners

A quick scan of this chart shows how the ‘operating system’ of finance pre-
determines ownership patterns – regardless of application. This closed system
operates in plain sight yet remains non-transparent except to those knowledgeable
about finance.

Internal funds typically account for 75% of all funds. Depreciation reserves allow
investors to recover each year part of the cost of an asset (equipment, building, etc.)
before computing taxable income. Depreciation write-offs account for 90% of internal
funds (two-thirds of all funds). Supply-side deficits increased and accelerated the tax
write-offs allowed for depreciation.

As this graphic confirms, it was perfectly predictable that supply-side deficits would
largely enrich the few, as the people in between understood. How is it possible that
financial sophisticates in the policy domain could have failed to anticipate such
foreseeable results?24

Any stimulus funded through this closed system has the same long-term effect.
Raise or lower the tax on profits, the end result is the same. Likewise for
depreciation: large or small, fast or slow, the long-term impact on ownership
patterns remains unchanged. Regardless whether interest rates are high or low,
creditors require collateral and proof of cash flow to repay debt.

Lastly, not since J.P. Morgan (1837-1913) have sales of new equities (shares)
accounted for more than 3-4% of funds raised in any year. Those few funds are
sourced largely from the well-to-do, typically with a set-aside of shares for the
people in between who handle the offering.

This closed system went quickly to scale after the Fall of the Wall in 1989 and the
changeover from public to private ownership after almost eight decades of state
ownership by the Soviets.

Widely shared belief in the Marxist mindset had proven so powerful a global
consensus that, by the mid-1990s, World Bank privatization programs were
underway in 95 countries. The transition period required to undo that damage
offered an opportunity for fraud by the people in between, oftentimes operating
under cover of the ‘Washington’ consensus.

The Reality
Broad-based purchasing power is essential for healthy markets and broad-based
ownership is indispensable for healthy democracies.25 By embracing a closed system
financing model certain to concentrate both wealth and income, democracies were
endangered and markets undermined. And the health of communities was put at risk
worldwide even as communities sought to address the perils inflicted on communities
by state ownership.
Unsustainable trends going rapidly to scale include:
• The wealth of the Forbes 400 richest Americans increased by $290 billion in
2006 for a total of $1.54 trillion; the minimum wealth for inclusion is now
$1.3 billion.
• The average CEO of a large U.S. company made $10.8 million in 2006. That’s
364 times the pay of their employees, as much pay in one day as employees
take home in a year.
• From 2003 to 2005, the increase in income of the top 1% of Americans
exceeded by 37% the total income of the poorest 20%. Incomes for the top
1% of households rose an average $465,700 each (42.6%) while incomes for
the poorest 20% rose $200 (1.3%).
• By 2005, Americans claiming more than $1 million in annual income (less
than one quarter of one percent of U.S. taxpayers) claimed 47% of total
income gains.
As this closed system became the global norm, oligarchs emerged worldwide. Over
the past decade, the leadership in Beijing became a financial Super Power as $1.3
trillion in foreign exchange was amassed under their control. Much of that money is
dollars sent to China by U.S. shoppers induced to believe in the consensus brand of
free trade – despite its foreseeable results.
This transfer of funds continues to gain momentum. China’s $27 billion trade deficit
with the U.S. for October 2007 exceeded the entire deficit for 2003. In 1985, our
trade deficit with China totaled $6 million. In 2006, it topped $233 billion. OPEC
countries earned an estimated $690 billion from oil exports in 2006, up from $243
billion in 2000. OPEC governments presently have petrodollar investments
conservatively estimated at $3.4 - $3.6 trillion.

Belief-Based Results
With Alan Greenspan chair of the Fed, the inducement of sustained low interest rates
(from 2002-2006) persuaded Americans to pull more than $800 billion a year out of
their home equity from 2004-2006. Much of that debt-financed purchasing power
found its way abroad.

A dozen years after the U.S. signed (in 1994) the North American Free Trade
Agreement (NAFTA), the world’s richest person emerged in a nation of 108 million
where one in five live in abject poverty. Mexican Carlos Slim Helu’s $59 billion in
personal wealth now eclipses Microsoft founder Bill Gates.

As imports from U.S. agribusiness undercut small farmers there, illegal immigration
soared here. Helu’s wealth surged $12 billion in 2006, led by his stake in Mexico’s
privatized telecom firm. His annual income now equals the combined income of three
million of Mexico’s poorest.

This pattern of narrow ‘closed system’ prosperity alongside widespread poverty
typifies the trend to oligarch-ization that was certain to accompany the globalization
of financial markets.

• In Indonesia, 61.7% of its stock market value is held by that nation’s 15
richest families. The comparable figure for the Philippines is 55.1% and
53.3% for Thailand.
• India’s 40 billionaires have amassed a combined wealth of $351 billion, up
from $170 billion since 2006.
• China was home to more than 100 billionaires in 2007, up from 15 in 2006.
• Worldwide, Forbes reported 946 billionaires worth $3.5 trillion in 2007, up
from 476 billionaires worth $1.4 trillion in 2003.
• Port cities are mobilizing to service the marina needs of mega-yacht owners.
More than 820 are under construction. The oligarchs that defrauded Russia of
more than $1 trillion own many of the most opulent yachts. With $18.7
billion, Roman Abramovich owns three.
• The richest 2% of adults worldwide own more than 50% of global assets,
while the poorest half of the adult population holds 1% of worldwide wealth.
• The U.N. Human Development Report identifies 2.6 billion people in the
developing world who lack adequate sanitation and 1.1 billion who lack access
to clean water while one billion people live on less than $1 per day.
• Key measures of societal health have stalled at appalling levels or worsened.
The U.N. Food and Agriculture Organization announced December 17th a
serious risk that global hunger will worsen in 2008.
History’s Greatest Fraud
Forget what a market democracy is supposed to do. What, in practice, does it do? No
matter what policy prescription is plugged into today’s closed operating system –
communist, capitalist or centrist – what the system does remains unchanged.

Anyone familiar with finance understood that supply-side subsidies were certain to
hasten the pace at which the closed system concentrates wealth and income. The
general public remains blind to its operations. Finance was always there but they
could not see it.

Anyone knowledgeable about finance knew supply-side deficits were certain to make
the already rich far richer. The people in between also knew those deficits would
crowd out fiscal resources for public services.26

Financial sophisticates also knew privatization would segue into closed system
financing certain to sustain and increase the wealth of those that privatization
advisers favored as owners. Thereafter, the structural appreciation that accompanies
progress was certain to flow to those favored few.

When foreseeable post-privatization results were combined with the widespread
systemic fraud that typified privatization, the circumstances created disorder,
instability and insecurity – i.e., entropy.

Russia illustrates the pre-staged frauds through which public assets can become
private wealth. And confirms how pre-staged oligarchs continue to reap the closed-
system benefits. Though the results in Russia were foreseeable, unfair, unethical and
unworkable, a Harvard University advisory team provided the academic authority to
sanction this nation-scale fraud.

Soon after Russian President Boris Yeltsin resigned under pressure on New Year’s
Eve 1999, Mikhail Khodorkovsky was jailed for tax evasion. As the rigged winner of
an oil company ‘auction,’ this aspiring oligarch acquired proven oil reserves of 11.5
billion barrels for 1.4 cents per barrel.

Russian oligarchs routinely deployed belief in the authority of law to displace the
equity expected under the rule of law. Assisted by the people in between (including
Harvard advisors), corrupt laws crafted by those with superior knowledge ensured
that Russia’s privatization would enrich the few. As elsewhere, public debt played a
key role in enabling this private plunder.

Khodorkovsky’s mega-fraud was the product of a national loan-for-shares fraud in
which the Yeltsin government borrowed funds from oligarch-controlled banks. As
collateral, the loans were secured with shares in state-owned oil companies, the
crown jewel of Russia’s assets. When the government ran short of cash, the
collateral was ‘auctioned’ – to the oligarchs.27

Arguably the largest fraud in history, the results of the loan-for-shares fraud remain
largely intact except for Yukos, the firm acquired by Khodorkovsky that has since
been renationalized. With assets stolen from the public still treated by Russian
lawmakers as lawfully acquired and privately owned, the wealth of Russia’s super-
rich surged from 34 billionaires in 2006 to 53 in 2007.

Dollar Democracy
Supply-side policies and privatization coincided with a worldwide surge of funds in
the hands of institutional investors, led by assets in U.S. pension plans.

As with Reagan-nomics, that surge was fueled by tax subsidies that comprise
America’s third largest fiscal expense ($150 billion per year),28 behind only the
Pentagon ($625 billion for 2008) and interest paid on the debt ($430 billion for
2006). U.S. pension fund assets are valued at one-tenth of the $165 trillion in
securities traded worldwide.

Mandated by law to pursue only those values measurable in money, these mega-
funds emerged as a major force in gathering support for finance-guided
globalization. The funds’ ongoing need for new investments also made them reliable
purchasers of subprime junk-loan bonds marketed as AAA-rated securities.

As lawmakers worldwide gradually granted greater authority to the pursuit of
financial returns, steadily less attention was directed to those values required for
sustainable communities and democratic societies.

Instead of people having an influence on forces that have an influence on them (i.e.,
democracy), this proxy approach to democracy granted priority to finance,
systematically undermining the dignity of self-determination.

The ‘consensus’ logic that began our analysis remains intact: no investor wants a
return less than the best. And no money manager can retain a job without offering
competitive returns. The result is a globalizing financial force backed by international
law and the World Trade Organization (WTO) that scours the world 24-7 rewarding
those who find what the law insists they seek.

The impact of that search undermines all three domains critical to the health of
communities: economic, social and environmental. With belief in a shared mindset
insistent that lawmakers grant priority to values calculated in money, money became
American democracy’s dominant purpose – to the foreseeable detriment of those
three key domains.

Complicit in Concept
In the same way that the citizens of a nation share a common mindset, proponents
of the dominant paradigm coordinate their actions around a shared perspective. That
shared mental state enabled the finance-guided process now going to global scale –
by consensus. Criminal State will explain how that mental state is sustained in spite
of its foreseeable results.

The World Bank Group includes an international monetary stabilization fund (the
IMF) founded in the post-WWII era when U.S. currency was wed to gold, a practice
that ended in 1971. The Bank, the IMF and the WTO work in unison. Those employed
in each organization believe in the integration of laws worldwide to harmonize the
global reach of the returns-driven process operating at the core of the consensus

Similarly, by our personal insistence on the best financial return, we evoked laws to
find what we seek. Just as it was our shared mindset that fueled the financial forces
now endangering our freedom, it was our purchasing power that fueled Beijing’s
capacity to modernize their military. By sustaining that shared belief, the people in
between induced Americans to make choices that systematically weakened us as a

By reinforcing behavior measurable in money, that shared mental state came to
embody the values for which America stands in the eyes of a bewildered global
public. Many of them know of our role in rescuing the world from an earlier form of
fascism. They wonder what happened to that America. Granted the authority of law,
our shared mindset gradually relegated to the periphery that broader bandwidth of
values not measurable in money, including democracy.29

As this widely shared belief became the common lens through which we view our
world, that shared perspective determined who we became as a nation. As our
globalized search for financial value displaced our concern for other values, financial
freedom emerged triumphant. As ‘our’ consensus went to scale, we discredited
democracy and endangered our freedom.

As the demand for financial returns worked its way through generations of
technological progress funded through the closed system of finance, U.S. foreign
policy became an influence certain to create oligarchies, guaranteed to fracture
societies and destined to undermine democracy. Allowed to continue, the people in
between will gradually erode our freedom based on decisions that we freely make.

The current U.S. president believes that steps taken to address the housing and
financial crises will avert a recession and remedy the problem. Once the U.S. military
grasps that its forces were deployed by those masterful at waging war by way of
deception, our Commander-in-Chief may grasp that his beliefs are giving aid and
comfort to those sustaining a form of systemic treason.

In WWI, battles were waged in only a few places. In WWII, warfare occurred in
thousands of places. In unconventional war, entropy can be induced everywhere
provided the people in between can persuade us to displace facts with what we
believe to be true. Their skill at waging war by way of deception is the weapon that
persuades us to fight their battles while undermining ourselves.

Criminal State offers the facts required to inform a misinformed public how this
happened. Future issues will chronicle the trans-generational premeditation with
which unconventional war has been waged on American values from inside our
government. And from inside a shared mental state influenced by education, think
tanks, media, politics and popular culture.

Once the American public grasps the common source of this treason, our military can
be deployed to ensure that never again is deception by an enemy within allowed to
displace the informed consent on which democracies depend and freedom relies....

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